AT&T Lawsuit Over Time Warner Shows Tough Turn on AntitrustBy
Trump’s antitrust chief demanded asset sales to win approval
Similar deals have been settled with behavioral conditions
The U.S. lawsuit to stop AT&T Inc.’s takeover of Time Warner Inc. has sparked accusations that the Justice Department, driven by political meddling from the Trump White House, is pursuing a risky case that it’s bound to lose.
Yet the move actually follows a mainstream approach to antitrust policy that sees risks to competition even from mergers that don’t combine direct competitors. The difference this time is the hard line drawn by the government on how to fix the resulting harm.
Typically these cases are settled with conditions designed to keep a level playing field for rivals. On Monday, the Justice Department shook observers by filing a lawsuit seeking to block the deal. AT&T shares slipped 0.7 percent to $34.41 in early market trading in New York Tuesday. The stock has tumbled 14 percent since the start of October through Monday.
Behind the case is Makan Delrahim, the Justice Department official who took over the antitrust division in September and with it, the division’s investigation into the Time Warner takeover. Despite his Republican credentials and his stint as a corporate lobbyist, Delrahim is taking a surprisingly tough stance on a deal that the companies and many investors expected would settle.
“If you’re a conservative antitrust hawk, and you’re saying I don’t want to be a regulator, I want to be an enforcer, that’s our job, this is a pretty good case to try that out,” said Harold Feld, a senior vice president at policy group Public Knowledge, which opposes the merger. “It’s a much stronger case than antitrust folks are giving credit for.”
Delrahim’s opposition to the AT&T deal follows rising criticism from some quarters, particularly Democrats, that lax antitrust enforcement is to blame for increasing concentration across the economy. These critics have been calling on enforcers to take a tougher stand against mergers to protect consumers.
Yet the government’s case has sparked speculation that President Donald Trump interfered in the case. CNN, which is owned by Time Warner, has been a regular target of Trump’s Twitter attacks against what he calls “fake news.” On the campaign trail, he said his administration wouldn’t approve an AT&T-Time Warner marriage because that would put “too much concentration of power in the hands of too few.”
Government lawsuits against deals that don’t involve direct competitors are almost unheard of. The last such case litigated to conclusion was a 1979 suit involving truck trailers and wheels, which the government lost.
For years, companies pursuing deals like AT&T’s bid for Time Warner, which unites a supplier with a distributor, have won approval by agreeing to restrictions on how they operate rather than selling assets.
“Those type of fixes aren’t always effective,” said Steven Salop, an economist at Georgetown University Law Center, said about behavioral remedies. “They’re unenforceable, leave loopholes that let companies avoid their restrictions, and cannot cover all the ways a firm can harm competition in the future.”
Delrahim has signaled that merging companies will have a harder time getting deals done by agreeing to those kinds of settlements. In a Nov. 16 speech in Washington before a roomful of the city’s top antitrust lawyers, he sharply criticized the agreements as replacing “competition with regulation.” They require enforcers to police future conduct of the companies to ensure they’re living up to their promises, Delrahim said.
That view fueled Delrahim’s push last week that AT&T sell its DirecTV business or Time Warner’s Turner unit to win approval, according to a person familiar with the matter.
Selling assets to resolve antitrust concerns are common in deals where direct competitors are combining. The idea is that by selling an overlapping business, the enlarged company won’t be able to use market power to raise prices. Those fixes are favored by enforcers because they let the market do the work of protecting competition rather than relying on a company’s promises to behave in a certain way.
The government said in its complaint Monday that the Time Warner takeover would lead to higher bills for consumers and less innovation in the industry. The combined company could use its control over programming like CNN and HBO to harm rivals by forcing them to pay hundreds of millions of dollars more a year for the right to distribute the content, the government said. The deal also would enable AT&T to impede competition from online video distributors, which would reduce choices for consumers, the Justice Department added.
“That potential harm would be reduced if AT&T sells either Turner Broadcasting or DirecTV,” said Salop, who has consulted with a competitor about the AT&T-Time Warner deal.
Delrahim isn’t entirely breaking new ground. In 2012, the Justice Department required United Technologies Corp. to sell assets as part of its agreement to buy Goodrich Corp. That deal would have made United Technologies both a manufacturer of aircraft turbine engines and the only supplier of engine control systems to its competitor Rolls-Royce Holdings Plc.
That investigation was cited in a speech last year by antitrust lawyer Jonathan Sallet when he was a deputy attorney general for the antitrust division.
“Some vertical transactions may present sufficiently serious risks of foreclosing rivals’ access to critical inputs or customers, or otherwise threaten competitive harm, that they require some form of structural relief or even require that the transaction be blocked,” said Sallet, now a partner with Steptoe & Johnson LLP.
The government’s lawsuit suggests a major shift in its view of “vertical media mergers” and will probably prevent other large deals in media and potentially other industries until a resolution is clear, KeyBanc analyst Andy Hargreaves said in a note.
Still, the Time Warner case won’t be easy, said Andrew Jay Schwartzman at Georgetown Law’s Institute for Public Representation. The government is up against deep-pocketed companies and mainstream antitrust theory that has viewed vertical deals as beneficial to consumers, he said.
The stakes are high, said Schwartzman. If the government wins, there will be more challenges seeking divestitures and if it fails, more deals will go through without any restrictions, he said.