The Justice Department departed from years of precedent on Monday when it sued to block AT&T’s (T) planned $85 billion acquisition of entertainment giant Time Warner (TWX).
The move is unusual because the government does not typically challenge so-called vertical mergers like this one, which do not involve the combination of direct competitors. Some have speculated the challenge stems from President Donald Trump’s stated disdain for Time Warner-owned CNN, which he has decried as “fake news.”
Indeed, AT&T seems confident a judge will approve the merger. But several antitrust experts told Yahoo Finance that the case is far from a slam dunk for AT&T despite its unusual nature. That’s because the government has a solid argument that AT&T could make Time Warner’s sought-after content like HBO more expensive for competing distributors like Dish, according to those experts.
Moreover, one leading antitrust scholar has seen growing momentum for more antitrust enforcement after the last decade yielded mega-mergers that might be seen as hurting consumers.
‘Attitudes towards mergers are changing’
To be sure, the government’s challenge of the AT&T merger initially appeared to come out of nowhere, fueling the speculation of its political motivation.
John Kirkwood, a professor at Seattle University School of Law, said that the government hasn’t challenged a vertical merger since 1973 in a case involving Fruehauf Corporation, then the nation’s biggest maker of truck trailers. And in that case, an appeals court ruled for Fruehauf.
Since then, antitrust enforcement has arguably grown relatively lax for both vertical mergers like the AT&T/Time Warner tie-up and horizontal mergers involving direct competitors like airlines. Those years of loose enforcement may be fueling a backlash, though.
“Attitudes towards mergers are changing and they’re changing in the direction of more enforcement,” says Herbert Hovenkamp, a professor at the University of Pennsylvania Law School and a leading authority on antitrust law. “There’s a view out there … that mergers have been under-enforced in the past decade or so and that too many mergers have gone through that have yielded higher prices.”
Of course, many mergers that have sparked criticism for hurting consumers — like those of airlines — have involved direct competitors. But, as the Justice Department alleges in its complaint against AT&T and Time Warner, vertical mergers can arguably raise prices for consumers, too. Hovenkamp noted that the guidelines for these types of vertical mergers have not been updated since 1984, and that they favor companies that want to merge rather than antitrust regulators.
In the next decade or so, however, Hovenkamp expects regulators to ramp up antitrust enforcement — no matter who sits in the White House or who holds a majority in Congress.
The ‘wild card’ in the AT&T/Time Warner case
While Hovenkamp predicts a new wave of antitrust enforcement regardless of which political party is in power, merger challenges also have a political component to them. Simply put, Republican-appointed judges are more likely to approve mergers — and Democratic-appointed judges are more likely to reject them. If the Justice Department’s suit against AT&T and Time Warner goes to trial, rather than settling beforehand, then a single judge rather than a jury will decide the case.
Hovenkamp called the variable of which judge would hear the suit the “wild card in the case.” (On Tuesday, a Republican-appointed judge, Richard Leon, was selected to hear the case.)
George Hay, an antitrust expert and professor at Cornell Law School, noted that in a recent decision by the U.S. Court of Appeals for the DC Circuit, two judges appointed by Democratic presidents voted to block health insurer Anthem’s acquisition of Cigna. Meanwhile, George W. Bush appointee Brett Kavanaugh filed a dissenting opinion arguing that the merger would have helped employers spend less money on health care.
This week, Trump added Kavanaugh’s name to his short list of Supreme Court appointees.
‘A weapon to harm competition’
It’s more than a little ironic that a Republican judge like Kavanaugh would be less friendly to a merger challenge brought by a Republican administration. But antitrust regulators tend to operate independently from the White House, according to antitrust experts.
In this particular case, the new head of the Justice Department’s antitrust division, Makan Delrahim, has dropped hints that he might challenge AT&T’s mega-bid for Time Warner. When antitrust authorities review vertical mergers like these, they tend to favor so-called behavioral remedies such as asking AT&T to sign a consent decree agreeing not to make Time Warner content more expensive for competitors. These kinds of remedies tend to be less onerous than requiring firms to divest assets, which is a more common remedy in horizontal mergers between direct competitors.
However, Delrahim has publicly expressed his distaste for behavioral remedies. Indeed, reports emerged earlier this month that the Justice Department was demanding the sale of either Turner Broadcasting or DirecTV before it would let a deal go through.
In its complaint, the Justice Department argues that AT&T, which already owns DirecTV, would “use its control of Time Warner’s popular programming as a weapon to harm competition.” Specifically, the government argues, AT&T would use the merger to strong-arm its competitors into paying hundreds of millions more per year for Time Warner’s networks. This could ultimately lead to higher bills and fewer options for American families, the Justice Department argues.
The government also alleges that a merged AT&T/Time Warner behemoth would have the power to stymie the growth of online TV options that it views as a threat to traditional TV.
Kirkwood, the professor at Seattle University’s School of Law, believes the government likely has a relatively strong case — or else it wouldn’t have brought the matter to court. He called Makan Delrahim, the new antitrust head, a “solid guy” who wouldn’t want to “get his nose bloodied at his first bat.” There is also chance that neither side will get its nose bloodied and this case will settle quickly.
As Hay, the Cornell professor noted, “This would not be the first case that ever settled on the steps of the courtroom.”
Erin Fuchs is deputy managing editor at Yahoo Finance.
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