Over the past twenty years, the Department of Justice and the Federal Communications Commission have reviewed hundreds of proposed mergers in the communications industry. All but a handful have been approved. No major merger has lingered at the reviewing agencies for more than a year without approval. Will the proposed Comcast-Time Warner merger be an exception to the rule?
The Wall Street Journal and Bloomberg have recently reported that the proposed Comcast-Time Warner merger is in serious trouble at the agencies. This deal was publicly announced in February 2014, 14 months ago. Have other major mergers been blocked after 14 months of review? Let’s review some of the major deals in the telecommunications industry that have been opposed by federal agencies:
* AT&T-SBC floated an idea of merger in June 1997. Chairman Reed Hundt of the FCC immediately termed it “unthinkable,” and the deal never progressed.
* WorldCom-Sprint –announced a merger in October 1999. Facing government opposition, the parties withdraw the merger application in July 2000, or 9 months later.
* EchoStar-DirecTV announced a merger in late October 2001. After months of clearly skeptical government review, the FCC announced its opposition in early October 2002, less than 12 months later.
* AT&T-T-Mobile – announced a merger in March 2011. The Department of Justice filed against it August 2011, or 5 months later.
None of the companies listed above was thought to be particularly close to the Administration at the time. In contrast, Comcast is widely viewed as being very close to the Obama administration. Will Comcast, despite its close associations to the Administration, be one of the few telecommunications mergers ever blocked?
The pattern above should not be interpreted to mean that Comcast-Time Warner is taking an exceptionally long time for federal antitrust review. Some deals, such as Bell Atlantic-GTE in 1999-2000 took much longer. Rather, the pattern is of reviewing agencies that occasionally block a deal doing so in a matter of months. If DoJ or the FCC block Comcast-Time Warner deal, it would have been the telecommunications merger under federal review for the longest time before formal opposition.
In a sense, Comcast-Time Warner is a deal that is too slow to fail. For more than a year, corporate management, competitors, suppliers, and customers have grown accustomed to—even if not happy about—a Comcast-Time Warner merger. Major parallel transactions such as Charter-Comcast and Charter-Bright House, are entwined around the larger Comcast-Time Warner deal. The longer the Comcast-Time Warner deal is unopposed, the more markets rationally anticipate and react to its consummation.
But now, if recent news reports are correct, the Comcast-Time Warner deal and all of the market expectations built around it are at risk of being reversed by federal agencies. Regardless of one’s views about whether the merger itself is good for the American economy, the current federal merger review process of telecommunications mergers, with redundant reviews without timelines, is unambiguously bad for merger activity and for the economy as a whole.
Timing and outcome are parts of the economic calculus about whether to pursue a merger. Delays and increased likelihood of blockage discourage investments in mergers. A rational investor, based either in the U.S. or abroad, will see increased likelihoods of merger failures in the United States as a reason to invest in other countries. Frightening away investors is harmful to the American consumer. The prospect of being bought out disciplines companies to be more efficient either (1) to stave off being bought if management wishes to remain independent or (2) to command a higher price should manage seek to be bought out.
A merger failure by a company widely perceived as having made substantial political investments over the years will also raise doubts about the efficacy of such political investments. At first blush, the failure of political investments should be a positive sign for serious financial investors. But further reflection reveals even more troubling questions. Unlike five years ago with NBC, did Comcast today simply not play its political cards well enough? If the Administration can turn down Comcast, what chance of approval would another company have had? In Washington where politics play a dominant role, it is difficult to see a $45 billion deal entirely insulated from politics.
For at least 14 months, Comcast’s management has been focused on the merger, planning for the consolidation, all while taking cautious steps not to offend government regulators. Outside lawyers, bankers, and consultants have prepared the eventuality of a merger, not for prolonged review that will lead to government opposition. All of the distraction and expense will have been for naught should the merger be blocked.
If the merger is eventually blocked, 14 or more months is entirely too long to reach that conclusion. It stretches the imagination to believe that a government agency could not decide a merger review in 6 months or 9 months.
Part of the problem is the parallel review of mergers by the DoJ and the FCC. Although each agency will publicly protest that its review is entirely independent, even casual observers know that there is close coordination. In 20 years and hundreds of transactions, DoJ and the FCC have not once reached opposite conclusions about whether to block a merger.
Each agency approaches mergers with different expectations. DoJ’s decision is not based on a public record, and usually it has access to more confidential information than the FCC. But DoJ must go to court to block a merger, and thus DoJ requires a credible legal case to block a merger. Not so at the FCC. All the FCC requires is a political will to oppose a merger, or to oppose it until it can extract concessions negotiated behind closed doors without any prospect of court review. Given the FCC’s ease of imposing conditions on mergers, DoJ often defers to the FCC to impose those conditions.
The FCC supposedly has a “180-day” clock for merger reviews, but the FCC “stops” the clock at the slightest whim. Stopping a clock is common in sports, but predictable consequences in ensue. A football game has 4 15-minute quarters. Because the game clock frequently stops, a football game usually takes 3 hours. Similarly, the FCC’s 180-day clock now stretches beyond a year.
Ultimately, merger reviews in the telecommunications sector could be improved and expedited by removing the review by two different agencies. One federal agency, the DoJ, is enough to protect both competition and the public interest. Even DoJ needs deadlines. Nine months should be more than enough time to review a proposed merger.