The AT&T - Time Warner Merger

AT&T is one of the biggest phone companies in the world. In fact, this was the company that first started building telephones. On the other hand, Time Warner is a giant in the media space. It owns major media channels like HBO and CNN. Each of these companies is gigantic in their own right. This means that a merger of these two companies would create a corporate giant. This is why such a merger was being blocked by many people. The American justice department filed an anti-trust lawsuit against this merger. Also, the American President, i.e., Donald Trump himself was opposed to the deal. He was asked about his opinions on this deal when he was a Presidential candidate. He categorically mentioned that if this deal went through, it would end up concentrating a lot of power in the hands of very few people.

Hence it would be safe to say that the public opinion was opposed to this mega-deal. However, AT&T and Time Warner justified this merger stating that it was inevitable that they merge to form a single company if they have to deal with companies like Netflix and Google. As a result, a tightly contested lawsuit was fought between the justice department and these mega-corporations. The final result is that the court has given its go-ahead to this merger. The justice department has vowed to continue its fight. However, for now, they could not stop the $109 billion mergers between these two companies.

In this article, we will have a look at some of the common objections that were raised against this merger.

• Negative Effect on Competition: The justice department has been alleging that the AT&T- Time Warner merger is likely to have an extremely negative effect on the other players in the industry. This is because this is a vertical merger. By buying out Time Warner, AT&T now controls a major part of the media supply chain. As a result, AT&T could make life difficult for its competitors like Comcast. For instance, there are TV shows and other content that Time Warner used to sell to AT&T as well as to other competitors. However, it is now possible that Time Warner might grant AT&T the exclusive right to distribute this content. This would negatively affect the viability of the competitors business. In the long run, it is likely that the merged entity may try to run its opponents out of business before their monopoly starts raising prices.
• Hurts Diverse Views: The media industry is considered to be strategically important because of many reasons. One of the important reasons is the fact that media can have a large influence on the political discourse that is happening in the nation. Hence, if a small number of people control what the media is projecting to the people, they can control the public opinion. This is opposed to the core principles of freedom of the press that America follows rigorously. Had Time Warner and AT&T not been in the media business, maybe they would not have faced so much opposition.
• Hurts Consumers: The justice department firmly believes that the Time Warner-AT&T merger will hurt the interests of the consumers. They believe that AT&T will have the power to block the competition from streaming popular content. It may raise prices for its competitors. This will create a scenario wherein consumers will be forced to abandon their current operator and jump on to the AT&T bandwagon. It is also likely that AT&T might temporarily drop its own pricing. This is called predatory pricing. It is meant to lure customers in the short term which helps destroy competition. Once the competition is out of the picture, the prices can be increased since the surviving company will be a de-facto monopoly.
• Hurts Investors: The Time Warner-AT&T deal is not good news for the investors either. After the merger, they will be in control of a global behemoth that spans two different stages of the supply chain. The most common problem reported by companies who have done vertical mergers in the past is the inability to determine the correct intra-subsidiary price. This means that it will be difficult to know what the content produced by Time Warner is really worth to AT&T. In the absence of competitive forces, notional models are used to determine the right price. However, this poses a big problem. It is likely that the executives of the joint company will find it difficult to allocate the right amount of resources to all the divisions and departments of the newly formed corporation.

Also, this merger is being financed by using large amounts of debt. The problem with leveraged buyouts is that the buyers do not seem to have a long time range. This means that they are in for making a quick buck and have a time frame of three to five years. A lot of strategic investments don’t start making money in such a short span of time. This makes the investors panic-stricken and their sudden frantic decisions sometimes end up causing irreversible loss to the underlying corporation.

To sum it up, the odds are stacked against the Time Warner-AT&T deal. Odds are that this deal will end up causing severe damage to at least some of the stakeholders.

Authorship/Referencing - About the Author(s)

The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.