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Why New Roadblock for Dealmaking May Be Vertical

For decades, U.S. antitrust enforcers have worried mostly about mergers between direct competitors that might lead to higher consumer prices. They’ve been less bothered by deals between companies that are in related businesses but don’t compete directly. That could be changing with the Justice Department’s lawsuit to block an $85.4 billion merger between AT&T Inc. and Time Warner Inc., which combines a distribution company with a content provider. The shift in enforcement raises the possibility that similar types of combinations could hit a roadblock, slowing down the pace of dealmaking.

1. What are the different types of mergers?

Horizontal and vertical. In the horizontal kind, a company buys one of its competitors. Imagine if Toyota Motor Corp. bought General Motors Co., or Apple Inc. acquired Samsung Electronics Co. These are the types of deals that have raised antitrust worries in the past. Vertical deals, on the other hand, unite companies that operate at different levels of production or distribution, as is the case with AT&T and Time Warner. Think of Toyota or Apple buying one of their many parts suppliers. These deals don’t increase concentration in an industry because they don’t combine head-to-head rivals.

2. Why don’t enforcers like horizontal deals? 

They potentially give an acquirer market power, depending on the shape of the industry. By taking out a competitor, the buyer may be able to raise prices on its own or in coordination with the remaining players. The Justice Department and the Federal Trade Commission have successfully challenged many of these types of deals. For example, the Justice Department in early 2017 stopped two health-insurance mergers — Anthem Inc.’s proposed takeover of Cigna Corp. and Aetna Inc.’s deal with Humana Inc.

3. Why the new worry about vertical mergers? 

In theory, they can make a company more efficient by giving it cost advantages over rivals. Those lower costs can be passed on to customers in the form of lower prices. Yet vertical deals also can threaten competition by, for example, giving a company the power to raise the operating costs of its rivals. In the Time Warner case, the Justice Department claims AT&T could charge higher rates for, say, Time Warner’s HBO, which produces the "Game of Thrones" series. That would push up costs for rival distributors such as Dish Network Corp., which presumably would pass on those higher costs to its customers. The case is set to go to trial on March 19.

4. Why is this coming up now? 

Enforcers have long recognized that vertical deals can present a host of problems that harm competition. It’s just that they tended to fix them through settlements in which companies agreed to restrictions on how they would conduct business in the future. When Comcast Corp. bought NBCUniversal in 2011 — a vertical deal that united Comcast’s distribution with NBCUniversal’s content — Comcast agreed to dozens of conditions. Many had to do with content-licensing to address the government’s view that Comcast would be able to harm online-video rivals like Netflix Inc. or Inc. by raising the cost of NBCUniversal content or withholding it altogether. President Donald Trump’s Justice Department views those kinds of fixes skeptically, a stance welcomed by those who say these conditions don’t work.

5. What other mergers might draw extra scrutiny? 

CVS Health Corp.’s $68 billion bid for Aetna Inc., also a vertical merger, could be next in the Justice Department’s crosshairs. It has the potential to reshape how Americans receive health care by uniting CVS’s pharmacies and drop-in clinics with an insurer. The companies say the deal would make basic care more convenient and less costly, but there’s also the risk that CVS might steer Aetna’s insured members to its pharmacies whether or not they live or work near one. 

6. What about the just-announced Disney deal?

Walt Disney Co.’s $52.4 billion acquisition of many 21st Century Fox Inc. assets is mostly a horizontal combination. But it raises some of the same concerns the Justice Department has with the AT&T-Time Warner deal. By combining its ESPN network with Fox’s 22 regional cable networks devoted to sports, Disney could force distributors to buy bigger bundles of content, for example. That would hurt rivals such as Dish Network’s Sling TV that are only interested in individual channels.

7. What’s behind the new activism? 

Trump’s antitrust chief, Makan Delrahim, has thrown out the playbook for resolving antitrust concerns in vertical deals. Days before suing AT&T and Time Warner, Delrahim criticized the behavioral settlements that enforcers have used to set requirements on how a company operates. Such conditions mean that the government must become a roving regulator to closely monitor a company’s affairs, he said. These settlements are hard to enforce, eventually expire and ultimately aren’t a real fix for competition problems, Delrahim told antitrust lawyers in Washington. He’s testing that view on the AT&T-Time Warner deal: Instead of negotiating a behavioral fix, he’s seeking the sale of Time Warner’s Turner Broadcasting unit or DirecTV, AT&T’s satellite-TV operator.

8. Does this mean big is bad — again?

Delrahim’s preference for asset sales over behavioral fixes raises the bar for getting vertical deals approved. But analyzing whether antitrust is entering a new era is made tougher by politics. The Time Warner lawsuit has sparked speculation that the decision to block the deal wasn’t motivated by antitrust concerns but by Trump’s disdain for CNN, part of Time Warner’s Turner Broadcasting unit. No evidence has emerged that Trump interfered in the review, but Delrahim will have to establish a longer track record to quell doubts about his approach to vertical mergers.

9. Do all antitrust enforcers agree?

So far, no. The Justice Department shares antitrust enforcement with the FTC, which hasn’t staked out a new position on vertical deals and behavioral settlements. But in a January merger study, the agency said its past behavioral fixes had successfully maintained competition, a sharp split with Delrahim’s view. The FTC, however, was led by a Democrat when it published the study. Trump’s pick to lead the agency, Joseph Simons, who hasn’t yet been confirmed by the Senate, could take a different approach.

The Reference Shelf

  • Bloomberg QuickTake explainers on Big Tech’s challenge to antitrust enforcers and on the European Union’s tougher approach.
  • Bloomberg News article on the European Union’s antitrust case against Google. 
  • Northeastern University economist John Kwoka documents the drop-off in U.S. merger enforcement.
  • The University of Chicago’s Stigler Center summarizes research on growing concentration in the economy.
  • An American Antitrust Institute paper in support of more vigorous enforcement over vertical mergers, especially AT&T-Time Warner
  • One scholar’s guide to vertical mergers and competitive effects. 
  • Analysis of the conditions placed on the Comcast-NBCUniversal vertical merger.

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