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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
and the increase in industry concentration that might ensue. Other factors that are considered include
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
Schedule 13D with the SEC within 10 days of reaching that percentage ownership threshold. The
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?
Answer: A typical consent decree requires the merging parties to divest overlapping businesses
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..
Answer: The use of fines to achieve social objectives assumes that the government can provide a
better solution than the free market. In general, the imposed solution will be less efficient that what
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?
Answer: Current antitrust guidelines recognize that the efficiencies associated with a business
combination may offset the potential anti-competitive effects of increased concentration. The
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.
Answer: Whether a company is able to engage in anticompetitive practices is heavily dependent on
how the market is defined. The presumption is that the degree of pricing power is directly related to
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?
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
these added reporting costs. There is evidence that the Act has been disproportionately burdensome on
Solutions to End of Chapter Case Study Questions
Behavioral Remedies as an Alternative to Structural Remedies
in Addressing Anticompetitive Practices
Discussion Questions:
1. What is anti-trust policy and why is it important? What does the often used phrase
"anticompetitive practices" 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
achieved under more competitive conditions. Firm’s achieving fimonopoly” or finear-monopoly”
2. What is a consent decree? If a consent decree cannot be negotiated successfully, what alternatives
are available to the parties involved?
Answer: Consent decrees are voluntary settlements negotiated between regulatory authorities and
3. What antitrust guidelines are generally followed by regulators in dealing with collaborative
arrangements such as joint ventures?
Answer: Collaborative efforts are horizontal agreements among competitors such as joint ventures
and strategic alliances. Regulators are less likely to block a collaborative effort if (i) the
4. Speculate as to the long-term effectiveness of behavioral remedies. Are they likely to be
enforceable in the long-term?
Answer: Structural remedies are generally preferred to behavioral remedies as a forced sale of
assets by the merger parties in areas in which their product lines overlap is most likely to create a
competitor after the merger is completed. While there are issues of whether the competitor created
5. If the firm that is being acquired is likely to have failed if it had been prevented from doing so,
antitrust regulators often approve the deal under what is known as the "failing firm" doctrine. Do
you believe that this is a good practice if the resulting merger raises the potential for
anticompetitive practices?
Answer: Yes, the "failing firm" doctrine makes sense since if the firm that eventually fails is
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
Case Study Short Essay Examination Questions
ANTI-COMPETITIVE CONCERNS SHRINK SIZE OF DRUGSTORE MEGAMERGER
__________________________________________________________________________________
KEY POINTS: To Illustrate
• When antitrust regulation is applied,
• How anticompetitive regulatory issues are often resolved, and
• Unintended consequences of regulatory delays.
The year 2017 was a difficult year for healthcare transactions seeking regulatory approval. A federal judge
blocked a planned $37 billion merger between health insurance giants Aetna and Humana in January after
the Justice Department concluded that the deal should not proceed due to antitrust concerns. The following
month another federal judge blocked a pending $48 billion merger between Anthem and Cigna for similar
reasons. Likewise, a proposed merger between drugstore chains Walgreens Boots Alliance (Walgreens)
and Rite Aid Corporation (Rite Aid) had to be revised three times in order to get regulatory approval. The
deal was finally approved almost two years after it was first announced.
Walgreen's CEO stated publicly that cost savings alone could total more than $1 billion annually. On
December 21, 2016, regional pharmacy Fred's agreed to acquire 865 Rite Aid stores as a result of the
merger for $950 million. Due to the planned sale of stores to Fred's, Walgreens would be acquiring
significantly fewer stores than envisioned in the original deal. To address this issue, Walgreens negotiated a
second deal to lower the price of the acquisition from $9.4 billion to $7.4 billion on January 17, 2017 and
delayed closing by six months.
On June 29, 2017, Walgreen's announced that it would drop its original plan to acquire Rite Aid because
of ongoing regulatory resistance. Instead, Walgreens agreed in a third transformation of the original deal to
buy about half of Rite Aid's existing stores for $5.18 billion in cash. Walgreen would acquire 2,186 stores,
3 distribution centers, and a portion of Rite Aid's inventory. This deal was later revised in the face of
continued resistance from the Federal Trade Commission (FTC). On September 19, 2017, the FTC finally
approved a fourth deal to purchase 1932 Rite Aid stores for $4.38 billion. Even with the reduction in the
number of stores acquired, Walgreens is now larger than CVS Health Corp. The planned sale of Rite Aid
outlets to Fred's was terminated.
further prolonging the review process. Walgreens wanted to avoid a second request for information from
the FTC.
Ironically, the new deal achieves many of the same strategic goals Walgreens sought through a merger
with Rite Aid. Walgreens still gains additional scale and volume to get larger discounts on bulk purchases
and gained as much as 70% of the geographic coverage it would have achieved with the merger. In the new
deal, Walgreens is paying more per store. Walgreens is paying $2.4 million per Rite Aid store, higher than
under previous agreements where it would have paid $2.04 to $2.06 million per store. However,
Walgreens is getting a better deal on stores it is buying from Rite Aid Corp than it would have under the
merger plan, because it was able to "cherry pick" many of the most profitable locations. Therefore, the
higher price per store would seem justified.
Under the merger plan it would have had to take all the stores and to assume Rite Aid's outstanding
long-term debt and other liabilities. Under the final agreement, Walgreens did not assume any Rite Aid
debt. The deal also resulted in less borrowing by Walgreens to finance the purchase price. The net result of
the Walgreen transaction is that it has effectively removed a competitor for less than it would have cost
under the original proposal.
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
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
DOWDUPONT'S REGULATORY NIGHTMARE
__________________________________________________________________________________
KEY POINTS: To Illustrate
• The daunting array of regulatory approvals multinational acquirers must obtain to complete deals in each
country in which they have operations,
• Common concessions made by acquirers to get government consent for M&As, and
• The potential delay in closing due to the regulatory process.
The merger between Dow Chemical Company (Dow) and E. I. du Pont de Nemours and Company (DuPont)
took nearly two years to complete. The new firm will be named DowDuPont Inc., with annual net sales of
$73 billion, a market capitalization of more than $153 billion, and market leadership positions in three
deal took about 21 months to complete in large part because of the complex multinational regulatory review
process it experienced.
The regulatory thicket through which Dow and DuPont had to navigate included the antitrust regulators
in the U.S., the European Union, Canada, China, India, and Mexico. To gain approval in each country, the
companies had to agree to concessions often involving the divestiture of some of their business units that
would have dominated their markets following the merger.
In the U.S., the Justice Department's Antitrust Division signed off on the transaction in June 2017, the
last to do so, after the companies agreed to sell certain assets. These included DuPont's crop protection
products and Dow's copolymers and ionomers products. The Justice Department had been reviewing the
planned merger for more than a year. In order to secure approval from the European Union, both companies
also were required to divest certain business units. DuPont sold off its crop protection business and
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.
When Comcast announced that it had an agreement to merge with Time Warner Cable (TWC) in
February 2014, AT&T saw an opening to get regulatory approval for a deal involving DirecTV. The
Comcast/TWC merger would have made Comcast the dominant cable company and broadband provider
in the industry. AT&T reasoned it could argue that Comcast needed a strong competitor. AT&T in
combination with DirecTV would be much stronger financially than DirecTV on its own and constituted
a formidable counterweight to a Comcast/TWC tie up.
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.
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
TV on a variety of mobile devices. DirecTV has suffered from years of sluggish subscriber growth in its
core satellite business and lacks any broadband infrastructure needed for streaming television. As the
biggest provider of pay TV the deal would also give AT&T more bargaining power with content firms.
Comcast has been the fi800 pound gorilla” in the cable industry in recent years. When the firm sought
to take control of foundering Time Warner Cable, alarm bells sounded among content providers and the
public and in turn regulatory agencies. Regulators were also concerned about the absence of a strong
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.
The more intriguing discussion is why Comcast/TWC failed to get approval while AT&T and
DirecTV did. The competitive issues surrounding the two deals were different in significant ways.
Comcast struck a deal to buy another provider of pay TV and internet service in TWC, but the transaction
would not eliminate a competitor in their served markets. In contrast, AT&T’s U-Verse service competed
with DirecTV in certain geographic markets. Therefore, AT&T’s acquisition of DirecTV would remove a
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.
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
neutrality rules intended to give legal content providers equal access to the internet. Under the rules, ISPs
could not discriminate against content by blocking or slowing transmission speeds and seeking payments
in exchange for faster lanes on their internet networks.
In the end, the perceived benefits of the deal persuaded AT&T to make a number of concessions to get
approval to take control of DirecTV which it valued at more than $48 billion. While the merger approval
did not require such structural remedies as divesting certain assets in geographic areas in which the two
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.
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
customers. Technically, this amounts to a net neutrality violation since it treats some types of data
differently than others. Therefore, AT&T could not cap data transmission for other broadband providers
while not capping users of its own broadband services. AT&T said it would not slow data transmission
from certain websites or prevent access by other websites to the internet. In addition, it would not take
payments to give some content providers faster transmission of their content than others.
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
migrate to watching videos online on a variety of mobile devices. Since the firm did not have
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
equally but to a slower service and less data usage than some others might be willing to pay for.
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
competition to achieve the same objective. Ostensibly, the regulatory authorities set up to enforce
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
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.
