AT&T/Time Warner: Lessons Learned for Companies Considering a Merger
March 12, 2019
On February 26, 2019, the U.S. Court of Appeals for the District of Columbia (Court of Appeals) issued an important antitrust decision, which will influence how vertical mergers are reviewed in the U.S., and perhaps in other countries, including Canada. The Court of Appeals refused to overturn the U.S. District Court (District Court) ruling that allowed AT&T (one of the largest pay-TV providers in the U.S.) and Time Warner (one of the largest content producers in the U.S.) to complete their US$108-billion merger. The trial was one of the most followed competition law cases of all time.
The appellate decision brings finality to the case, as the U.S. Department of Justice (DoJ) indicated it will not be seeking leave of the Supreme Court to pursue a further appeal.
Below we provide background on the decision and discuss the key takeaways for merger preparation, reviews and challenges in Canada.
On October 22, 2016, AT&T announced its proposed acquisition of Time Warner. The merger would combine Time Warner’s programming content, which includes television stations HBO, CNN, TBS and TNT, with AT&T’s mobile, TV and broadband distribution services, notably DirecTV. Faced with new competition from Netflix and Amazon, which offer competing services, leaders from both companies positioned the merger as a way to enhance content offerings, tailor advertising, and improve accessibility and availability of content across platforms. Despite the many pro-competitive benefits from the merger, including an estimated US$1.5-billion in cost savings, the DoJ filed suit on November 20, 2017, seeking to block the merger.
At trial, the DoJ alleged that the merger would give AT&T the ability to use Time Warner’s popular programming to gain leverage in negotiating distribution deals with other distributors, resulting in higher prices being passed onto consumers, and that the merger would stifle the growth of innovative and next-generation distributors.
After a 23-day trial that involved 28 witnesses, the District Court denied the DoJ’s request to block the merger. The District Court made several important findings, all of which the Court of Appeals upheld.
Competitor Testimony, Prior Statements and Internal Documents
Competitor testimony featured prominently in the DoJ’s case. At trial, the DoJ called nine witnesses, from competitors to AT&T’s DirecTV, to testify about the harm their companies were likely to experience once AT&T acquired control of Time Warner.
Despite the DoJ’s reliance on competitor complaints to pursue the matter to trial in the first place, the District Court ultimately concluded that the complaints were speculative as the potential for harm could not be quantified. It was not enough for rivals of DirectTV to speculate on the likely negative impact of the transaction on their businesses. The Court of Appeals agreed.
The DoJ also argued that the District Court failed to properly weigh the statements AT&T and DirectTV had made in prior regulatory filings. At the time of the Comcast-NBCUniversal merger in 2009, both AT&T and Time Warner argued that the transaction could result in higher fees for consumers. The District Court was reluctant to assign significant weight to these filings since AT&T and Direct TV were direct competitors. The Court of Appeals agreed.
The DoJ also led into evidence a number of presentations, emails and memos drafted by employees of the merging parties. The District Court found that many of these documents had not been reviewed by senior management responsible for making important company decisions. Accordingly, the District Court was reluctant to give that evidence any weight.
The District Court also did not take issue with the fact that many of the documents had changed prior to being finalized by management. The Court of Appeals did not comment on this issue in the appellate decision.
The outcome of this appeal reinforces how early guidance to a merger planning team can help ensure that final versions of documents produced to the Competition Bureau accurately reflect the business objectives of the company engaged in the merger.
The DoJ’s case relied on expert opinion about the likely effects on subscription fees paid by consumers if Time Warner threatened to withhold content and cause blackouts of its channels on distributors other than DirecTV. The District Court took issue with how the DoJ’s economic theory was divorced from real world experiences in which blackouts were not only infrequent, but also did not result in material customer migration as the DoJ’s expert had predicted. The District Court also criticized the DoJ’s expert for relying on outdated or faulty data.
The Court of Appeals agreed and acknowledged further that it would be difficult to predict long-term price increases given the continuous changes and increasing competitiveness in the industry.
It is critical that economic models used align with the way a business actually works, which must be explained to the court in a way which is understandable. The best and most recent data must be used, and with caution, as the data may not reflect the future reality of the market, such as the decline of revenue for DirecTV from the expansion of Netflix and other OTT services. The DoJ failed here, as noted by the Court of Appeals.
Litigating the Fix
Both the District Court and the Court of Appeals concluded that the model used by the DoJ’s expert was flawed by failing to account for the irrevocable offer of no-blackout arbitration agreements for Time Warner’s Turner networks, something which, coincidentally, already exists in Canada.
In advance of the trial at District Court, the DoJ attempted to bar testimony related to AT&T’s remedial arbitration commitment. The District Court denied this request, which allowed the merging parties to introduce evidence about the impact of the arbitration commitment on the negotiating leverage between Time Warner and distributors. The District Court concluded that the “real-world effects” of the arbitration agreements would likely prevent an increase in AT&T’s bargaining leverage post-merger.
The Court of Appeals agreed with the District Court’s finding. In doing so, the Court of Appeals recognized the importance of considering contractual obligations—and by extension, remedies—in the analysis of vertical mergers.
The decision recognizes the importance of supporting economic theories at trial with concrete real-world evidence. It also highlights the important role of documents in these matters and how adopting effective mitigation strategies can help get a transaction through the process.
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