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Mergers And The Bluster Of Bigness, Badness

Nobody in business, media or otherwise, wants to be the little guy. Hence, all executives are schooled in thinking big. Their bankers tell them to think big because the paper work for a big deal is just the same as a small deal. There is no incentive to be anything but big.

attentionThe US Department of Justice (DoJ) filed suit (November 20) to block, as hinted earlier, the acquisition by AT&T of Time Warner. The DoJ argues, reported Reuters (November 21), the merger would allow AT&T to force pay-TV rivals to pay “hundreds of millions of dollars more per year (to carry) Time Warner’s networks” and "would result in fewer innovative offerings and higher bills for American families.” AT&T and Time Warner reached an agreement for the acquisition in October 2016; price tag US$85.4 billion.

There are two kinds of mergers and acquisitions: vertical and horizontal. An example of a vertical merger is a pizza restaurant chain buying a cheese factory. Horizontal, then, is buying more pizza restaurants. The former very rarely run into competition questions in the US, the latter very often. AT&T, a telecom, buying Time Warner, a media content producer, is a clear example of vertical integration, a distributor acquiring a producer.

The DoJ argument opposing the transaction hinges on the assumption that the new company, with expanded market share, would raise prices, thus harming consumers. Given the current uncertainties among media operators, not limited to the US, this argument holds little water. With Netflix, Amazon Prime and several others in the subscription VoD business upsetting market conditions market share and price are inversely correlated. Consider, too, the impending entry of Apple into television. Facebook and YouTube in the content business only drives down the cost to consumers.

Undeterred, AT&T chief executive Randall Stephenson said, effectively, bring it on. "I've done a lot of deals in my career, but I've never done one where we have disagreed with the Department of Justice so much on even the most basic of facts.” Mr. Stephenson also said DoJ demands to spin-off either pay-TV operation DirectTV or television network operator Turner Broadcasting, owner of news channel CNN, “is a non-starter.” AT&T asked the federal district court in Washington DC to set an early trial date.

Many observers suspect, without direct evidence, influence on the DoJ decision to block the acquisition on Trump administration distaste for CNN news coverage. "There's been a lot of reporting and speculation whether this is all about CNN, and frankly I don't know,” Mr. Stephenson added. “But nobody should be surprised that the question keeps coming up because we've been witnessing such an abrupt change in the application of antitrust law here,"

Rock back a week or two: the Walt Disney Company, reported CNBC (November 6), initiated “talks” with 21st Century Fox this past summer to acquire non-broadcast assets, largely film and TV studios. The discussions were discontinued. Two years earlier 21st Century Fox abandoned a hostile offer of US$80 million when Time Warner “refused to engage,” reported Reuters (August 5, 2014). A year before that, the Murdoch family split its holdings into publishing (News Corporation) and TV/entertainment (21st Century Fox).

As quick as a fox in a henhouse, other big companies circled 21st Century Fox. Telecom Comcast, which owns NBCUniversal, expressed interest in the film and TV studios, international TV platforms Sky plc in the UK and Europe and Star in India as well as the FX and National Geographic franchises. Telecom Verizon jumped in along with Sony Pictures, all looking for the most tasty.

Wide - perhaps wild - speculation posits, post-auction, remaining 21st Century Fox assets returning to News Corporation for a more news and sports oriented company. It would be smaller but fat with cash, at least sufficient to keep the newspaper business going a few more years. 21st Century Fox chief executive James Murdoch “would consider moving to Disney or Comcast,” said an unnamed source, quoted by Bloomberg (November 19).

Also in the rumor mill of those interested in parts of 21st Century Fox or, they say, Time Warner is Apple. It is the world’s most valuable company with sufficient free cash to buy anything, like twenty aircraft carriers. Chief executive Tim Cook has big decisions ahead.

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