With a federal court just clearing AT&T‘s (NYSE:T) proposed merger with Time Warner (NYSE:TWX) yesterday, there was a sense of renewed optimism in the market on Wednesday regarding other blockbuster deals that may face better odds with obtaining regulatory approval. Comcast was reportedly waiting on the court decision regarding AT&T and Time Warner before unveiling its own bid for certain Twenty-First Century Fox assets, one that would compete with Disney‘s current offer. Comcast didn’t waste any time, announcing a $65 billion bid today — 19% higher than Disney’s offer.
Elsewhere in the telecom sector, T-Mobile (NASDAQ:TMUS) is looking to merge with Sprint (NYSE:S) in a deal that investors are already skeptical about, precisely due to expectations of heightened regulatory scrutiny. Shares of both wireless carriers gained modestly in trading today. However, while the odds of getting approval may have slightly improved, the overall chances are still slim.
This horizontal merger could still go sideways
The biggest distinction between the two deals is that one is a horizontal merger (T-Mobile-Sprint), while the other is a vertical merger (AT&T-Time Warner).
In a vertical merger, a company is looking to vertically integrate parts of the value chain, such as acquiring a critical supplier for some raw input used by a manufacturer. Since separate companies have their discrete own profit and value creation motives, vertical mergers can allow the acquiring company to save on costs, effectively capturing those value creation operations for itself. The company can then choose whether or not to keep those savings for itself, pass them along to consumers in the form of lower prices, or some combination of both. In this case, AT&T is effectively a distributor of content, with Time Warner supplying that content.
In a horizontal merger, a company attempts to acquire a direct competitor that is competing on the same playing field. Horizontal mergers are often motivated by cost savings as well, but these savings are usually the result of achieving greater scale, as well as eliminating any redundant overhead. The inevitable result of a horizontal merger is that the combined company is able to grab more market share, which is precisely where antitrust concerns come in. Eliminating a direct competitor fundamentally reduces competition, which has far greater potential to harm consumers.
This is why the Department of Justice universally scrutinizes horizontal mergers much more closely, including calculating a Herfindahl-Hirschman Index (HHI) that quantifies the impact on market concentration. Small companies merging in an unconcentrated market are less of a risk to consumers than two major players merging in an oligopolistic market. The T-Mobile-Sprint merger still faces an uphill battle.