By Robyn Bardmesser
Synergies: the buzzword reverberating across every corner of the business community whenever a new merger or acquisition comes down the pipe. Yet amid the buzz, the harmful effects of mergers and acquisitions (M&A) on industry are often ignored. Each M&A deal professes that the newlywed companies will together produce synergies, ultimately creating value for shareholders without harming consumers.
Take one recent high-profile example: the AT&T-Time Warner tie-up. The merger of AT&T and Time Warner comes on the heels of a long history of M&A deals across industries, setting the stage for the following litigation with the Department of Justice. This $85.4 billion deal was announced in 2016 and is unprecedented in terms of its combination of scale and vertical nature, combining the content maker and content distributor. This potentially gave AT&T anti-competitive access to Time Warner’s content, including CNN, TNT, HBO, and all of Warner Bros. Through this merger, AT&T can use Time Warner’s content to market itself to other cable companies and create a digital advertising business. This merger comes in the wake of tech’s rising dominance over the media industry, a trend popularized by Netflix. In addition to the sheer scale of this meger, the power this gives AT&T over the pricing of Time Warner’s content sparked significant antitrust concerns. It is one of several mega-mergers swirling in the business world—along with CVS and Aetna, Disney and Fox, Comcast and Sky; each deal on the order of tens of billions.
In 2016, the Department of Justice began a renewal of their antitrust efforts in light of swelling, unchecked M&A activity. Litigation between the DOJ and AT&T took center stage as the first time in decades that the government went to court against a vertical merger. This court case attempted to prevent the merger but ended with AT&T winning after a judge declared that it is only possible, rather than necessarily likely, that this merger will result in price increases. This long litigation battle underscores how antitrust law focuses on the wrong factors in evaluating a merger, demonstrating its myopic tendencies. It focuses on the potential effects of a given merger on prices, rather than on the broader economic context from which the merger arose. Such merger myopia prevents courts from incorporating a fuller understanding of anti-competitive behavior’s effects on both industry and consumers.
Much of economic theory hinges on markets being perfectly competitive, yet the modern American economy fails that assumption in almost every industry. As firm concentration increases in an industry, companies use rent-seeking behavior to increase barriers to entry, thereby enabling their business to continue rent-seeking behavior. This behavior has been apparent in the American economy, which, as a result, has seen market power grow more concentrated across all industries. The Fortune 500 share of US GDP has increased from 58% to 73%, led by Fortune 100 companies. The aerospace industry once had 80 firms; now it has four. Between 1980 and 1994, there were over 6,000 bank mergers, with the top 10 banks controlling half of the nation’s financial assets. Weakening competition produces greater profits for companies for a host of reasons. Companies are able to price their products higher without any substantial improvement to their products, as in the airline industry. New, competitive companies have incentives to join bigger, established companies for a plethora of reasons, including access to their customer base, resources of the parent company, in addition to the reality that if new companies do not join bigger companies, they may get beaten out of the market. This has all corresponded with a fall in initial public offerings, where companies issue public shares to raise funding and garner attention, which indicates that instead of going public, companies are rather seeking M&As to keep their business running. Whereas M&A was originally used as a tool against globalization, allowing American companies to compete internationally, it now dominates the domestic economy.
The tech industry itself is mired with anticompetitive behavior—with the FAANG (Facebook, Amazon, Apple, Netflix, Google) bloc dominating the stock market and swallowing up all of its smaller competitors. Netflix pioneered online video content and then later video creation, with Amazon and Hulu and a host of other companies following suit in their successful business model. The merger with Time Warner will enable AT&T to compete with this business model, which would allow the media industry to once again compete with tech giants.
The DOJ estimated that, as a result of this merger, the price of cable bills could rise for consumers by $0.45 per month, since AT&T could now charge more for Time Warner content, which would total up to $400 million annually. Antitrust law requires a high burden of proof on the DOJ—they must prove that it is not only possible but likely for the consumer to be hurt. AT&T and Time Warner agreed to an anti-blackout clause, i.e. AT&T could not hold back (“blackout”) any content produced by Time Warner from its competitors.
This case has highlighted antitrust law’s myopic nature. The ramifications of the AT&T-Time Warner merger go beyond an increase to cable bills. The history of M&A activity shows that although one merger may not have a large effect on industry, many mergers will compound on themselves. Furthermore, antitrust law does not deal with the fact that often companies use M&A to expand into different industries and bolster their revenues. Elizabeth Warren’s latest initiative includes antitrust elements, which would include breaking up the tech companies that have been giving companies like Time Warner and AT&T competition. Her plans involve a novel approach to antitrust and would present a viable reinvigoration of these efforts, that, instead of blocking mergers, could scale industries back to being competitive.
If the DOJ had succeeded in blocking the AT&T and Time Warner merger, that would have not fixed anything either; paradoxically, by letting this merger go through, there is now more competition for the tech giants. One merger alone, even of an $85 billion magnitude, does not have the power to make an industry substantially less competitive. Without a holistic approach to M&A that considers anti-competitive behavior within the industry, rival industries, and the overall economy, antitrust will continue to lack the teeth it needs to protect consumers and small businesses.