Although President Donald Trump is widely considered a pro-business president, there’s been one area where he’s been tougher than his predecessor: merger approval. In March, the president shot down Broadcom‘s offer to acquire Qualcomm, citing national security concerns. However, the best example of the administration’s merger antipathy is its aggressive moves against AT&T‘s (NYSE: T) proposed acquisition of Time Warner (NYSE: TWX).
Initially, the government’s challenge was considered mostly unwinnable, with AT&T general counsel David McAtee calling the challenge a “radical and inexplicable departure from decades of antitrust precedent.” Further reports that the president’s opposition was centered on negative coverage of his candidacy and early presidency from CNN — a Time Warner property Trump refers to as “fake news” — didn’t burnish the government’s case.
But with a court decision expected within the next week, some experts are changing their tune.
The government convinced at least one expert
Herbert Hovenkamp, referred to as the “dean of American antitrust law,” is now of the impression the government will prevail and be able to block the deal: “To me, it is a close call, but I think the government has met its burden,” he told The New York Post. He noted to the publication that he thinks the government has proven AT&T and Time Warner could boost their profits by raising prices if they merged.
While Hovenkamp’s opinion is noteworthy, other legal and industry observers feel differently. Craig Moffett, longtime cable and media analyst, wrote in a research note (via FierceCable) that “most observers seem to give AT&T 75%-or-better odds of winning in court,” although he was more reserved at 50-50.
One industry or two?
AT&T lawyer McAtee is correct that this is a radical departure from precedent, but perhaps it’s appropriate. To date, the federal government has always treated television as two separate but interrelated industries. On one hand was content programming — the studios and networks that provide scripted and live content. On the other was delivery — your cable or satellite company.
The distinction was important, as until recently the federal government had been more concerned with policing horizontal mergers between companies operating in the same segment of an industry rather than vertical mergers between companies operating at different levels of the same industry. The predominant measurement the government uses, the Herfindahl-Hirschman Index (HHI), does an ineffective job of measuring the impact of vertical mergers. In fact, vertical mergers are often considered pro-competitive, as they can promote increased efficiency.
Television, however, is becoming more and more vertically integrated. For instance, the Obama administration allowed Comcast to buy NBCUniversal from General Electric, which gave the cable company USA Network, CNBC, and NBC, among others.
Another development, perhaps more important in the future, is the rise of direct-to-consumer content delivery via streaming. Essentially any content firm — a big tech company (Netflix), a movie studio (Disney), or a TV network (CBS All Access) — can become a provider of both content and delivery.
Why all businesses should follow this case closely
The Trump administration has argued for this holistic view of content and delivery, saying the AT&T/Time Warner merger will increase prices: It will most likely win if this is the judge’s deciding factor. Even a first-year business major knows that mergers tend to raise prices. However, this appears to be a low bar for the court to disallow a merger. Still, it’s likely that many businesses are watching this case closely, as a deal-laden environment (merger mania) tends to be accompanied by above-average stock prices and valuations in the short run.
Because the tremendous cost of mergers — investment banker, attorney, and accountant fees, among other costs — becomes essentially wasted money if a deal falls through, the current lawsuit could have a chilling effect on future deals and on Wall Street’s investment-banking departments. Post-decision, investors should pay close attention to T-Mobile US‘s proposed acquisition of Sprint, to take Wall Street’s temperature for deals in the Trump era.
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Jamal Carnette, CFA owns shares of AT&T and General Electric. The Motley Fool owns shares of and recommends Netflix and Walt Disney. The Motley Fool owns shares of Qualcomm. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.