Justice may have a case to block AT&T-Time Warner
When the US Justice Department sued to squelch the merger of AT&T (T) and Time Warner (TWX) on Monday, many on Wall Street predicted that the government's antitrust action would fail because it was legally weak.
Maybe not. This merger has gotten extra attention due to its politically fraught nature after Donald Trump last year as a candidate vowed to stop the $85 billion AT&T buyout because it involves his nemesis, Time Warner's CNN cable news unit. But Justice's antitrust hand may be stronger than many realize.
As he left Washington for his Florida estate Tuesday, Mr. Trump summed up Justice's argument, leaving aside his animus for CNN: "I always felt that that was a deal that was not good for the country. Your pricing is going to go up."
At the heart of the controversy is the type of merger that's involved. The AT&T-Time Warner union is a "vertical merger," meaning two companies in the same industry that don't compete against one another decide to combine. The more common "horizontal merger" is between two companies occupying the same end of a business, such as Qualcomm's (QCOM) recent acquisition of NXP Semiconductors. They both make computer chips.
In this instance, AT&T, which is a telecom and broadband colossus that owns broadcast satellite provider DirectTV, aims to hook up with a generator of content, Time Warner, which owns HBO ("Game of Thrones") and Warner Studios (the Harry Potter series and the recent hit "Wonder Woman"). Time Warner also controls Turner Broadcasting, home to TV assets like TNT, TBS and, of course, CNN.
Supporters of the deal argue that a vertical merger will leave the playing field as it was before because the two partners operate in different parts of the media supply chain. The government disputes that logic, saying the proposed combo's economic heft and the span of its operations over the industry landscape would allow it to jack up prices and muscle other distributors by threatening to withhold shows from its lineups.
As a result, the Justice Department wants the merger partners to divest some of their holdings, either DirectTV or Turner, to prevent consumer harm. The government and the companies had been in talks to potentially use consent agreements that merely extract a promise from management not to engage in price gouging or other anti-competitive behavior. That's what happened when cable firm Comcast (CMCSA) bought NBC Universal in 2013.
The conventional wisdom in the media industry and on Wall Street is that Justice's AT&T-Time Warner case is flawed because little legal precedent exists to prevent vertical mergers. When the government this week announced its lawsuit, AT&T chief executive Randall Stephenson told a news conference, "It defies logic, and it's unprecedented."
Investment firm Raymond James in a research note agreed with AT&T that "40 years of case law support its position." Cowen & Co. wrote that it expected to "see a settlement as possible and, failing that, we believe AT&T would prevail in court."
Another reason to doubt the federal case is that, in a time of cable cord-cutting, blocking this merger is increasingly as relevant as denying a tie-up between a horse carriage maker and a buggy-whip company. To UBS analysts, Justice's lawsuit would encounter difficulty when "traditional TV viewership within the 12-24 demographic has fallen" 50 percent in seven years, "as the Internet giants gain momentum."
Nevertheless, there's reason to believe the antitrust action is on more solid ground than some think. Broadcast and cable outlets, while less potent than they were before the rise of the internet, still are enormous presences in American life. Here's why the AT&T-Time Warner case appears to have a solid foundation:
- Justice won't shy from litigating. As Diana Moss, president of the nonprofit American Antitrust Institute, pointed out, "the government won't go to court" unless it's confidant it will win. And although bluffing isn't unknown in the annals of jurisprudence, Justice appears willing to try this case.
- Vertical mergers indeed have an antitrust track record. To say, as AT&T's CEO does, that the attempt to thwart his union with Time Warner lacks precedent is off the mark. Most vertical mergers are settled out of court, compelling the same kinds of divestitures as judges would impose. Example: When aerospace giant United Technologies (UTX) purchased landing-gear maker Goodrich in 2013, the acquired company had to divest an electrical power division.
- Consent decrees lack teeth. Justice isn't wrong in saying that courts are unequipped to police whether a merger is sticking by what it promised. "There are a lot of complaints" about compliance to consent agreements, Moss said. "They need an ongoing monitor," but none exists.
To be sure, the AT&T-Time Warner saga has an X factor: the president. Mr. Trump's disdain for CNN is a strong element in this drama. What AT&T's Stephenson called "the elephant in the room" could play a role in how the case ends. Depending on your viewpoint, the cable news channel is either a biased liberal outlet hell-bent on opposing the president, or simply journalists doing their jobs and uncovering problems with Mr. Trump.
In one instance that especially irritated the president and his followers, CNN earlier this year broke the story of a salacious dossier containing unsubstantiated claims about Mr. Trump's personal life.
Senator Amy Klobucher, a Minnesota Democrat, and others have raised questions about whether the White House has tried to influence the review process. The administration denied that it has been in contact with Justice in an attempt to influence antitrust decision-making. Should that not prove to be true, it could affect the outcome of this case.
However this tale develops, because it involves Donald Trump, its resolution will extend far beyond who pays CNN anchor Wolf Blitzer's salary.