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?
Answer: Regulators attempt to measure the likelihood of increased market power, i.e., the ability to
raise prices resulting from a business combination. Initially, regulators examine the size of the market
2.2 What are the obligations of the acquirer and target firms according to Section 14(d) of the Williams
Act?
Answer: The acquirer must disclose its intentions and business plans as well as any agreements
between the acquirer and the target firm in a Schedule 14D-1. The disclosure must also include the
2.3 Discuss the pros and cons of federal antitrust laws.
Answer: Such laws are intended to prevent individual corporations from assuming too much market
power such they can limit their output and raise prices without concern for any significant competitive
reaction. Antitrust laws such as the Hart-Scott-Rodino Act require that the firms involved in the
pending transaction notify the regulatory authorities before completing the transaction. The regulators
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?
Answer: Any person or firm acquiring 5% or more of the stock of a public corporation must file a
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.
Answer: Regulation almost always is reactive rather than proactive. Efforts to promote innovation
through regulation may be particularly inappropriate in that the conditions that give rise to innovation
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?
Answer: Detractors argue the Act is overkill in that it imposes costly and unnecessary burdens on
firms. They argue that many firms have de-listed from the major exchanges in recent years because of
Solutions to End of Chapter Case Study Questions
Anti-Competitive Concerns Shrink Size of Drugstore Megamerger
Discussion Questions & Answers:
1. What is anti-trust policy and why is it important? What does the often used phrase “antitrust
concerns” mean?
Answer: Anti-trust policy is a government policy intended to prevent firms from achieving
excessive pricing power, i.e., the ability to raise prices to levels much higher than could have been
2. In analyzing whether the purchase of Rite Aid stores would result in anticompetitive practices, the
FTC examined Walgreens’ regional market share before and after the sale of Rite Aid’s stores.
What factors other than market share should be considered in determining whether a potential
transaction might result in anti-competitive practices?
Answer: Other factors include the availability of substitute products and services, customer price
sensitivity, and the potential for improved operating efficiency. For years, consumers have been
3. What are the risks to Walgreens and Rite Aid of delaying the closing date? Be specific.
Answer: The risks of delay are significant and can be measured in terms of loss of key employees
at Rite Aid, as well as potential customer and supplier attrition. Other costs such as the sheer
4. Who do you think are the winners and the losers in this deal? Consider all constituents including
shareholders, consumers, suppliers, and regulators.
Answer: The winners were Walgreens shareholders, consumers, and regulators. Walgreens ended
up getting most of what it wanted (about 70% of the geographic coverage that it would have
achieved via merger) without paying as much as the original deal required. In addition, it did
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
fiunreasonably” 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 fifair 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 fiunreasonably”
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
False
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 fiblue 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
REGULATORS APPROVE
MERGER OF AT&T AND DIRECTV BUT NOT COMCAST AND
TIME WARNER CABLE
Case Study Objectives: To Illustrate
• Common ways in which regulators and acquirers compromise,
• How the FCC’s net neutrality regulations re–shape media industry behavior, and
• How deals among competitors can be treated differently by regulators even when they are comparable in
size.
__________________________________________________________________________________
For years, AT&T had been flirting with the idea of acquiring satellite pay TV company DirecTV. But
such a deal would have resulted in increased market concentration which may have precluded getting
regulatory approval, and this concern caused AT&T to hold back. Regulators are charged with protecting
the public interest by stimulating healthy competition and innovation. Two large firms attempting to
merge in the same industry is generally a fired flag” for regulators concerned about the potential for
limiting competition and for higher prices charged to consumers.
AT&T’s interest in DirecTV’s satellite service is not simply about finding more pay TV customers in
a market that is fast maturing, it’s about bundling and getting more money from the same customers. By
adding DirecTV’s 20 million pay TV subscribers into its diversified product portfolio consisting of
wireless, phone, fiber-optic broadband, and cable TV, AT&T hoped to create more attractive bundled
packages for which they could charge premium prices to boost revenue and profit.
The firm’s previous growth engine had been wireless mobile services, but now that market is maturing
wireless service. With its satellite TV revenue alone, DirecTV generates about $102 per user.
AT&T is the nation’s largest telecommunications company by revenue and second largest wireless
company by subscribers. The DirecTV deal gives AT&T, with 2014 revenue of $133 billion, a greater
national presence to expand video delivery and another $33 billion in yearly revenue. But it also pairs the
carrier with a business that is past its prime as Americans increasingly disconnect from pay TV and watch
and eventually wireless TV. AT&T has 11 million U-verse customers, but only 5.7 million of them get
TV. With DirecTV — the second-largest pay TV provider in the U.S., behind only Comcast — AT&T
instantly becomes a national player in providing pay TV.
But the competitive landscape changed dramatically in 2015. In less than six months, regulators
disallowed the proposed merger of Comcast and TWC while approving the mergers of Charter
Communications (Charter) and TWC as well as AT&T and DirecTV. All three proposed mergers were
valued between $45 and $55 billion. What made one proposed merger unacceptable and the others okay?
third competitor behind Comcast and AT&T. Prior to acquiring TWC, Charter was a weak player in the
industry. This gave them an edge in getting support from the regulators who say the combination of
Charter and the financially ailing TWC provides potentially the strong third competitor they thought was
necessary to protect consumer interests.
competitor in the U-Verse markets since the satellite-TV service would be owned and marketed by
AT&T. Usually this would require the new company to divest assets to create another competitor in areas
in which they overlapped in order to get regulatory approval.
What seems to have killed the Comcast/TWC merger was that the combined firms would dominate the
broadband services market potentially enabling the new firm to engage in a variety of anticompetitive
While regulators were more favorably disposed to approve the AT&T/DirecTV merger, they were
going to require significant concessions from AT&T before doing so. AT&T was going to be in for
difficult bargaining over issues concerning the FCC’s net neutrality rules which AT&T believed were
inimical to product innovation in the telecommunications industry. AT&T and other internet service
providers (ISPs) had vigorously opposed the Federal Communications Commission’s (FCC) net
firms competed, it did require far reaching behavioral remedies. Behavioral remedies require the
combining firms to adopt a set of future practices designed to lessen potentially anticompetitive policies.
As a condition for FCC approval, AT&T agreed to extend its broadband service to an additional 12.5
million people, many of whom were in low income areas not currently served by the firm. This would
require AT&T to make substantial new investments to expand geographically its high speed broadband
network, effectively increasing the nation’s fiber-optic network by 40% and adding billions of dollars in
new assets to the firm’s balance sheet. The FCC insisted on this investment since an internal study found
that 55 million Americans — 17% of the population — still lack access to internet service with sufficient
speed to watch video or accomplish other data-intensive tasks. Increasing the availability of high-speed
Internet connections has been a priority for the FCC.
AT&T also agreed not to discriminate against unaffiliated content providers. The major area of
concern was in the fast growing market for online video content. AT&T cannot exclude its own or
affiliated video services and content from monthly data caps it imposes on it broadband internet
The conditions for approval fell short of what some critics had wanted. Netflix had urged the FCC to
forbid explicitly AT&T from charging access fees to content providers that connect to its network. This is
what Charter had agreed to in its merger with Time Warner Cable in late 2015. Consumer groups have
opposed AT&T’s purchase of DirecTV from the outset expressing concern that the merger would not lead
to lower rates for consumers or encourage competition. Consumer organizations and a trade group
representing small cable operators repeatedly called for strengthening consumer protections. These
Discussion Questions & Answers:
1. The net neutrality principle states that all legal content providers should have equal access to the
internet and that no provider can gain faster access to the internet by paying a premium price.
Internet service providers (ISPs) which are now regulated by the FCC as public utilities argue that
net neutrality reduces the incentive for firms to innovate because they cannot charge for premium
services that might require faster network speeds than other services. In your opinion is innovation
helped or hurt by net neutrality rules? How are all content providers forced potentially to pay
more to ISPs for online access as a result of net neutrality rules? Explain your answers.
Answer: ISP innovation could be discouraged under net neutrality rules. Treating all content
providers equally means that the ISPs cannot recover the cost associated with a content provider
2. Should regulators in your opinion have extracted more concessions from AT&T before granting
approval to merge with DirecTV? Explain your answer.
Answer: There is a temptation to use whatever leverage one has to extract as much from the other
parties to the negotiations as possible. However, if regulators are to serve the public interest they
3. As a regulator, would you have approved the takeover of DirecTV by AT&T? Explain your
answer.
Answer: DirecTV’s core satellite pay TV business was mature and likely to decline as consumers
4. Free markets discriminate among consumers based on price: those that can afford a product or
service can get it and those that can’t don’t. Net neutrality offers everyone equal access to the
internet. Of these two options, which do you believe is most fair? Explain your answer.
Answer: It is tempting to say that giving everyone equal access is more desirable because it is in
some sense the fairer option. What net neutrality really means is that everyone will be treated
according to what consumers actually wanted.
5. 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.
Answer: Antitrust legislation was passed with the objective of ensuring that firms could not
engage in what were viewed as anticompetitive practices. These included gaining excessive
market share such that they could effectively set prices or collude with competitors to restrain
COMCAST’S ATTEMPTED 2015 TAKEOVER OF TIME WARNER UNRAVELS IN THE FACE OF
VIGOROUS OPPOSITION
__________________________________________________________________________________
KEY POINTS: To Illustrate how
• Public opposition can sway regulatory decisions,
• Criteria applied to regulatory rulings can vary from one deal to another, and
• Timing often is everything in gaining regulatory approval.
It would appear that some things in life are not meant to be. Comcast’s aborted takeover of Time Warner
Cable (TWC) appears to be one of these things. On April 25, 2015, Comcast CEO Brian Roberts and his
board decided to withdraw their offer to takeover TWC for $45.2 billion amidst stiff opposition from
regulatory agencies and public outcry.
Announced 14 months earlier, The Comcast-Time Warner Cable deal had promised to reshape the
media landscape—forcing TV channel-owners and other pay TV operators to contemplate their own
mergers. The proposed takeover of TWC reflected Comcast’s belief that it had to get bigger to gain
negotiating leverage over cable networks in the distribution of their content. From the outset, the proposed
merger ignited a firestorm of controversy from the public, dissatisfied with perceived price gouging and
poor customer service. Media content providers, including Netflix and Dish Network, lobbied regulators
What ultimately caused the deal to unravel? In the end, the coup de grace was the threat of delay. It was
clear to the companies that the Federal Communications Commission (FCC) was prepared to call for an
administrative judge to hear the case and months or years could have passed before any ruling would be
determined. Proposed mergers do not get better with age as customers, suppliers, employees and
shareholders abandon the firms amid the uncertain outcome.
The Department of Justice (DoJ) and FCC while pursuing separate investigations collaborated
Some observers compared the regulatory reaction to the Comcast and TWC tie–up to AT&T’s $39
billion bid to buy T-Mobile in 2011, the last big telecom merger killed by the DoJ. While AT&T and T-
Mobile were competitors in large geographic areas, Comcast and TWC did not compete directly. Therefore,
assessing the impact was more complex. In the case of AT&T and T-Mobile, the substantial increase in
bad customer service.
Regulators chose to focus on the impact of the combination of the broadband market. The FCC
increased its definition of broadband speeds from 4 megabits per second to 25 megabits per second. The
issue became choice and availability. Comcast admitted that they would be the only choice following the
merger for 25 mbps or higher for about 63% of households in that range.
Also, Comcast’s timing was poor as the announcement came at a time when there was growing support
for the FCC’s neutrality rules. Net neutrality is the principle that Internet service providers should enable
have approved a merger in the face of such opposition.
End of Chapter Case Study
Regulators Approve Merger of American and US Airways
to Create Largest Global Carrier
Case Study Objectives: To Illustrate
• The role of regulatory agencies in mergers and acquisitions
• How decisions by regulators impact industry structure
• Common ways in which regulators and acquirers reach compromise.
After months of setbacks and delays, the merger of American Airlines and US Airways to create the largest
global air carrier became a reality on December 9, 2013, after the airlines reached a settlement with the
judge, enables the debtor to leave bankruptcy as a reorganized firm.
American’s merger with US Airways created a third major global carrier that can compete with United
Airlines and Delta Airlines, which completed their own mergers in recent years. The new airline will be 2%
larger than United Continental Holdings in terms of traffic, the number of miles flown by paying
passengers worldwide. This transaction will determine the industry structure for years to come by leaving
only a relative handful of airlines to control most domestic and international flights. The expectation is that
industry rivalry will be more intense since all major carriers are more effective competitors. This, in turn,
will moderate air fare increases and accelerate industry innovation.
What is perhaps most surprising about the Justice Department’s intervention is its timing. Having
known about the proposed merger for months, it waited until just a few days before American’s
During this period, the Justice Department has not expressed concern about possible anticompetitive
practices. Instead, industry consolidation was seen as a means of creating fewer but more effective
competitors in the US airline industry ravaged by escalating fuel prices, strained labor relations, and bone–
The Justice Department and six state attorneys general and the District of Columbia challenged the
merger contending that fares would skyrocket if another merger went through. Their position was in effect
that this was one merger too many. If allowed, the American–US Airways combination would result in
excessive concentration and airfares would spiral upward as airlines gained pricing power.
The Justice Department argued that there was no need for the merger. Rather, American would be able
Regulators faced a conundrum. If they were wrong and American could not compete effectively as an
independent carrier, the airline could reenter bankruptcy and ultimately be liquidated at a cost of increasing
industry concentration, substantial job losses, and potentially higher industry fares anyway.
The two airlines had been close to finishing the merger in August 2013 when the antitrust lawsuit to block
the deal was filed. A trial had been set for November 25, 2013. A federal judge had approved the American
Airlines bankruptcy plan which included the merger with US Airways on September 12, 2013, nearly 2
years after the carrier filed for bankruptcy. The plan was supported by major creditors as well as three
major labor groups. However, the bankruptcy court’s approval was contingent on American resolving the
Justice Department’s lawsuit.
In reviewing previous mergers, federal regulators have not focused on the overall size of the combined
airline but instead looked at whether a merger would decrease competition in individual cities. To do so,
regulators examine specific routes or city pairs, and look at whether a merger reduces the number of
The all-stock deal gave creditors of American control of the combined firms due to a debt for equity
swap in which creditors were willing to exchange what they were owed for shares in the new company
once it emerged from bankruptcy. US Airways stockholders received one share of common stock in the
combined airline for each US Airways share they owned, giving US Airways’ shareholders 28% of the
equity of the combined firms. The remaining 72% of the shares were issued to American’s labor unions and
employees.
The merger is unusual in that it provides for full recovery for secured creditors and a sizeable portion of
the debt owed to unsecured creditors, as well as 3.5% of shares in the new company going to American’s
pre-bankruptcy shareholders. It is unusual in Chapter 11 cases and unprecedented in airline restructurings
leader in the United States on the East Coast the Southwest and in South America. But it would remain a
smaller player in Europe, where United and Delta are stronger. The merger does little to bolster American’s
presence in Asia, where it is far behind its rivals.
While United and Delta went through bankruptcies and mergers in the last decade, American has been
steadily losing ground while racking up losses that totaled more than $12 billion since 2001. It was the last
major airline to seek court protection to reorganize its business, filing for bankruptcy in November 2011.
The wave of big mergers in the industry has created healthier and more profitable airlines that are now
11. Union leadership was lauding Parker publicly as a savior and cheering for the merger. By February
2013, the 10-month long duel between Parker and Horton ended in an agreement to combine the two
airlines. The deal was valued at the time at $11 billion. Parker was to become the CEO with Horton serving
as Chairman for no more than 12 months.
Both Parker and Horton started their careers in the finance department at American in the mid-1980s
and knew each other. Horton is often described as unflappable and a believer in detailed planning. Horton
representatives from American’s unions, trade creditors, and trustees, and a second group made up chiefly
of hedge funds that had acquired unsecured bonds for pennies on the dollar around the time of bankruptcy.
Nothing could pass the UCC without two-thirds approval of the bondholders. Several hedge funds formed
their own group dubbed the fiad hocs.”
The ad hocs were convinced the standalone plan for American was a better way for them to realize a
Chapter 11 without labor contracts leaving the destiny of labor unclear. The unions eventually agreed, but
only with the caveat that the new firm post-bankruptcy would have a new board and management. A month
later, US Airways increased its initial offer from it owning 50.1% of the firm to one in which American’s
shareholders would own 70% of the new firm. Both creditors groups backed the deal and Horton was able
to improve the terms to 72%. Even with the labor concessions, the new contracts substantially raised the
to merge with Delta while it was in bankruptcy protection. Delta rallied workers and creditors against the
hostile bid, with creditors rejecting his bid in early 2007. As head of US Airways, he was again thwarted in
two attempts to takeover United, with United eventually going with Continental. American represented the
last major US air carrier that he could acquire. Parker had clearly learned that to win American he would
have to get labor’s backing. He approached American differently in 2012, successfully lining up their