What Is Actually Happening?
AT&T plans to buy out Time Warner[1] for approximately $85.4 billion.[2] AT&T, the second largest wireless carrier and owner of DirecTV, intends to take ownership of all of Time Warner’s assets, including its popular HBO, CNN, and TBS stations, as well as Time Warner film and TV Studios, to become one of the world’s largest entertainment producers.[3] The terms of the acquisition include AT&T paying $107.50 for each share of Time Warner, which would be paid half in cash and half in stock.[4] An acquisition at this price would result in a roughly 19-20% premium since, as of Thanksgiving weekend, Time Warner was trading between $89 and $90.[5] According to the Wall Street Journal, AT&T and Time Warner, “. . . aim to be the first U.S. wireless company to compete nationwide with cable companies by providing an online-video bundle akin to a traditional pay-television package.”[6]
What Could Go Wrong?
On Monday, November 20th, the Justice Department sued to block the acquisition under antitrust considerations—this being the first suit of its kind under the Trump administration.[7] The complaint was filed in Federal District Court for the District of Columbia against AT&T, DirecTV, and Time Warner.[8] AT&T by itself is one of the largest internet and telephone providers in the United States, and in 2015 became one of the largest television distributors when it acquired DirecTV.[9] Acquiring Time Warner gives AT&T unrivaled capacity both in terms of how it reaches consumers and what it provides to them. According to Makan Delrahim, the Justice Department’s top antitrust regulator, “This merger would greatly harm American consumers. It would mean higher monthly television bills and fewer of the new, emerging innovative options that consumers are beginning to enjoy.”[10]
The U.S. also alleges that the acquisition would directly harm online streaming firms by having content withheld from them or by charging them at significant premium prices.[11] This means that AT&T could charge their competitors higher prices to broadcast Time Warner’s popular networks (TNT, TBS, CNN, and Cartoon Network) and afford to walk away from any deals in hopes that consumers will switch to DirecTV who, being a subsidiary of AT&T, would be able to provide these networks at a much lower cost.[12] The chances of AT&T acting in such a way would provide them with significant leverage when negotiating network prices with its competitors. If this were to happen, it would directly harm AT&T competitors and create unreasonably high prices. These higher prices would, as a result, be passed onto the consumers—the exact issue antitrust law is meant to safeguard against.
Furthermore, preventing this acquisition would set an important precedent for the future by which the federal government will not sit idly by as super-corporations like Google and Apple buy out their competition and perform mergers similar to the Time Warner and AT&T deal. If the Justice Department is successful, big corporations will have to think twice before merging, knowing that the federal government will scrutinize any proposed merger or acquisition. Consequentially, to avoid spending significant amounts on antitrust litigation expenses, big corporations will carefully consider which mergers would be most beneficial to the company and would not adversely affect the average consumer.
The Case for the Acquisition
The most important technical aspect from this case to understand is that the proposed merger between AT&T and Time Warner is not a horizontal merger.[13] Horizontal mergers occur when two companies that directly compete with each other merge into one company. Antitrust laws generally protects against this, since the absence of competition allows the monopolistic company to charge higher prices. However, the merger of AT&T and Time Warner is a vertical one.[14] A vertical merger is when two companies that buy and sell from each other merge into one to improve efficiency and reduce costs.[15] AT&T/DirecTV is a media-distribution company while Time Warner is a media-content company (i.e. they will be creating the content that they intend to sell and distribute).[16] According to AT&T CEO Randall Stephenson, the plan of this merger is to actually lower prices by becoming more efficient and cutting costs.[17] Interestingly, a similar vertical merger was approved in the past when Comcast purchased NBC, which may bolster the case for a successful AT&T and Time Warner merger.[18]
The claim that AT&T will charge higher prices for Time Warner’s networks (because they can always walk away and encourage consumers to switch to DirecTV) seems less plausible because higher prices may result in lower profits. Television networks’ profits are strongly associated with TV show ratings. There would be two problems if AT&T limited Time Warner’s networks to DirecTV viewers exclusively. First, AT&T would have to bet that the gain in DirecTV profits is greater than the lost licensing revenue that would result from AT&T walking away from any negotiations.[19] Second, they would have to bet that consumers would be willing to abandon their current providers for DirecTV.[20]
No one is certain what the outcome of this merger will be, but this case is of utmost importance for future mergers. Being that this is the first major antitrust case for the Trump administration, the result of this lawsuit will become an important precedent for M&A and antitrust law moving forward.
[1] This is not to be confused with Time Warner Cable, which is an entirely different company.
[2] Brian Fung, Everything You Need to Know About AT&T’s Deal with Time Warner, Wash. Post (Oct. 24, 2016), https://www.washingtonpost.com/news/the-switch/wp/2016/10/24/everything-you-need-to-know-about-atts-deal-with-time-warner/?utm_term=.5d3fc4ac1078.
[3] See id.
[4] Thomas Gryta et al., AT&T Reaches Deal to Buy Time Warner for $85.4 Billion, Wall Street J. (Oct. 22, 2016, 11:06 P.M.), https://www.wsj.com/articles/at-t-reaches-deal-to-buy-time-warner-for-more-than-80-billion-1477157084.
[5] Yahoo Finance (Nov. 27, 2017, 5:35 P.M.), https://finance.yahoo.com/quote/TWX?p=TWX.
[6] Gryta et al., supra note 4.
[7] Cecilia Kand & Michael J. de la Merced, Justice Department Sues to Block AT&T-Time Warner Merger, N.Y. Times (Nov. 20, 2017), https://www.nytimes.com/2017/11/20/business/dealbook/att-time-warner-merger.html.
[8] Id.
[9] Id.
[10] Id.
[11] Id.
[12] Harry First, 3 Critical Points That Sum up the Suit Against AT&T/Time Warner Merger, CNBC (Nov. 21, 2017, 11:26 A.M.), https://www.cnbc.com/2017/11/21/3-critical-points-that-sum-up-the-suit-against-atttime-warner-deal-commentary.html.
[13] Meg James & Jim Puzzanghera, U.S. Faces Tough Battle Proving AT&T Would Use Time Warner to Squeeze Competition, L.A. Times (Nov. 21, 2017, 5:15 P.M.), http://beta.latimes.com/business/la-fi-att-time-warner-20171121-story.html.
[14] Id.
[15] Victoria J. Buchholz & Todd G. Buccholz, Why the AT&T/Time Warner Merger Makes Sense and the Justice Department Lawsuit Doesn’t, L.A. Times (Nov. 24, 2017, 5:00 A.M.), http://beta.latimes.com/opinion/op-ed/la-oe-buchholzandbuchholz-justice-department-att-suit-20171124-story.html.
[16] John Cassidy, The Economic Case Against an AT&T-Time Warner Merger, The New Yorker (Nov. 22, 2017), https://www.newyorker.com/news/our-columnists/the-economic-case-against-an-att-time-warner-merger.
[17] See The Case for the AT&T-Time Warner Deal, Wall. Street J. (Oct. 30, 2016, 10:21 P.M.), https://www.wsj.com/articles/the-case-for-the-at-t-time-warner-deal-1477880460.
[18] Id.
[19] First, supra note 12.
[20] Id.
