Chapter 2
The Regulatory Environment
Answers to End of Chapter Discussion Questions
2.1 What factors do U.S. antitrust regulators consider before challenging a merger or acquisition?
2.2 What are the obligations of the acquirer and target firms according to Section 14(d) of the Williams
Act?
2.3 Discuss the pros and cons of federal antitrust laws.
2.4 When is a person or firm required to submit a Schedule 13D to the SEC? What is the purpose of such a
filing?
2.5 Give examples of the types of actions that may be required by the parties to a proposed merger subject
to a FTC consent decree?
2.6 Having received approval from the Justice Department and the Federal Trade Commission,
Ameritech and SBC Communications received permission from the Federal Communications
Commission to form the nation’s largest local telephone company. The FCC gave its approval of the
$74 billion transaction, subject to conditions requiring that the companies open their markets to rivals
and enter new markets to compete with established local phone companies. SBC had considerable
difficulty in complying with its agreement with the FCC. Between December 2000 and July 2001,
SBC paid the U.S. government $38.5 million for failing to provide adequately rivals with access to its
network. The government noted that SBC failed repeatedly to make available its network in a timely
manner, to meet installation deadlines, and to notify competitors when their orders were filled.
Comment on the fairness and effectiveness of using the imposition of heavy fines to promote
government-imposed outcomes, rather than free market outcomes..
2.7 In an effort to gain approval of their proposed merger from the FTC, top executives from Exxon
Corporation and Mobil Corporation argued that they needed to merge because of the increasingly
competitive world oil market. Falling oil prices during much of the late 1990s put a squeeze on oil
industry profits. Moreover, giant state-owned oil companies are posing a competitive threat because
of their access to huge amounts of capital. To offset these factors, Exxon and Mobil argued that they
had to combine to achieve substantial cost savings. Why were the Exxon and Mobil executives
emphasizing efficiencies as a justification for this merger?
2.8 Assume that you are an antitrust regulator. How important is properly defining the market segment in
which the acquirer and target companies compete in determining the potential increase in market
power if the two firms are permitted to combine? Explain your answer.
2.9 Comment on whether antitrust policy can be used as an effective means of encouraging innovation.
Explain your answer.
2.10 The Sarbanes-Oxley Act has been very controversial. Discuss the arguments for and against the Act.
Which side do you find more convincing and why?
Solutions to End of Chapter Case Study Questions
Regulators Approve Merger of American and US Airways to
Create Largest Global Airline
Discussion Questions
1. Whose interests do you believe antitrust regulators represent? What trade-offs do antitrust
regulators face in making decisions that impact the groups whose interests they represent? Be
specific.
2. Speculate as to why the share prices of American and US Airways increased sharply on the
day that the agreement with the Justice Department had been reached? Why did the share
prices of other major airlines also increase?
3. Why do you believe the regulators approved the deal despite the large increase in industry
concentration and their awareness that historically increases in concentration would likely
result in a further reduction in industry capacity?
4. How does the approval of a merger involving a firm in Chapter 11 complicate decision making
for regulators?
5. How did the delay in filing the Justice Department lawsuit impact the economic viability of
American Airlines?
Examination Questions and Answers
Answer true or false to the following questions.
1. Insider trading involves buying or selling securities based on knowledge not available to the
general public. True or False
2. The primary reason the Sarbanes-Oxly Act of 2002 was passed was to eliminate insider trading.
True or False
3. Federal antitrust laws exist to prevent individual corporations from assuming too much market
power such that they can limit their output and raise prices without concern for any significant
competitor reaction. True or False
4. A typical consent decree for firms involved in a merger requires the merging parties to divest
overlapping businesses or to restrict anticompetitive practices. True or False
5. Foreign competitors are not relevant to antitrust regulators when trying to determine if a merger of
two domestic firms would create excessive pricing power. True or False
6. The U.S. Securities Act of 1933 requires that all securities offered to the public must be registered
with the government. True or False
7. Mergers and acquisitions are subject to federal regulation only. True or False
8. Whenever either the acquiring or the target firm’s stock is publicly traded, the transaction is
subject to the substantial reporting requirements of federal securities laws. True or False
9. Antitrust laws exist to prevent individual corporations from assuming too much market power
such that they can limit their output and raise prices without concern for how their competitors
might react. True or False
10. Unlike the Sherman Act, which contains criminal penalties, the Clayton Act is a civil statute and
allows private parties injured by the antitrust violations to sue in federal court for a multiple of
their actual damages. True or False
11. The Williams Act of 1968 consists of a series of amendments to the Securities Act of 1933, and it
is intended to protect target firm shareholders from lighting fast takeovers in which they would not
have enough time to adequately assess the value of an acquirer’s offer. True or False
12. Whenever an investor acquires 5% or more of public company, it must disclose its intentions, the
identities of all investors, their occupation, sources of financing, and the purpose of the
acquisition. True or False
13. Whenever an investor accumulates 5% or more of a public company’s stock, it must make a so–
called 13(d) filing with the SEC. True or False
14. If an investor initiates a tender offer, it must make a 14(d) filing with the SEC. True or False
15. In the U.S., the Federal Trade Commission has the exclusive right to approve mergers and
acquisitions if they are determined to be potentially anti-competitive. True or False
16. In the U.S., the Sherman Act makes illegal all contracts, combinations and conspiracies, which
“unreasonably” restrain trade. The Act applies to all transactions and businesses engaging in both
interstate and intrastate trade. True or False
17. Acquisitions involving companies of a certain size cannot be completed until certain information
is supplied to the federal government and until a specific waiting period has elapsed.
True or False
18. If the regulatory authorities suspect that a potential transaction may be anti-competitive, they will
file a lawsuit to prevent completion of the transaction. True or False
19. Under a consent decree, the regulatory authorities agree to approve a proposed transaction if the
parties involved agree to take certain actions following closing. True or False
20. Negotiated agreements between the buyer and seller rarely have a provision enabling the parties to
back out, if the proposed transaction is challenged by the FTC or SEC. True or False
21. About 40% of all proposed M&A transactions are disallowed by the U.S. antitrust regulators,
because they are believed to be anti-competitive. True or False
22. The U.S. antitrust regulators are likely to be most concerned about vertical mergers. True or False
23. The market share of the combined firms is rarely an important factor in determining whether a
proposed transaction is likely to be considered anti-competitive. True or False
24. A heavily concentrated market is one in which a single or a few firms control a disproportionately
large share of the total market. True or False
25. Market share is usually easy to define. True or False
26. U.S. antitrust regulators may approve a horizontal transaction even if it results in the combined
firms having substantial market share if it can be shown that significant cost efficiencies would
result. True or False
27. In addition to market share, antitrust regulators consider barriers to entry, the number of product
substitutes, and the degree of product differentiation. True or False
28. Antitrust authorities may approve a proposed takeover even if the resulting combination will
substantially increase market concentration if the target from would go bankrupt if the takeover
does not occur. True or False
29. Alliances and joint ventures are likely to receive more intensive scrutiny by regulators because of
their tendency to be more anti-competitive than M&As. True or False
30. U.S. antitrust regulators in determining if a proposed business combination is likely to be anti–
competitive consider only domestic competitors or foreign competitors with domestic operations.
True or False
31. Antitrust regulators rarely consider the impact of a proposed takeover on product and technical
innovation. True or False
32. There are no state statutes affecting proposed takeovers. True or False
33. States are not allowed to pass any laws that impose restrictions on interstate commerce or that
conflict in any way with federal laws regulating interstate commerce. True or False
34. Some state anti-takeover laws contain so-called “fair price provisions” requiring that all target
shareholders of a successful tender offer receive the same price as those who actually tendered
their shares. True or False
35. State antitrust laws are usually quite similar to federal laws. True or False
36. Under federal law, states have the right to sue to block mergers they believe are anti-competitive,
even if the FTC or SEC does not challenge them. True or False
37. Federal securities and antitrust laws are the only laws affecting corporate takeovers. Other laws
usually have little impact. True or False
38. Employee benefit plans seldom create significant liabilities for buyers. True or False
39. Unlike the European Economic Union, a decision by U.S. antitrust regulators to block a
transaction may be appealed in the courts. True or False
40. The primary shortcoming of industry concentration ratios is the frequent inability of antitrust
regulators to define accurately what constitutes an industry, the failure to reflect ease of entry or
exit, foreign competition, and the distribution of firm size. True or false
41. Antitrust regulators take into account the likelihood that a firm would fail and exit a market if it is
not allowed to merger with another firm. True or False
42. Efficiencies rarely are considered by antitrust regulators in determining whether to accept or reject
a proposed merger. True or False
43. The Herfindahl-Hirschman Index is a measure of industry concentration used by U.S. antitrust
regulators in determining whether to accept or reject a proposed merger. True or False
44. Horizontal mergers are rarely rejected by antitrust regulators. True or False
45. The Sherman Act makes illegal all contracts, combinations, and conspiracies that “unreasonably”
restrain trade. True or False
46. The requirements to be listed on most major public exchanges far exceed the auditor independence
requirements of the Sarbanes-Oxley Act. True or False
47. U.S. and European Union antitrust law are virtually identical. True or False
48. Transactions involving firms in different countries are complicated by having to deal with multiple
regulatory jurisdictions in specific countries or regions. True or False
49. Antitakeover laws do not exist at the state level. True or False
50. Environmental laws in the European Union are generally more restrictive than in the U.S. True or
Multiple Choice: Circle only one of the alternatives.
1. In determining whether a proposed transaction is anti-competitive, U.S. regulators look at all of
the following except for
a. Market share of the combined businesses
b. Potential for price fixing
c. Ease of new competitors to enter the market
d. Potential for job loss among target firm’s employees
e. The potential for the target firm to fail without the takeover
2. Which of the following is among the least regulated industries in the U.S.?
a. Defenses
b. Communications
c. Retailing
d. Public utilities
e. Banking
3. All of the following are true of the Williams Act except for
a. Consists of a series of amendments to the 1934 Securities Exchange Act
b. Facilitates rapid takeovers over target companies
c. Requires investors acquiring 5% or more of a public company to file a 13(d) with the
SEC
d. Firms undertaking tender offers are required to file a 14(d)-1 with the SEC
e. Acquiring firms initiating tender offers must disclose their intentions and business plans
4. The Securities Act of 1933 requires the registration of all securities issued to the public. Such
registration requires which of the following disclosures:
a. Description of the firm’s properties and business
b. Description of the securities
c. Information about management
d. Financial statements audited by public accountants
e. All of the above.
5. All of the following is true about proxy contests except for
a. Proxy materials must be filed with the SEC immediately following their distribution to
investors
b. The names and interests of all parties to the proxy contest must be disclosed in the proxy
materials
c. Proxy materials may be distributed by firms seeking to change the composition of a target
firm’s board of directors
d. Proxy materials may be distributed by the target firm seeking to influence how their
shareholders vote on a particular proposal
e. Target firm proxy materials must be filed with the SEC.
6. The purpose of the 1968 Williams Act was to
a. Give target firm shareholders time to review takeover proposals
b. Prosecute target firm shareholders who misuse information
c. Protect target firm employees from layoffs
d. Prevent tender offers
e. Promote tender offers
7. Which of the following represent important shortcomings of using industry concentration ratios to
determine whether the combination of certain firms will result in an increase in market power?
a. Frequent inability to define what constitutes an industry
b. Failure to measure ease of entry or exit for other firms
c. Failure to account for foreign competition
d. Failure to account properly for the distribution of firms of different sizes
e. All of the above
8. In a tender offer, which of the following is true?
a. Both acquiring and target firms are required to disclose their intentions to the SEC
b. The target’s management cannot advise its shareholders how to respond to a tender offer
until has disclosed certain information to the SEC
c. Information must be disclosed only to the SEC and not to the exchanges on which the
target’s shares are traded
d. A and B
e. A, B, and C
9. Which of the following are true about the Sherman Antitrust Act?
a. Prohibits business combinations that result in monopolies.
b. Prohibits business combinations resulting in a significant increase in the pricing power of
a single firm.
c. Makes illegal all contracts unreasonably restraining trade.
d. A and C only
e. A, B, and C
10. All of the following are true of the Hart-Scott-Rodino Antitrust Improvements Act except for
a. Acquisitions involving firms of a certain size cannot be completed until certain
information is supplied to the FTC
b. Only the acquiring firm is required to file with the FTC
c. An acquiring firm may agree to divest certain businesses following the completion of a
transaction in order to get regulatory approval.
d. The Act is intended to give regulators time to determine whether the proposed
combination is anti-competitive.
e. The FTC may file a lawsuit to block a proposed transaction
11. All of the following are true of antitrust lawsuits except for
a. The FTC files lawsuits in most cases they review.
b. The FTC reviews complaints that have been recommended by its staff and approved by
the FTC
c. FTC guidelines commit the FTC to make a final decision within 13 months of a
complaint
d. As an alternative to litigation, a company may seek to negotiate a voluntary settlement of
its differences with the FTC.
e. FTC decisions can be appealed in the federal circuit courts.
12. All of the following are true about a consent decree except for
a. Requires the merging parties to divest overlapping businesses
b. An acquirer may seek to negotiate a consent decree in advance of consummating a deal.
c. In the absent of a consent decree, a buyer usually makes the receipt of regulatory
approval necessary to closing the deal.
d. FTC studies indicate that consent decrees have historically been largely ineffectual in
promoting competition
e. Consent decrees tend to be most effective in promoting competition if the divestitures
made by the acquiring firms are to competitors.
13. U.S. antitrust regulators are most concerned about what types of transaction?
a. Vertical mergers
b. Horizontal mergers
c. Alliances
d. Joint ventures
e. Minority investments
14. Which of the following are used by antitrust regulators to determine whether a proposed
transaction will be anti-competitive?
a. Market share
b. Barriers to entry
c. Number of substitute products
d. A and B only
e. A, B, and C
15. European antitrust policies differ from those in the U.S. in what important way?
a. They focus on the impact on competitors
b. They focus on the impact on consumers
c. They focus on both consumers and competitors
d. They focus on suppliers
e. They focus on consumers, suppliers, and competitors
16. Which other types of legislation can have a significant impact on a proposed transaction?
a. State anti-takeover laws
b. State antitrust laws
c. Federal benefits laws
d. Federal and state environmental laws
e. All of the above
17. State “blue sky” laws are designed to
a. Allow states to block M&As deemed as anticompetitive
b. Protect individual investors from investing in fraudulent securities’ offerings
c. Restrict foreign investment in individual states
d. Protect workers’ pensions
e. Prevent premature announcement of M&As
18. All of the following are examples of antitakeover provisions commonly found in state statutes
except for
a. Fair price provisions
b. Business combination provisions
c. Cash-out provisions
d. Short-form merger provisions
e. Share control provisions
19. A collaborative arrangement is a term used by regulators to describe agreements among
competitors for all of the following except for
a. Joint ventures
b. Strategic alliances
c. Mergers and acquisitions
d. A & B only
e. A & C only
20. Vertical mergers are likely to be challenged by antitrust regulators for all of the following reasons
except for
a. An acquisition by a supplier of a customer prevents the supplier’s competitors from
having access to the customer.
b. The relevant market has few customers and is highly concentrated
c. The relevant market has many suppliers.
d. The acquisition by a customer of a supplier could become a concern if it prevents the
customer’s competitors from having access to the supplier.
e. The suppliers’ products are critical to a competitor’s operations
21. All of the following are true of the U.S. Foreign Corrupt Practices Act except for which of the
following:
a. The U.S. law carries anti-bribery limitations beyond U.S. political boundaries to within
the domestic boundaries of foreign states.
b. This Act prohibits individuals, firms, and foreign subsidiaries of U.S. firms from paying
anything of value to foreign government officials in exchange for obtaining new business
or retaining existing contracts.
c. The Act permits so-called facilitation payments to foreign government officials if
relatively small amounts of money are required to expedite goods through foreign custom
inspections, gain approvals for exports, obtain speedy passport approvals, and related
considerations.
d. The payments described in c above are considered legal according to U.S. law and the
laws of countries in which such payments are considered routine
e. Bribery is necessary if a U.S. company is to win a contract that comprises more than 10%
of its annual sales.
22. Foreign direct investment in U.S. companies that may threaten national security is regulated by
which of the following:
a. Hart-Scott-Rodino Antitrust Improvements Act
b. Defense Production Act
c. Sherman Act
d. Federal Trade Commission Act
e. Clayton Act
23. A diligent buyer must ensure that the target is in compliance with the labyrinth of labor and
benefit laws, including those covering all of the following except for
a. Sexual harassment
b. Age discrimination,
c. National security
d. Drug testing
e. Wage and hour laws.
24. All of the following factors are considered by U.S. antitrust regulators except for
a. Market share
b. Potential adverse competitive effects
c. Barriers to entry
d. Purchase price paid for the target firm
e. Efficiencies created by the combination
25. The Sarbanes-Oxley bill is intended to achieve which of the following:
a. Auditor independence
b. Corporate responsibility
c. Improved financial disclosure
d. Increased penalties for fraudulent behavior
e. All of the above
Case Study Short Essay Examination Questions
Regulatory Challenges in Cross-Border Mergers
______________________________________________________________________________________
Key Points
Such mergers entail substantially greater regulatory challenges than domestic M&As.
Realizing potential synergies may be limited by failure to receive support from regulatory agencies in
the countries in which the acquirer and target firms have operations.
______________________________________________________________________________________
European Commission antitrust regulators formally blocked the attempted merger between the NYSE
Group and Deutsche Borse on February 4, 2012, nearly one year after the exchanges first announced the
deal. The stumbling block appeared to be the inability of the parties involved to reach agreement on
divesting their derivatives trading markets. The European regulators argued that the proposed merger
would result in the combined exchanges obtaining excessive pricing power without the sale of the
derivatives trading markets. The disagreement focused on whether the exchange was viewed as primarily a
European market or a global market.
The NYSE Group is the world’s largest stock and derivatives exchange, as measured by market
capitalization. A product of the combination of the New York Stock Exchange and Euronext NV (the
European exchange operator), the NYSE Group reversed the three-year slide in both its U.S. and European
market share in 2011. The slight improvement in market share was due more to an increase in technology
spending than any change in the regulatory environment. The key to unlocking the full potential of the
international exchange remained the willingness of countries to harmonize the international regulatory
environment for trading stocks and derivatives.
Valued at $11 billion, the mid-2007 merger created the first transatlantic stock and derivatives market.
Organizationally, the NYSE Group operates as a holding company, with its U.S. and European operations
run largely independently. The combined firms trade stocks and derivatives through the New York Stock
Exchange, on the electronic Euronext Liffe Exchange in London, and on the stock exchanges in Paris,
Lisbon, Brussels, and Amsterdam.
In recent years, most of the world’s major exchanges have gone public and pursued acquisitions. Before
this 2007 deal, the NYSE merged with electronic trading firm Archipelago Holdings, while NASDAQ
Stock Market Inc. acquired the electronic trading unit of rival Instinet. This consolidation is being driven
by declining trading fees, improving trading information technology, and relaxed cross-border restrictions
on capital flows and in part by increased regulation in the United States. U.S. regulation, driven by
Sarbanes-Oxley, contributed to the transfer of new listings (IPOs) overseas. The strategy chosen by U.S.
exchanges for recapturing lost business is to follow these new listings overseas.
Larger companies that operate across multiple continents also promise to attract more investors to
trading in specific stocks and derivatives contracts, which could lead to cheaper, faster, and easier trading.
As exchange operators become larger, they can more easily cut operating and processing costs by
eliminating redundant or overlapping staff and facilities and, in theory, pass the savings along to investors.
Moreover, by attracting more buyers and sellers, the gap between prices at which investors are willing to
buy and sell any given stock (i.e., the bid and ask prices) should narrow. The presence of more traders
means more people are bidding to buy and sell any given stock. This results in prices that more accurately
reflect the true underlying value of the security because of more competition. The cross-border mergers
also should make it easier and cheaper for individual investors to buy and sell foreign shares.
Before these benefits can be fully realized, numerous regulatory hurdles have to be overcome. Even if
exchanges merge, they must still abide by local government rules when trading in the shares of a particular
company, depending on where the company is listed. Companies are not eager to list on multiple exchanges
worldwide because that subjects them to many countries’ securities regulations and a bookkeeping
nightmare. At the local level, little has changed in how markets are regulated. European companies list their
shares on exchanges owned by the NYSE Group. These exchanges still are overseen by individual national
regulators. In the United States, the SEC still oversees the NYSE but does not have a direct say over
Europe, except in that it would oversee the parent company, the NYSE Group, since it is headquartered in
New York. EU member states continue to set their own rules for clearing and settlement of trades. If the
NYSE and Euronext are to achieve a more unified and seamless trading system, regulators must reach
agreement on a common set of rules. Achieving this goal seems to remain well in the future. Consequently,
it may be years before the anticipated synergies are realized.
Discussion Questions:
1. What are the key challenges facing regulators resulting from the merger of financial
exchanges in different countries? How do you see these challenges being resolved?
2. In what way are these regulatory issues similar or different from those confronting the SEC and
state regulators and the European Union and individual country regulators?
3. Who should or could regulate global financial markets?
4. In your opinion, will the merging of financial exchanges increase or decrease international
financial stability?
The Importance of Timing: The Express Scripts and Medco Merger
______________________________________________________________________________________
Key Points
• While important, industry concentration is only one of many factors antitrust regulators use in
investigating proposed M&As.
• The timing of the proposed Express Scripts–Medco merger could have been the determining factor
in its receiving regulatory approval.
______________________________________________________________________________________
Following their rejection of two of the largest M&As announced in 2011 over concern about increased
industry concentration, U.S. antitrust regulators approved on April 2, 2012, the proposed takeover of
pharmacy benefits manager Medco Health Solutions Inc. (Medco) by Express Scripts Inc., despite similar
misgivings by critics. Pharmacy benefit managers (PBMs) are third-party administrators of prescription
drug programs responsible for processing and paying prescription drug claims. More than 210 million
Americans receive drug benefits through PBMs. Their customers include participants in plans offered by
Fortune 500 employers, Medicare Part D participants, and the Federal Employees Health Benefits Program.
The $29.1 billion Express Scripts–Medco merger created the nation’s largest pharmacy benefits
manager administering drug coverage for employers and insurers through its mail order operations, which
could exert substantial influence on both how and where patients buy their prescription drugs. The
combined firms will be called Express Scripts Holding Company and will have $91 billion in annual
revenue and $2.5 billion in after-tax profits. Including debt, the deal is valued at $34.3 billion. Together the
two firms controlled 34% of the prescription drug market in the first quarter of 2012, processing more than
1.4 billion prescriptions; CVS-Caremark is the next largest, with 17% market share. The combined firms
also will represent the nation’s third-largest pharmacy operator, trailing only CVS Caremark and Walgreen
Co.
The Federal Trade Commission’s approval followed an intensive eight-month investigation and did not
include any of the customary structural or behavioral remedies that accompany approval of mergers
resulting in substantial increases in industry concentration. FTC antitrust regulators voting for approval
argued that the Express Scripts–Medco deal did not present significant anticompetitive concerns, since the
PBM market is more susceptible to new entrants and current competitors provide customers significant
alternatives. Furthermore, the FTC concluded that Express Scripts and Medco did not represent particularly
close competitors and that the merged firms would not result in monopolistic pricing power. In addition,
approval may have reflected the belief that the merged firms could help reduce escalating U.S. medical
costs because of their greater leverage in negotiating drug prices with manufacturers and their ability to cut
operating expenses by eliminating overlapping mail-handling operations. The FTC investigation also found
that most of the large private health insurance plans offer PBM services, as do other private operators. Big
private employers are the major customers of PBMs and have proven to be willing to switch PBMs if
another has a better offer. For example, Medco lost one-third of its business during 2011, primarily to CVS
Caremark.
In addition, to CVS Caremark Corp, PBM competitors include UnitedHealth, which has emerged as a
recent entrant into the business. Having been one of Medco’s largest customers, UnitedHealth did not
renew its contract, which expired in 2012, with Medco, which covered more than 20 million of its
pharmacy benefit customers. Other competitors include Humana, Aetna, and Cigna, all of which have their
own PBM services competing for managing drug benefits covered under Medicare Part D. With the loss of
UnitedHealth’s business, Express Script–Medco’s share dropped from 34% in early 2012 to 29% at the end
of that year.
Critics of the proposed merger argued that smaller PBM firms often do not have the bargaining power
and data-handling capabilities of their larger competitors. Moreover, benefit managers can steer health plan
participants to their own pharmacy-fulfillment services, and employers have little choice but to agree, due
to their limited leverage. Opponents argue that the combination will reduce competition, ultimately raising
drug prices. As the combined firms push for greater use of mail-ordering prescriptions instead of local
pharmacies, smaller pharmacies could be driven out of business, for mail-order delivery is far cheaper for
both PBMs and patients than dispensing drugs at a store.
Discussion Questions:
1. Why do you believe the U.S. antitrust regulators approved the merger despite the large increase in
industry concentration?
2. Did the timing of the proposed merger between Express Scripts and Medco help or hurt the firms
in obtain regulatory approval? Be specific.
3. Speculate as to how the Express Scripts-Medco merger might influence the decisions of their
competitors to merge? Be specific.
AT&T/T-MOBILE DEAL
SHORT-CIRCUITED BY REGULATORS
______________________________________________________________________________________
Key Points
Regulators often consider market concentration when determining whether an M&A will drive up
prices and reduce consumer choice and product/service quality.
What is an acceptable level of concentration often is difficult to determine.
Concentration may be an outgrowth of the high capital requirements of the industry.
Attempts to limit concentration may actually work to the detriment of some consumers.
______________________________________________________________________________________
United States antitrust regulators have moved aggressively in recent years to block horizontal mergers (i.e.,
those involving direct or potential competitors) while being more lenient on vertical deals (i.e., those in
which a firm buys a supplier or distributor). These actions foreshadowed the likely outcome of the deal
proposed by telecommunications giant AT&T to acquire T-Mobile for $39 billion in cash in early 2011.
Despite the unfavorable regulatory environment for horizontal deals, AT&T expressed confidence that it
could get approval for the deal when it accepted a sizeable termination fee as part of the agreement if it did
not complete the transaction by March 2012. However, the deal would never be completed, as U.S. antitrust
regulators made it clear that a tie-up between number two, AT&T (behind Verizon), and number four, T–
Mobile (behind Sprint), would not be permitted.
On December 20, 2011, AT&T announced that it would cease its nine-month fight to acquire T-Mobile.
AT&T was forced to pay T-Mobile’s parent, Deutsche Telekom, $3 billion in cash and a portion of its
wireless spectrum (i.e., cellular airwaves) valued at as much as $1 billion. T-Mobile and AT&T did agree
to enter into a seven-year roaming agreement1 that could cost AT&T another $1 billion. The announcement
came shortly after AT&T had ceased efforts to fight the Justice Department’s lawsuit filed in August 2011
to block the merger. The Justice Department would not accept any combination of divestitures or other
changes to the deal, arguing that the merger would raise prices to consumers and reduce both choice and
service quality. Instead, the Justice Department opted to keep a “strong” fourth competitor rather than allow
increased industry concentration.
But T-Mobile’s long–term viability was in doubt. The firm’s parent, Deutsche Telekom, had made it
clear that it wants to exit the mature U.S. market and that it has no intention of investing in a new high-
speed network. T-Mobile is the only national carrier that does not currently have its own next-generation
high-speed network. Because it is smaller and weaker than the other carriers, it does not have the cash or
the marketing clout with handset vendors to offer exclusive, high-end smartphones to attract new
customers. While competitors Verizon and AT&T gained new customers, T-Mobile lost 90,000 customers
during 2011.
In response to these developments, T-Mobile announced a merger with its smaller rival MetroPCS on
October 3, 2012, creating the potential for a stronger competitor to Verizon and AT&T and solving
regulators’ concerns about increased concentration. However, it creates another issue by reducing
competition in the prepaid cell phone segment. MetroPCS’s low-cost, no-contract data plans and cheaper
phones brought cellphones and mobile Internet to millions of Americans who could not afford major–
carrier contracts. While T-Mobile announced the continuation of prepaid service, it has an incentive not to
make it so attractive as to cause its own more profitable contract customers to shift to the prepaid service as
their contracts expire. While T-Mobile also announced plans to develop a new high-speed network, it will
be late to the game.
1 Roaming agreements are arrangements between wireless companies to provide wireless service to each
other’s subscribers in areas where a carrier’s coverage is spotty.