AT&T INC’s £70 Billion Acquisition of Time Warner
Deal Overview
Acquirer: AT&T INC
Target: Time Warner
Total Transaction Size: $85.4 Billion (£70 Billion)
Close Date: 4th June 2018
Company Details: Acquirer - AT&T INC
Founded: 1885
Founder: Alexander Graham Bell and Associates
CEO: John Stankey
Market Cap: £147.02 Billion
AT&T INC., headquartered in Dallas, Texas, is a long-standing telecommunications company. The company has a well-established focus on landline, wireless broadband transmission, and cable television systems, as well as a foothold in developing, producing and distributing film, television and gaming content.
In 1899 AT&T acquired American Bell Telephone’s (its parent company) assets to become the new parent company. This acquisition led to the formation of the Bell System, which dominated the telephone service industry for more than 100 years in America. The system held a vertical monopoly over telecommunication products and services in America and Canada, accumulating an asset value of £150 billion ($450 billion today) at the time of its breakup. The system was broken up due to antitrust issues in 1983. AT&T continued its long-distance services, however due to its decreased market monopoly the company faced increased competition.
While the company was initially focused on landline and wireless broadband services, they expanded into the media and entertainment business with DirecTV in 2015 for $48.5 billion. This diversification made it the largest pay TV company in the country with an estimated 26 million subscribers. This merger allowed AT&T to gain an initial dominant foothold in streaming video services providing the company with huge bargaining power allowing AT&T to licence additional content.
Company Details: Target - Time Warner
Founded: 1990
CEO: Jeff Bewkes
Valuation: Approx. $85.4 Billion
Time Warner, headquartered in New York, was formed as a result of a merger between Time Inc. and Warner Communications.
Time Inc was a global media and entertainment company, which focused on providing programming, feature films, television, and home video production and distribution. Time Inc also had a significant presence as a diversified publisher, owning many well-known publications such as Time magazine, People magazine, and Sports Illustrated. The company was formed because of pervious mergers, as such Time Inc was made up of various divisions including Warner Bros, HBO and many more.
Warner Communications operated as an American entertainment conglomerate, compiled of various well-known assets such as Warner Bros. Pictures and Warner Music Group. The company previously had extensive acquisition deals, such as with Ted Turner's Turner Broadcasting System in 1996, which expanded the company’s media holdings allowing its re-entry into the cable television industry. Warner Bros. re-entry into is pre-1950 film library gave it a significantly larger content accumulation to distribute to its customer base.
In another historic acquisition deal in 2000, Time Warner was acquired by AOL creating a $350 billion corporation. The deal aimed to create a dominating conglomerate in both the traditional media and digital media industries. However, the success of this acquisition was diminished by the lack of compatibility between AOL’s digital systems and Time Warner’s media systems. The mismatch of capabilities led to huge inefficiencies in the overall operations. The predicted benefits of the merger were never seen, and by 2002 the financial fallout was estimated to be $99 billion. In December 2009 Time Warner spun-off AOL, with many attributing the overall failures to a lack of adaptability between the companies’ strategies as well as a huge misalignment in company cultures.
The Acquisition
The acquisition between AT&T and Time Warner was an $85 billion deal. The acquisition was a ‘vertical merger’, which is where a company takes control of different stages of the market supply chain, in order to improve output efficiency and reduce operational costs. The business strategy was for Time Warner to produce media content, including films and television channels, which were to be distributed by AT&T at a lower cost. The aim of the acquisition was to increase efficiency, allowing for lower costs to be charged to consumers.
AT&T were attracted to this acquisition, as it would allow for them to increase their reach in the media and entertainment industry. AT&T’s ability to utilise the array of content produced by Time Warner would allow for this goal to be achieved; through using Time Warner’s established ability to collect and monitor data usage regarding content viewership, it would enable the conglomerate to tailor digital advertising and direct specific content to their viewers more efficiently. The acquisition would allow the enlarged company to compete with well-known rivals such as Google and Facebook both of which were considered the leaders in this industry. Time Warner was attracted to the acquisition, due to the benefits of access to AT&T’s distributions networks. The media distributional routes of AT&T would allow Timer Warner to market and disperse its entertainment content to a much larger audience at a lower cost.
Legal Contentions
Both companies had a history of attracting attention from the Department of Justice, specifically regarding Antitrust law, as with the Bell System in 1984.
Antitrust law, also referred to as Competition law, focuses on promoting fair competition in a particular market, to prevent the establishment of large monopolies. These lawsuits generally brought by the Department of Justice showcase their focus on protecting consumers and businesses from the damaging effects of powerful companies taking over a market.
The acquisition of the global leading companies in the entertainment, media and telecommunications industry attracted extensive litigation from the Department of Justice, under President Donald Trump, due to their fears of anti-competitive practices. This was the first antitrust lawsuit of the administration, with the Department fearing that the acquisition would lead to inflated premium rates being charged to consumers due to a lack of competition in the market. The Department of Justice argued the inflated prices imposed upon consumer would result in an estimated $436 million of extra fees for consumers. The greater bargaining power the companies would gain in the specified industries led to fears that the merged companies could withhold content from others and further monopolise in the market, contrary to antitrust objectives. The Department also seemed to use this lawsuit to set a precedent for other monopolistic corporations in alternatives markets. Makan Delrahim, the head of the Justice Department’s Antitrust Division, stated the government would not stand idly by as corporations expand and force higher prices on consumers.
Antitrust lawsuits challenging this type of vertical integration merger had not been seen for approximately 40 years prior to 2018. This was attributed to the fact that mergers of this kind were typically seen as less likely to create anticompetitive negatives, thus have been harder for government agencies to challenge. This is due to the monopolistic implications of vertical mergers being more uncertain and not actively eliminating competition in the supply chain. The lack of previous judicial precedent in this area meant there was limited grounds to guide the Department. However, despite the lack of precedent, given the expected market power of the conglomerate fuelling antitrust concerns, it was deemed necessary for this action to be taken.
AT&T contended the merger improving their output efficiency and lowering operational costs, would be beneficial for consumers, as it would allow for costs to be reduced and increased availability of content.
The courts found the case brought by the Department of Justice failed to meet the required burden of proof to sustain its claims of anticompetition concerns. As a result, the acquisition proceeded and was finalised in 2018. Further appeals were brought by the Department in 2019, but once again failing due to a lack of evidence that the merger would lessen competition in the media and entertainment industries.
Overall Impact and Future Implications
Initial predictions provided by economists focused on the economic benefits of the merger, specifically regarding the benefits of vertical integration in lowering costs and increasing efficiency.
Analysts examined comparable companies’ success, such as Netflix’s success in the streaming and digital media content distribution markets, to provide reasonings for the merger. The comparison demonstrated that the traditional model employed by both AT&T and Time Warner required diversification, which would be achieved through a merging of the companies.
However, in 2022, AT&T sold Time Warner to Discovery for an estimated $43 billion, approximating roughly $47 billion lost over the course of the 4 years. The primary reasons driving this spinoff were theorised to be a mismatch in corporate personalities. A wide array of literature seems to suggest culture is the main failing point of similar mergers which initially seem promising on paper but have adversarial effects. The Government’s antitrust suit focal point was centralised on mainstream economic theory based upon the marginal cost benefits predicted. Therefore, the predicted implications of the merger claimed by the Department focused solely on its assumed economic success, failing to identify the potential effect company culture can have in the limited efficiency improvements of the corporation. Whilst the productive potential of the combined companies was clear, the reported lack of synergy was the driving reason for the mergers’ failure. Synergy refers to the increased revenue, reduced costs of combining operations and complementing strengths of the companies (such as the explained combination of AT&T’s distribution channels and Time Warner’s content library).
In application the merger resulted in a cultural clash between the companies, AT&T being a highly bureaucratic risk-averse companies clashing with Time Warners creative fast-paced culture. This mismatch resulted in stifled innovation with the benefits in capitalising each other established infrastructure never being realised. Further to this, there seemed to be poor strategic execution once the merger took place, there was unclear positioning in the market meaning AT&Ts ability to distribute Time Warner’s content to its consumers never effectively took place.
Overall, the merger provides a perfect example that what may seem a perfect match on paper can be extremely diminished through alternative, less considered factors such as company culture.