Only one day after a federal court approved a blockbuster $85.4 billion merger between AT&T Inc. and Time Warner Inc., cable giant Comcast Corp. announced a $65 billion bid for a sizable chunk of Rupert Murdoch’s 21st Century Fox Inc.
The close timing between those two deal developments makes it appear as if the court’s approval of AT&T’s bid for Timer Warner triggered Comcast’s own announcement.
“Clearly they were awaiting the outcome of this ruling, ” said Robert Profusek, head of M&A at Jones Day, about the decision by Comcast executives to go forward with their own potential megamerger.
But it remains unclear whether or not approval of AT&T’s Time Warner transaction—over the objections of the Trump administration—will prompt a spate of merger mania beyond Comcast’s bid to acquire Twentieth Century Fox Television and other assets.
Four out of five M&A lawyers at top New York-based firms contacted for this story stressed that one court’s approval of one deal—no matter how welcome—will not influence M&A deal flow that significantly for the remainder of this year.
“I don’t really agree that somehow this is stimulating for M&A. There isn’t going to be an avalanche of deals,” said Jones Day’s Profusek said, echoing the sentiments of others. He added that antitrust reviews are not what make companies contemplate new deals and favorable rulings are “not what cause deals.”
In his ruling on June 12, U.S. District Judge Richard Leon in Washington, D.C., denied the U.S. Department of Justice’s request to enjoin AT&T’s merger with Time Warner. In that exclamation point-larded, 172-page opinion, Leon explicitly noted that others should not regard his ruling as some kind of M&A invitation to all comers.
“[T]he temptation by some to view this decision as being more than a resolution of this specific case should be resisted by one and all!” Leon wrote in the second-to-last page of his decision.
On June 14, two days after Leon’s ruling, the Justice Department said it would no longer seek an injunction halting the AT&T-Time Warner deal. As a result, on the same day, AT&T announced the completion of its acquisition. But antitrust officials at the Justice Department have not completely forsaken their objections to the transaction. Within 60 days of Leon’s ruling, they could still file an appeal, a scenario still under consideration, a Main Justice spokesman said.
If Leon had agreed with the Justice Department and issued an injunction on June 12, such a ruling would have had the consequence of significantly restricting the flow of M&A transactions, said three different M&A lawyers. But that doesn’t mean Leon’s approval of the deal will prompt other companies to propose new mergers, those same lawyers said.
“The nature of antitrust review is very granular,” said an M&A partner at a large New York-based firm, who requested anonymity in discussing deal matters. Each new transaction has its own particular details that may or may not spark the attention of an antitrust regulator concerned about anti-competitiveness, the lawyer said.
Some deals, for instance, have what the M&A expert called “bad documents” or written communications between executives discussing how a merger will give them more power in certain markets, which provide litigation fodder for an antitrust challenges. The AT&T and Time Warner deal had no “bad documents,” said the lawyer, noting that the proposed union was ”vertical” the same lawyer noted, meaning a combination between two companies operating at different levels in a supply chain. But Leon’s approval of the deal doesn’t mean all proposed vertical mergers will now emerge from antitrust regulatory reviews unscathed, the lawyer said.
In November 2017, when the Justice Department first challenged AT&T’s Time Warner bid on antitrust grounds, many M&A lawyers were surprised since government regulators had recently rarely voiced opposition to vertical mergers and had not generally viewed them as limiting competition. Due to the unexpectedness of that decision, the Justice Department’s objects to the AT&T-Time Warner transaction caused more merger uncertainty. By rejecting the Justice Department’s arguments, Leon erased such concerns and created market conditions more attractive for companies to consider certain M&A options, said one deal lawyer.
“The market reacts unfavorably to uncertainty. When we see well-established principles called into question, it cannot help but have a chilling effect on M&A,“ said Mark Greene, head of the corporate department and leader of the international practice at Cravath, Swaine & Moore. “So against that backdrop, the court’s decision has alleviated that uncertainty.”
Leon’s ruling did not eliminate the prospect that companies will incur tremendous expenses—from their lawyers and other professional advisers—due to prolonged legal and regulatory challenges that often drag on for more than a year. In his ruling, Leon noted that during the AT&T-Time Warner case, 32 lawyers entered appearances for the Justice Department and 14 did so for the defendants. O’Melveny & Myers partner Daniel Petrocelli led the legal team advising AT&T, while Craig Conrath, a veteran of the Justice Department’s Antitrust Division, took the leader for the government.
Despite the long slog for AT&T and Time Warner, Hogan Lovells antitrust partner Logan Breed expressed confidence that more deals will ensue in the aftermath of Leon’s ultimately favorable decision, one that could create more work for M&A lawyers.
“I think this ruling is going to impact companies’ decisions about whether they are going to try vertical mergers,” said Breed, who specializes in M&A antitrust reviews.
Media and telecommunications companies remain likely candidates for vertical mergers because of the fundamental economics of those industries—media giants have lost revenue sources and telecom titans are dealing with different forms of competition. By pairing up, companies in those two sectors can often achieve cost savings, Breed said.
Even the Justice Department conceded in its briefs filed in the antitrust litigation in Leon’s court that the proposed merger between AT&T and Time Warner would reduce costs for consumers by $352 million, Breed said. For their part, the two companies calculated that their union would lead to yearly savings of $1.5 billion and increased revenues of $1 billion, Leon noted in a footnote to his opinion.
Asked whether his own corporate clients are going to respond explicitly because of that decision with new deal proposals, Breed is cautiously optimistic. On the day of Leon’s ruling, the Hogan Lovells partner said he received an email from a client in the telecom sector with an inquiry related to a possible new transaction.
“So, yes,” said Breed in his succinct response to a question many M&A lawyers are undoubtedly asking themselves as the second quarter of 2018 draws to a close.