After eighteen months of investigation and litigation, a federal district court has rejected the Justice Department's challenge to AT&T's $108 billion acquisition of Time Warner Inc. Although the government could appeal, the merger is likely to close before the parties' June 21 termination date.
This "vertical" merger combines companies at different distribution levels. Time Warner is an entertainment company with rights to video content (CNN, TNT, TBS, HBO). AT&T is a distribution company, providing wireless, broadband, and pay-TV services to customers (including DIRECTV and U-Verse). This marked DOJ's first vertical merger trial in forty years and attracted substantial interest from the business community.
DOJ believed postmerger Time Warner would have more leverage to charge higher prices for its "must have" content to other distributors (Charter cable, Dish satellite, others), which would be passed on to customers. To the extent Time Warner failed to reach a deal with distributors, lost revenues (content fees and advertising revenues) would be offset as some customers switched to AT&T video distribution.
In a 170-page opinion, the court was unpersuaded by DOJ's theory and evidence, including documents and testimony from the parties and industry participants and the government's expert economist.
- Vertical mergers, which have built-in efficiencies, are harder to challenge than horizontal mergers, where market share presumptions help the plaintiff. The court relied on DOJ's concession that AT&T/Time Warner brings significant efficiencies.
- This DOJ's policy decision to avoid behavioral remedies (a commitment to behave competitively postmerger) limited its options here to a divestiture or structural remedy (not always the best fit for a vertical merger) and litigation to block the deal.
- Each merger is different, but this decision may temper future vertical challenges.
- The decision should have little impact on horizontal mergers, where this DOJ has been consistent with mainstream Republican enforcement.