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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
market concentration as measured by market share would have enabled the combined firms to raise prices
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
access to all content and applications regardless of the source, and without favoring or blocking particular
products or websites. After the FCC approved its rules in February 2015, regulators used the new
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
Justice Department 2 weeks before a scheduled trial date. The settlement enabled American to merge with
US Airways. This merger was the cornerstone of its plan to leave the protection of Chapter 11 of the US
Bankruptcy Code, which allows a debtor to cease payments to creditors while it creates a reorganization
plan. A result of negotiation with the debtor’s major stakeholders, the plan, if approved by the bankruptcy
judge, enables the debtor to leave bankruptcy as a reorganized firm.
were caught by complete surprise. The American–US Airways tie-up is the fourth major merger in the US
airline industry since 2008, when Delta bought Northwest airlines. United and Continental merged in 2010,
and Southwest Airlines bought discount rival AirTran Holdings in 2011.
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 argued that there was no need for the merger. Rather, American would be able
to exit bankruptcy as a vigorous competitor with strong incentives to compete with Delta and United. The
Justice Department wanted American to abandon the merger reorganization and to go back to its original
plan of reorganizing as an independent or standalone airline.
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 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
for shareholders to receive any meaningful recovery of the value of their prebankruptcy shares. American
labor unions and other employees received an aggregate 23.8% of the common stock of the combined
airlines ultimately distributed to holders of pre-bankruptcy unsecured claims against the debtors.
The new company will have more than 100 million frequent fliers and will continue to be based in the
Dallas–Fort Worth, Texas, area. The merged airlines will also have a combined 94,000 employees, 950
planes, 6,500 daily flights, 8 major hubs, and total revenue annually of $39 billion. It would be the market
The shares of US Airways Group Inc. rose $0.25–$23.52 at the close of the day the agreement with the
Justice Department was reached, making the post-merger company worth more than $16 billion. American
shares jumped by 6% to $12 per share. Shares of United, Delta, and JetBlue also climbed.
The ability to navigate through the challenges of Chapter 11 and to gain regulatory approval reflected
the disparate yet complementary personalities of the CEOs of American (Tom Horton) and US Airways
(Doug Parker). While the two CEOs had known each other for some time, the unconventional tactics
adopted by Parker when he approached Horton about a merger strained their relationship.
In April 2012, Horton received a surprise letter from Parker apprising him that Parker would make a bid
for American once it filed for bankruptcy, which it had done in November 2011. US Airways about half the
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
saw bankruptcy as American’s salvation. By 2011, the firm had fallen behind United and Delta. In
November 2011, the board agreed to put the firm into Chapter 11 and named Horton the CEO, moving
aside the then CEO Gerard Arpey who had resisted efforts to enter bankruptcy as too disruptive to the firm.
The ad hocs were convinced the standalone plan for American was a better way for them to realize a
windfall for their debt holdings they had purchased at a deep discount. As such they supported Horton’s
standalone strategy. At the same time, they agreed with Horton not to talk to Parker. Horton also agreed
with other unsecured creditors to talk to other potential merger partners. When JetBlue backed out, this left
only US Airways.
Parker stood in marked contrast to Horton. He is often described as flamboyant, charismatic, and the
consummate dealmaker. At age 39, Parker headed America West and later bought US Airways out of
bankruptcy in 2005. Parker worked to create a leaner America West, cutting 350 office jobs and closing a
hub. Parker saw a chance to transform America West from a regional to a national carrier. In 2006, he tried
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
To make this deal happen, it was clear that it took the behind the scenes negotiating skills of Horton to
line up creditor support for the merger and Parker’s ability to garner union support. Together they were
able to convince the Justice Department that the deal made sense and after agreeing to certain concessions
that regulatory approval should be granted. The deal was able to be completed before the end of 2013
because American’s creditors had agreed to the terms of the Chapter 11 bankruptcy reorganization plan, US
Airways shareholders had voted overwhelmingly in favor of the deal, and European Union regulators had
already given their approval.
the bulk of management will come from US Airways, the technology will all come from American. Parker
has extensive experience in the challenges of integrating airlines. In 2005, when American West acquired
US Airways the pilots from each of these firms have yet to agree on a common contract and seniority rules
and to this day cannot fly together.
The new company expects to incur $1.2 billion in one-time transition costs spread over the next 3 years
to pave the way for anticipated increases in revenue and cost savings. One billion dollars in annual net
synergies is expected to come by 2015. After the merger closes, American and US Airways will continue to
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.
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
competition to achieve the same objective. Ostensibly, the regulatory authorities set up to
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?
Answer: Investors approved of the merger and other airline share prices rose due to
the expectation that their profits would rise as a result of less competitive fare discounting.
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?
Answer: The airline industry is among the most capital intensive and cyclical industries in
existence. Preserving the ability of airlines to raise capital to maintain and modernize their
4. How does the approval of a merger involving a firm in Chapter 11 complicate decision making for
regulators?
Answer: Presumably, the firm was in Chapter 11 because it was failing. The objective of
Chapter 11 is to give the debtor firm a respite from its creditors to remake itself into a viable
5. How did the delay in filing the Justice Department lawsuit impact the economic viability of
American Airlines?
Answer: The delay created an unnecessary amount of uncertainty for all stakeholders to the
process including investors, creditors, workers, suppliers, and communities. The uncertainty
disrupted the ability of these stakeholders to plan for the eventual exit of American from
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
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.
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.
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?
Answer: Despite the merger, the exchanges are still subject to local government securities’
regulations when trading in a particular company’s shares. The rules that apply depend on where
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?
Answer: In the U.S., state securities’ laws can be more onerous than federal laws. Moreover, they
may differ from state to state. Consequently, an issuer seeking exemption from federal
3. Who should or could regulate global financial markets?
Answer: The potential for rivalry exists among regulatory bodies within a country. This potential
often is compounded when markets cross national boundaries as nationalistic concerns emerge. In
4. In your opinion, will the merging of financial exchanges increase or decrease international
financial stability?
Answer: Disparate regulations and trading expenses inhibit the free flow of capital internationally.
To the extent the merging of the exchanges harmonize applicable national regulations and reduce
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
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
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.
Discussion Questions:
1. Why do you believe the U.S. antitrust regulators approved the merger despite the large increase in
industry concentration?
Answer: While market concentration often is a necessary condition for firms to engage in
monopolistic pricing practices, it is by no means sufficient. Highly concentrated industries such as
autos, airlines, steel, and aluminum often are highly price competitive due to the commodity-like
2. Did the timing of the proposed merger between Express Scripts and Medco help or hurt the firms
in obtain regulatory approval? Be specific.
Answer: Escalating healthcare expenses represent in increasingly burdensome expense for both
public (e.g., Medicare and Medicaid) and private insurers in the U.S. PBMs offer a potential
3. Speculate as to how the Express Scripts-Medco merger might influence the decisions of their
competitors to merge? Be specific.
Answer: The approval of regulators of this transaction could serve as a “green light” for other
PBMs to feel that they would also receive merger approval if they were to pursue this strategy. In
Gaining Regulatory Approval Often Requires Concessions By Merger Partners
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.
• To gain regulatory approval, acquirers often are compelled to sell assets to another firm to either
strengthen that firm’s competitive position or to create another viable competitor.
What may seem to make good business sense on paper often takes years to complete. First, Anheuser-
Busch InBev (ABI) had to reach an agreement with the highly reluctant takeover target, Grupo Modelo
(Modelo). Second, ABI had to convince regulators that the deal would not reduce competition in the US
beer market. Consequently, this deal from start to finish took almost 5 years.
ABI, which already owned a 50% noncontrolling interest in Modelo, was interested in acquiring the
shares it did not own. These shares were mostly held by wealthy Mexican families. ABI is itself the result
of a $52 billion merger in 2008 between the maker of Anheuser-Busch and a Belgian-Brazilian brewer
InBev. It was looking to expand internationally and wanted to secure the rights to sell Corona’s and
Modelo’s other Mexican brands around the world, particularly in Europe and South America. Furthermore,
The Justice Department argued that the proposed combination of these two firms would exacerbate price
coordination within the industry. ABI would raise its prices in the fall and shortly thereafter MillerCoors
would allegedly follow suit, often by the same amount. In certain geographic areas, Modelo accounts for as
much as 20% share giving it the opportunity to gain market share by not matching the price increase. This
tended to enforce price competition. According to the Justice Department, aggressive pricing in New York,
California, and Texas kept ABI from raising prices, forced it to lower prices, or caused it to lose market
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
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.
Justice Department Requires VeriFone Systems to Sell Assets
before Approving Hypercom Acquisition
Key Points:
• Asset sales commonly are used by regulators to thwart the potential build-up of market power
resulting from a merger or acquisition.
• In such situations, defining the appropriate market served by the merged firms is crucial to
identifying current and potential competitors.
______________________________________________________________________________
In late 2011, VeriFone Systems (VeriFone) reached a settlement with the U.S. Justice Department to
acquire competitor Hypercom Corp on the condition it sold Hypercom’s U.S. point-of-sale terminal
business. Business use point-of-sale terminals are used by retailers to accept electronic payments such as
credit and debit cards.
The Justice Department had sued to block the $485 million deal on concerns that the combination would
limit competition in the market for retail checkout terminals. The asset sale is intended to create a
significant independent competitor in the U.S. The agreement stipulates that private equity firm Gores
Group LLC will buy the terminals business.
Discussion Questions
1. Do you believe requiring consent decrees that oblige the acquiring firm to dispose of certain target
company assets is an abuse of government power? Why or why not?
U.S. antitrust regulators are required to promote the smooth functioning of interstate commerce.
2. What alternative actions could the government take to limit market power resulting from a business
combination?
Answer: Regulators could require the combined firms to submit to price controls or to subject price
The Legacy of GE's Aborted Attempt to Merge with Honeywell
Many observers anticipated significant regulatory review because of the size of the transaction and the
increase in concentration it would create in the markets served by the two firms. Most believed, however,
that, after making some concessions to regulatory authorities, the transaction would be approved, due to its
perceived benefits. Although the pundits were indeed correct in noting that it would receive close scrutiny,
they were completely caught off guard by divergent approaches taken by the U.S. and EU antitrust
line of spare parts GE would be able to supply. This so-called range effect or portfolio power is a relatively
new legal doctrine that has not been tested in transactions of this size.3
On May 3, 2001, the U.S. Department of Justice approved the buyout after the companies agreed to sell
Honeywell's helicopter engine unit and take other steps to protect competition. The U.S. regulatory
authorities believed that the combined companies could sell more products to more customers and therefore
could realize improved efficiencies, although it would not hold a dominant market share in any particular
market. Thus, customers would benefit from GE's greater range of products and possibly lower prices, but
they still could shop elsewhere if they chose. The U.S. regulators expressed little concern that bundling of
products and services could hurt customers, since buyers can choose from among a relative handful of
The EU authorities continued to balk at approving the transaction without major concessions from the
participants—concessions that GE believed would render the deal unattractive. On June 15, 2001, GE
submitted its final offer to the EU regulators in a last-ditch attempt to breathe life into the moribund deal.
GE knew that if it walked away, it could continue as it had before the deal was struck, secure in the
knowledge that its current portfolio of businesses offered substantial revenue growth or profit potential.
Honeywell clearly would fuel such growth, but it made sense to GE's management and shareholders only if
it would be allowed to realize potential synergies between the GE and Honeywell businesses.
GE said it was willing to divest Honeywell units with annual revenue of $2.2 billion, including regional
jet engines, air-turbine starters, and other aerospace products. Anything more would jeopardize the
rationale for the deal. Specifically, GE was unwilling to agree not to bundle (i.e., sell a package of
components and services at a single price) its products and services when selling to customers. Another
stumbling block was the GE Capital Aviation Services unit, the airplane-financing arm of GE Capital. The
EU Competition Commission argued that that this unit would use its influence as one of the world's largest
purchasers of airplanes to pressure airplane manufacturers into using GE products. The commission seemed
