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Today I’m writing about all the money and power in the world, which is to say, mergers. My goal with BIG is to offer analysis that helps explain the world, but also that moves policymakers. The reason for this particular topic is that there is an opportunity for us to influence regulators, who recently asked for public feedback on merger policy. So I’m going to explain why the secret force in the universe is the rules by which corporations are allowed to combine with one another, and how we can fix it.

This is also the beginning of a project. Over the next few months, I’m going to ask for your help putting together a public comment to submit. Together, we’re going to get into the guts of the administrative state, which is normally the province of well-heeled lawyers and lobbyists, but technically is open to everyone. For the first time in a long time, regulators want to hear from us, so we should tell them what we think. The monopolists certainly will offer their point of view.

Before I get to mergers, here are a couple of BIG pieces you might have missed.

Sometimes Antitrust Is Rocket Science: Lina Khan’s FTC and the Pentagon just challenged the high-profile merger of Lockheed Martin and Aerojet. Lockheed’s goal was to monopolize the hypersonic missile business, but the government said no. Why? One reason is the Pentagon is starting to get cross-wise with Wall Street.
Larry Summers Honors Stephen Breyer's "Progressive Deregulation of Airlines": This is a follow-up of my piece on Breyer’s legacy. Many people lauded his tenure on the court, but there’s a curious pattern about why some of them did so.
If you are an antitrust lawyer, consider applying to be a trial lawyer at the Department of Justice Antitrust Division. To put it another way, it’s the Renaissance, and the antitrust agencies are Florence.

And now…

In Praise of Independent Judges, from Learned Hand to Richard J. Leon | The New Yorker — In 2018, Judge Richard Leon ruled against the government to clear the AT&T-Time Warner merger. He also wears a bow tie.

Angering the Masters of the Universe

Wall Street loves mergers. Mergers are a profit center for bankers, but more than that, they allow financiers to structure commerce in a particular way, to extract cash from the public by consolidating markets. Antitrust, by contrast, is in part how the public manages mergers, by challenging the bad ones. It is M&A for the people.

To that end, one of the biggest antitrust cases of the Trump era was the challenge to the AT&T-Time Warner merger, a deal announced in 2016 that incurred the wrath of not only Donald Trump, but also Bernie Sanders and Hillary Clinton. Because of the size and type of the merger, any challenge would set important precedent for other dealmakers on Wall Street. If the AT&T-Time Warner tie-up were blocked, then investment bankers would be leery of proposing other such arrangements. And it looked like merger policy would change, since Trump’s Antitrust Division soon challenged the deal.

But in the summer of 2018, Judge Richard J. Leon, in a decision larded with economic analysis, ruled against the government, and allowed the merger to go forward because he thought it would let the combined entity compete with big tech. Like the Comcast-NBC tie-up in 2010, this deal showed that the policy response to the rise of dominant firms like Google and Facebook would be to combine other firms, a sort of antitrust version of ‘let’s create Mothra to fight Godzilla.’

It was a critical moment. Mergers are one of the key tactics used by firms to monopolize markets, and this loss kept the monopoly party going. Nearly every dominant firm today - from Google to CVS to Raytheon - used mergers to build their power and maintain it. For the rest of the Trump era, enforcers allowed one purchase after another to go forward without challenge, everything from search giant Google buying Fitbit to defense contractor Northrup Grumman buying rocket engine maker Orbital-ATK.

But AT&T-Time Warner didn’t change policy so much as provide continuity with the merger-friendly era that has existed since the 1980s. What’s weird about the successive merger waves over the last forty years, including the one going on now, is that Congress never changed our laws against illegal mergers. Firms, which had once been reluctant to combine, started doing so because enforcers allowed. or even encouraged it. This shift was subtle, and largely went unnoticed.

In 1982, Reagan Antitrust chief Bill Baxter rewrote what are known as merger guidelines. Such guidelines, which describe how enforcers see market share thresholds and barriers to entry, are what courts and businesses use to assess whether they can buy a rival, a supplier, or a customer. Baxter radically relaxed these guidelines in the name of efficiency, and effectively stopped bringing cases. Corporate executives, Baxter believed, knew best what the economy and their firms needed, not meddling government bureaucrats. The Wall Street merger boom of the 1980s was one result. But since then, no one has meaningfully rewritten these guidelines, so merger waves have continued unabated.

But that is changing.

A few weeks ago, the Federal Trade Commission and the Department of Justice Antitrust Division announced they were in the process of reversing Baxter’s ideological choice, and writing new merger guidelines. The FTC’s Lina Khan has gotten a lot of attention for her ideological challenge to the status quo, and she has noted that the commission will be considering undoing consummated mergers. Indeed, their case against Facebook does just that. While Khan has gotten more attention, Antitrust Division chief Jonathan Kanter has been equally forceful. In his very first public speech a few weeks ago in front of a room full of corporate lawyers, he chastised decades of under-enforcement, poor judging and unrealistic economic projections.

“When I look at the current state of antitrust law,” he said, “the most charitable explanation is that we are stuck fighting the last generation’s war, with precedent that bears little or no resemblance to today or the future.“ The muted tone belies the reality that these are fighting words. “Courts engage with markets as they actually exist,” he added. “Where there are natural experiments and direct evidence of competitive harm, economic theory must give way to market realities.” Both the FTC and the Antitrust Division at DOJ have a host of tools at their disposal, beyond new merger guidelines. These include bringing creative types of challenges, and looking back at mergers in which merging parties promised not to engage in certain behaviors, and then seeing if the merged parties violated their promises. (Live Nation-Ticketmaster comes to mind.) Fundamentally, merger law can be used not just to stop bad mergers, but to break ‘em up. And it has been so used in the past.

Kanter’s speech, though it will affect how business is conducted in America in fundamental ways, was not something covered by most media outlets. But in the business press, which is what all the money in the world reads, it was front page news.

The more aggressive posture on mergers is changing behavior already among investors and deal-makers. Here, for instance, is the Wall Street Journal noting the FTC’s recent change in its posture on mergers in the defense base.

And so too in the biotech space.

Why is this change happening? Clearly a shift in leadership at the agencies is important, critical even. Kanter and Khan are pushing aggressively to shift policy. But they are doing so with the wind at their backs. In many of the merger challenges, like Lockheed-Aerojet and Nvidia-ARM, Republicans, and new stakeholders like the military, are on board. The reason for this new consensus is that it’s become too obvious that mergers tend not to work out.

And to understand why, let’s go back to AT&T-Time Warner.

How AT&T-Time Warner Embarrassed a Federal Judge

The thinking behind the combination of the telecom giant and movie and TV studio was as follows. AT&T sells lots of phones, and Time Warner has a lot of movies and TV shows. What if… you could watch Time Warner content on your AT&T phone? For some reason, no one involved in the deal admitted you could already do this, and thus the main justification for the deal made no sense. But that was the thinking.

At the press roll-out, AT&T CEO Randall Stephenson breathlessly argued the deal would let AT&T deliver content on mobile phones, leading to “the next wave of innovation in converging media and communications industry.” This Epcot-style fake futurism of stuff that was already commonplace was probably not the rationale for the deal - Time Warner CEO Jeff Bewkes’s $400 million golden parachute had more to do with it.

Regardless, during the trial, the judge was impressed with fancy executives, as judges often are. And he bought their arguments. With a strong sense of self-assuredness, Leon’s opinion lauded the “considerable efficiencies” the two firms would bring if they could combine their assets.. “The merged entity could,” he wrote in his decision, “gather and edit individual news clips from CNN throughout the day - all tailored to a user’s interests - and deliver that news to the wireless customer for viewing on his or her fifteen-minute break.” Indeed, AT&T said they would roll out a cheap pay TV service called AT&T Watch. There were many other promises, on jobs, lower prices, innovation, and so forth.

It’s been three and a half years since the deal closed, and what happened? Just moving away from the antitrust questions for a second, the answer is that it didn’t work out, at all. In fact, this week, AT&T got shellacked by Wall Street because it is cutting its dividend and undoing the merger, splitting off its content arm from its telecommunications service. So by any metric, the merger was a waste of time, money, and creative talent.

From the beginning, it was clear the deal was run poorly. I remember running into one ex-consultant for PwC telling me her colleagues were hired to make the merger work, but didn’t do much except submit invoices for increased scope whenever someone would ask for anything. Turf battles among executives were rampant. The ‘considerable efficiencies’ cited by Leon were, well, not so considerable.

Of course, when it comes to whether the merger would reduce competition, it’s now clear the deal should have been blocked. To assuage the judge and enforcers, AT&T made many commitments on which it didn’t follow through. CEO Randall Stephenson, in response to government allegations he would raise prices, said “On its face, the premise is absurd.” The claim “literally defies logic to me,” he added. Naturally, AT&T immediately raised prices on DirecTV after the deal closed, which so enraged DOJ lawyers that they began calling the price hikes the “Leon tax.”

That’s not the only broken promise. AT&T also made Time Warner content exclusive to its own paywall, which is something it pledged not to do. It said it would add workers, but since the deal was announced until 2020, AT&T reduced employment by 41,000. The firm killed the cheap $15/month deal for pay TV promised in the trial, and sold anime service Crunchyroll to Sony, which helped create an anime streaming monopoly. And the vaunted ability to compete with Google and Facebook didn’t work out.

On a basic level, AT&T-Time Warner also made our culture worse by reducing the output of what people like. A few weeks ago, entertainer and comedian Adam Conover explained why his popular show, Adams Ruins Everything, was canceled. The show was produced by TruTV, a Time Warner channel. AT&T was just too big to know what they had bought, so they laid off everyone at TruTV, which meant they ended up canceling a bunch of shows that were popular and made money. Here’s Conover explaining.

Adam Conover @adamconover

Need proof that corporate mega-mergers are bad? Pull up a chair while I tell you the story of how a merger killed not just my show, but also put an entire TV network worth of workers out of a job.

So there we go. Disaster all around, predicted by most people, except Judge Leon.

And AT&T-Time Warner is the rule, not the exception. Big mergers rarely work out, even for shareholders. Financial analysts Taiki Morita and Nick Schmitz recently looked at all 268,350 mergers in CompuStat from 2000-2021, and found that “corporate acquirers in the US generally tended to underperform the market. And the bigger the deal, the worse the returns. The firms in the 10th decile generated a -23% premium relative to the market in the subsequent year.” In other words, the government enforcers trying to block the merger had a keener sense of the interests of AT&T shareholders than Judge Leon or the CEO of either AT&T or Time Warner.

But it’s not just Judge Leon who looks foolish, because this kind of unrealistic economist-driven thinking pervades the Federal bench. Two years after Leon approved AT&T-Time Warner, Southern District Judge Victor Marrero gave the green light to a combination between Sprint and T-Mobile. Leon’s ruling on AT&T-Time Warner wasn’t crazy, even if the actual rationale shows he credulous took corporate CEOs at their word. The government did a pretty bad job litigating the AT&T-Time Warner deal. The architect of that case - economist Carl Shapiro - actually conceded that the merger would bring efficiencies, which in retrospect is comical. But Marrero had no justification whatsoever for clearing Sprint-T-Mobile, which were direct competitors in a concentrated market, a situation everyone agrees leads to price hikes. But he did so anyway. And the broken promises followed.

For instance, T-Mobile said prices would drop as a result of the merger. And they should have. In the mobile sector, as Luigi Zingales notes, Americans pay $50 billion more per year than Europeans for similar cell phone service, which is about $14/month in pure profit for every single American. And since the DOJ blocked AT&T’s attempt to buy T-Mobile in 2011, prices actually had been dropping. After the T-Mobile Sprint merger, however, prices for mobile service plateaued, or even began going up.

Similarly, the firm pledged the deal would create “new jobs from Day One.” Naturally, T-Mobile employment dropped by 9,000 in the first year of the deal. T-Mobile began strong-arming dealers almost immediately, and is now being sued for doing so, even as the number of authorized dealer stores fell by 11%. Perhaps the most embarrassing part for Judge Marrero is that T-Mobile pledged to help set up a competitor in wireless - DISH - and then after the merger went through, cut off DISH’s access to its network instead.

Once again, T-Mobile-Sprint is not a one-off. Because of lax merger policy, monopolization of industries is systemic. The Wilshire 5000, for instance, now includes less than 3500 companies, because of mergers.

Autocrats of Trade

To make this point more clearly, I think it helps to think about specific industry examples, which will show how roll-ups have changed American business. I sometimes go back into my archives, and look at the different monopolies I’ve covered. And most firms, if not all, achieved market power by using mergers. I’ll briefly go through a few of the industries that have been consolidated because of lax merger law.

Search: Google has a market share of 90%+ for its search engine, and it also rules mapping, online video, analytics, mobile operating systems, and the plumbing of online ad buying and selling. Nearly every one of its major business lines - except search - came from acquisitions, which include Applied Semantics (2003), Keyhole (2004), Android (2005), Urchin (2005), YouTube (2006), and DoubleClick (2007), Admob (2009), ITA (2011), Waze (2013), Nest (2014), and Fitbit (2020).

The most important merger was Google’s purchase of DoubleClick. In a prescient dissent, Commissioner Pamela Jones Harbour noted the “combination is likely to ‘tip’ both the search and display markets in Google’s favor, and make it more difficult for any other company to challenge the combined firm.” Google has been a monopoly ever since.

Pharmacies/Insurance: There’s been a decades-long merger spree in pharmacies, pharmacy benefits managers, and health insurers, which is one reason pharmaceutical prices are so high and rural pharmacies are shutting down. One key player is CVS, which is so big its various lines of business touch one out of every three Americans. CVS is a massive pharmacy chain, but it generates its real profits through its pharmacy benefits management business, which is a middleman in the medical supply chain. It also owns Aetna, one of the largest health insurers in America.

Key to this were its mergers. CVS bought People Drug Stores (1990), Revco D.S. (1997), Soma.com (1999), Phar-Mor (2002), Eckerd (2004), Sav-On and Osco drugstores (2006), Caremark RX (2007) Long Drug Stores (2008), Rx America (2008), Target’s pharmacy business (2015), Aetna (2018). And those are only some of the bigger mergers, CVS has been buying lots of independent pharmacies for decades.

Lab Testing: As Olivia Webb described in her newsletter on health care, there is a testing duopoly made up of LabCorp and Quest Diagnostics, who slow-walked the roll-out of more Covid testing. Quest is a a result of mergers. The key ones were Diagnostic Medical Laboratory, Inc. (1997), SmithKline Beecham Clinical Labs (1999), MedPlus (2001), American Medical Laboratories and affiliate LabPortal (2002), Unilab Corporation (2003), LabOne (2005), Focus Diagnostics (2006), Hemocue (2007), AmeriPath (2007), Athena Diagnostics (2011), Celera Corporation (2011), Solstas Lab Partners Group (2014), Summit Health (2014), Cleveland HeartLab (2017), and Oxford Immunotec (2018).

Audio Streaming: Upset about Joe Rogan and Spotify? Spotify isn’t a monopoly, but it certainly has meaningful market power, and a lot more than it did just a few years ago. The only reason it has its gatekeeping power over creators is because of an aggressive merger spree. From 2014 to 2020, Spotify bought 15 companies, companies that build everything from data analytics to music and audio production tools to audio ad tools to licensing platforms, and podcasting networks. These companies included the Echo Nest (2014), Seed Scientific (2015), CrowdAlbum (2016), Sonalytic (2017), MightyTV (2017), Mediachain (2017), Niland (2017), SoundTrap (2017), Loudr (2018), Gimlet (2019), Anchor (2019), SoundBetter (2019), Parkast (2019), and The Ringer (2020).

Social networking: Facebook, like Google, bought its way into dominance. The key purchases were competitors Instagram and WhatsApp, but as the FTC noted in its antitrust complaint, Facebook purchased firms like Octazen, Glancee, and EyeGroove just to shut them down so competitors couldn’t access their services.

Hollywood: From the break-up of the Studio System in the 1940s until the 1990s, Disney was a reasonably sized though not dominant entertainment company that made movies and ran theme parks. But today, ‘Imperial Disney’ controls so much box office market share that it can dictate terms to movie theaters, and its streaming service lets it dictate terms to artists. From the 1990s onward, Disney bought ABC, Pixar, Lucasfilm, BAMTech, Marvel, and Fox. The context here is consolidation throughout much of the rest of the entertainment industry into a small group of vertically integrated streaming giants, and the recreation of a new studio system. Creators, independent producers, and theaters have suffered as a result, and studios are at this point too big to risk making films that upset powerful entities, like the Chinese government.

Aerospace and Defense: One of the key reasons for the Boeing 737 Max fiasco, and the dangerous collapse of the American aerospace industry in general, was Boeing’s disastrous merger with McDonnell Douglass in 1997, as well as its purchase of Rockwell International’s aerospace and defense businesses.

Cheerleading: I’ve written a lot on the cheerleading monopolist Varsity Brands, and this one too is a story of mergers. How did Varsity dominate the industry? “Using an array of tactics, but mostly buying rivals starting in the early 2000s, and then accelerating into the 2010s. It bought Jam Brands in 2015, Spirit Celebrations in 2016/2017, and Epic Brands in 2018. Varsity came to control or eliminate virtually all cheerleading competitions, or roughly 90% of the market.”

I could go on and on, as the merger waves do. Gold mines. Academic library services. Lacrosse leagues and teams. Ammunition. Mail sorting software. Tactical helmets. Street sweeping. Video games. Etc…

The point is, mergers are the key fulcrum that has consolidated power in American society. And now, for the first time in our lifetimes, antitrust enforcers are genuinely pushing back, with real merger challenges and now a revamp of this until-now catastrophic set of guidelines. The consequences of this shift in policy could be catalytic. Large firms, rather than buying competitors, will have to invest in building new products and services. The endless waves of layoffs due to mergers will slow, and it will be much harder for dominant firms to buy firms and shut them down for strategic reasons. Moreover, we will likely see a return of corporate research labs, which were a result of antitrust that prevented firms from buying small innovative competitors. It’s hard to overstate the importance of this shift.

What an extraordinary moment. With all the noise around us pressing the notion that politics can’t deliver, in this corner of the world, it already is.

Thanks for reading.

And please send me tips on weird monopolies, stories I’ve missed, or comments by clicking on the title of this newsletter. And if you liked this issue of BIG, you can sign up here for more issues, a newsletter on how to restore fair commerce, innovation and democracy. And consider becoming a paying subscriber to support this work, or if you are a paying subscriber, giving a gift subscription to a friend, colleague, or family member.

cheers,

Matt

BIG by Matt Stoller

Mergers Ruin Everything