The recent U.S. district court decision rejecting a U.S. government challenge to the $85 billion AT&T merger with Time Warner provides judicial guidance for deals involving companies with complementary businesses. Companies should take note.
AT&T/Time Warner Offers Rare Spotlight on Antitrust Treatment of Vertical Deals
A U.S. court has provided a rare precedent that is likely to guide merger control for decades. Mergers involving suppliers, distributors and other complementary business partners have been subject to uncertain regulatory review for deals that affect U.S. markets.
For the first time in four decades, the United States Department of Justice (DOJ) brought a “vertical” merger case to trial—only to receive a stunning defeat. The government alleged AT&T would leverage its distribution strengths to increase costs to its rivals for must-have cable and satellite television content.
The U.S. agencies typically decide such mergers by negotiating remedies without any judicial oversight. This lack of oversight has added to uncertainty when planning deals. In an environment of unpredictable regulatory policy and unsettling global events, the court’s decision provides new clarity for businesses considering strategic M&A deals involving complementary services, products and technologies.
U.S. regulators typically challenge as many as 30 of these “horizontal” mergers each year. By contrast, vertical merger challenges are much less common. U.S. regulators typically average one to two vertical merger enforcement actions each year. Before AT&T/Time Warner, all of these vertical merger challenges had been resolved under threat of litigation by concessions negotiated outside a courtroom. Recent examples of deals restructured by regulators have involved semiconductors, data services, movie theaters, petroleum and aviation.
Vertical Deal Concerns
Mergers between companies that complement each other often have the potential to offer significant efficiencies that can benefit consumers. And any consumer harm is usually indirect.
When U.S. regulators object to a vertical deal, it generally is out of a concern that the target company offers something critical to competition. For example, controlling a critical supplier may allow the combined firm to reduce the ability of downstream rivals to aggressively compete with the combined firm.
The typical case is resolved with a mandate to alter business practices and sometime also by a divestiture. The DOJ sought divestitures in AT&T/Time Warner. In a recent acquisition involving rocket engines, the U.S. Federal Trade Commission had required the acquirer to supply engines to rival rocket manufacturers on non-discriminatory terms.
AT&T/Time Warner Decision Implications
Notably, the district court did not provide a green light for future vertical deals. It instead rejected the DOJ’s challenge as presenting insufficient and unreliable evidence of harm. The Court’s focus was on the potential for harm to U.S. consumers, as opposed to harm to competitors. This means regulators must show that consumers are likely to be harmed by increased prices or reduced quality or services. Even if the decision does not weaken the agencies’ position in future vertical merger negotiations, it will certainly guide those negotiations and provide greater clarity as to the legal bases for a challenge and remedies.
Companies can take this opportunity to reevaluate the business case for vertical deals in light of the court’s focus on whether evidence of likely consumer harm exists—much as is done when competitors merge. Businesses should still pay early, careful attention to understanding the broader efficiencies and potential allegations of harmful consumer effects from both types of mergers.
Merging parties should also take note of the DOJ’s strong views on remedies. In the AT&T transaction, the DOJ rejected a party-proposed remedy that did not include divestitures. That DOJ view is not likely to change just because of the agency’s loss in this case. In light of the DOJ’s stance, companies may still want to consider the possibility of agency-imposed divestitures when negotiating deal breakup fees and other risk-shifting terms for especially high-risk vertical mergers.
Noah Brumfield is antitrust partner in the firm’s Washington, D.C., and Palo Alto offices and the Taiwan Practice head. Charles Miller, a summer associate at White & Case (JD expected 2019), assisted in the development of this publication.