2 May 2018
Telecom company AT&T and the American Department of Justice (DOJ) are fighting a legal battle over the intended merger between AT&T and Time Warner. An interesting debate, the outcome of which will have important consequences for the feasibility of other so-called 'vertical mergers', especially in the TMT sector.
In a vertical merger, the merging parties are active on different levels of the (supply) chain and they do not compete with each other. Following the merger, there are the same number of players in the relevant markets as there was before the merger. Such a merger is much less likely to lead to a distortion of competition than a horizontal merger (between competitors). A vertical merger often leads to efficiencies in production or distribution and can even improve competition. In most cases competition authorities therefore approve vertical mergers.
The same treatment could be expected of the vertical merger between AT&T and Time Warner, given that they are not direct competitors (or at least not as concerns their core business activities). AT&T is active in the telecom market and provides telephone and television subscriptions. Time Warner is active in the television and film industry and produces movies, TV shows and video games. It owns TV networks such as CNN and HBO.
No objections from the European Commission
The European Commission gave its approval for the merger over a year ago (see the Decision of 14 March 2017). The decision notes that in the EEA AT&T only provides telecom services to business customers and not to consumers. The Commission therefore assessed the intended merger under the 'simplified procedure'. This procedure is followed in the case of mergers where the merging parties are not engaged in business activities in the same product and geographic market (in Europe) or in markets up or downstream from each other (see the Notice on the simplified procedure).
The DOJ does, however, have objections to this merger. AT&T's is much more active in the US and its activities are also aimed at consumers. As a result, AT&T is also active in a market which is downstream of the market on which Time Warner is active (AT&T buys products from Time Warner). According to the DOJ, the intended merger will lead to a less innovative offering of products and higher prices for American consumers (see the DOJ complaint of 20 November 2017). The DOJ expects that AT&T will use its acquired power to "hinder its rivals by forcing them to pay hundreds of millions of dollars more per year for Time Warner's networks, and it would use its increased power to slow the industry's transition to new and exciting video distribution models that provide greater choice for consumers".
AT&T argues that the contrary is true (see its pretrial brief of 9 March 2018). AT&T emphasizes the efficiencies and synergies - and with that lower prices and more innovation - to which almost all mergers between suppliers (such as Time Warner) and customers (such as AT&T) lead. Such eficiencies and synergies will, according to AT&T, also flow from the AT&T/Time Warner merger. AT&T suggests that research shows that restricting rivals' access to Time Warner's networks would not be profitable for the merged company. According to AT&T, this merger is necessary to be able to compete with other (vertically integrated) tech and media companies such as Netflix, Google, Amazon, Apple and Facebook, all of which invest enormous amounts in the online video business.
The DOJ's position is part of a broader current trend in the competition law assessment of deals. Competition authorities and courts are more alert to the possible negative effects of mergers on vertical markets. A good example of this trend is the judgment of the General Court of the EU relating to the decision of the European Commission to allow Liberty Global's acquisition of Ziggo. The General Court found that the Commission had not analyzed the vertical effects on the possible market for the supply of premium pay TV sports channels (a market in which only one of the merging parties was active). Another notable development is that mergers in the TMT sector seem to raise competition law concerns more often than mergers in other sectors. This is true of both vertical and horizontal mergers.
Furthermore, should more countries incorporate a deal value merger threshold (instead of or in addition to the current mostly turnover related thresholds), as Germany and Austria have already done, then even more deals will have to be notified and will possibly encounter competition law issues. This will have consequences for the technology sector in particular. The turnover involved in mergers in the technology sector is often not (yet) very high (and therefore the turnover thresholds for a merger filing are not met) but the deal value is often significant (as was the case with the acquisition of Whatsapp by Facebook for example).
It has been a long time since the DOJ has requested the court to block a vertical merger. On both sides of the Atlantic the developments in this case are therefore being followed closely. Both sides in the debate raise plausible arguments. The question is which arguments will in the end carry more weight with the court. The answer to that question will have considerable consequences for future (vertical) mergers, especially in TMT sectors.