Merger fight’s war of numbers
A Justice Department win against AT&T’s $85 billion acquisition of Time Warner would usher in a new era in antitrust policy
When the Justice Department goes to court today to try to block the $85 billion megamerger between AT&T and Time Warner, it will rely on a tried-andtrue argument: The deal would raise prices for ordinary consumers.
WASHINGTON — When the Justice Department goes to court Monday to try to block the $85 billion megamerger between AT&T and Time Warner, it will rely on a tried-and-true approach of arguing that the deal would raise prices for ordinary consumers.
The agency’s expert economist has estimated the precise increase in cost to cable TV subscribers — $463 million a year or, as AT&T points out, about 45 cents a month per user.
Whether that amount is truly harmful to competition will be at the heart of one of the most closely watched antitrust trials in decades.
The case will determine the fate of a type of merger between companies that operate in different parts of the same industry — called “vertical” acquisitions — that has allowed big corporations such as Google, Amazon and CVS to expand their reach into new lines of business. The outcome of the trial will have major ramifications for the government’s ability to bless or block those deals.
A Justice Department win would usher in a new era in antitrust policy, signaling to companies that for the first time since the Nixon administration the government is taking a more aggressive view toward mergers that create sprawling entities whose operations touch different corners of the economy.
“If DOJ were to succeed on this, it’d be a major lane-change in
merger enforcement going forward,” said David Balto, an antitrust lawyer and former Justice official.
It could also give the Justice Department significant leeway to challenge deals with relatively small anticipated effects on prices, said Hal Singer, an economist at George Washington University’s Institute of Public Policy.
But a government defeat would give AT&T full control over one of the world’s largest media and entertainment conglomerates, and open the floodgates to a wave of new vertical mergers Justice may have little power to stop.
The government’s challenge to AT&T comes amid a rapid-fire string of mergers and acquisitions in the United States. Already, more than $409 billion worth of deals have been announced in 2018, a 67 percent jump from the same time last year and the fastest start ever for mergers and acquisitions in a single year, according to Dealogic, a financial advisory firm. Between 2010 and 2016, the number of mergers for which companies sought federal approval leaped by 58 percent, according to a study of regulatory filings by Michael Kades, of the think tank Washington Center for Equitable Growth.
The case marks the first time the Justice Department has taken a vertical deal to court since 1972, when the agency successfully thwarted Ford’s acquisition of the sparkplug maker Autolite. In a 5to-2 decision, the Supreme Court ruled that Ford’s ownership of Autolite would have made it harder for new sparkplug manufacturers to enter the market.
Antitrust regulators cite similar concerns about the AT&T deal, which they say could hurt consumers and rival cable companies in an increasingly connected digital economy.
AT&T could use its exclusive ownership over Time Warner’s popular channels, such as HBO and Turner Broadcasting’s CNN, to demand higher payments from cable companies that wish to show those channels, the Justice Department will argue in court next week.
The result could be $736 million a year in extra costs to cable companies, according to the agency’s calculations. Roughly 60 percent of those charges would ultimately be passed along to consumers, the agency says, and could provoke additional consolidation..
AT&T has said that the Justice Department’s case is “purely theoretical.” Its own analysis employing the government’s economic models suggests that prices would actually decrease, particularly after accounting for a voluntary commitment to have price disputes over Time Warner’s content mediated in arbitration.
The antitrust debate is giving pause to business leaders nationwide, analysts say, particularly in the health-care sector, where a bevy of recent cross-industry deals could raise similar regulatory issues. CVS’s $69 billion acquisition of the health insurer Aetna, as well as Cigna’s $52 billion purchase of Express Scripts, could both be affected by the AT&T trial, analysts say.
Antitrust regulators had told AT&T in November that the deal’s threat to competition could be resolved by spinning off some of Time Warner’s assets. But the proposal was a nonstarter for AT&T, which aspires to build a massive digital empire that marries the telecom giant’s broadband distribution network with Time Warner’s entire portfolio of video content.
If AT&T wins its case, the government would not be able to compel the company to divest Time Warner assets. Instead, AT&T would be able to complete its takeover of the entertainment firm without conditions.
Negotiations between the two sides broke down during a critical meeting shortly after the Senate confirmation of President Donald Trump’s antitrust chief at the Justice Department, Makan Delrahim.
AT&T demanded White House communications logs — records that the company believed could show whether the suit was the result of political interference by Trump in the Justice Department’s independent antitrust probe. But the political issue will not be litigated in court. Last month, the federal judge overseeing the case blocked AT&T from seeking additional records from the government.
If approved, the AT&T merger could lead to a wave of copycat consolidation in media and entertainment.
The trial highlights the enormous role Silicon Valley giants have played in destabilizing traditional markets. Firms such as Netflix and Amazon, with their streaming video apps, have encouraged consumers to cut the cord and abandon their cable subscriptions, undermining the TV industry’s legacy business model. Google and Facebook are digital advertising behemoths, controlling vast shares of the market for online ads.
By buying their way into business sectors such as groceries, comparison shopping and health care, tech titans have directly contributed to some of the vertical consolidation taking place nationwide. And they are prompting firms in many of the affected industries to respond in kind. AT&T executives say their acquisition of Time Warner is purposebuilt to counter the rise of Silicon Valley.