It just was not in the cards for Time Warner Cable (UNKNOWN:TWC.DL) and Comcast (NASDAQ:CMCSA). After a last ditch effort to win over the Department of Justice, the two companies saw the writing on the wall: regulators were pushing the deal to the courtroom, a move that would have dragged out the process and likely ended with a ruling against the merger. Last Friday, Comcast officially announced it was backing out out of the $45 billion deal.
By now, you probably know all of this already, but what is still a bit unclear is exactly why the government puts its stamp of approval on some deals but pulls back from others. Obviously, the decision is made on a case-by-case basis, but there are a few key factors we can garner from recent decisions to get a better idea of what regulators look for to approve a deal.
A cable company . . . for the people?
When two companies look to join forces, they need to prove to regulators that the deal is somehow in the best interest of the public. In the case of Comcast and Time Warner, the companies agreed to divest some of their current customers to other cable providers, so that the combined entity would only control about 30% of the U.S. cable TV market.
What a nice gesture, right? But as BTIG media and technology analyst Richard Greenfield pointed out to CNBC last week, the U.S. government was not just concerned about the number of subscribers the two companies would have serviced but also how much they dominated certain regions in particular. If the merger succeeded, many U.S. cable customers would only be able choose Comcast-Time Warner as their cable and Internet provider. Yay monopolies!
To prevent this from happening, staff attorneys at the Department of Justice antitrust division moved to block the merger, which could have resulted in a lawsuit requiring Comcast and Time Warner to prove in court that the deal was in the best interest of consumers. This is typically considered a death nail for merger prospects, and it is not unusual.
We have seen this before
A few years ago, the government put an end to the $39 billion union of T-Mobile (NASDAQ:TMUS)and AT&T (NYSE:T). In that attempt, the Justice Department actually sued AT&T in order to block the deal, and the FCC moved to block the deal as well. Both regulatory bodies often decide as separate entities whether or not large deals should go through.
Like Comcast-Time Warner, the government feared that AT&T and T-Mobile would hold too much market share. In that case, the combined entity would have hurt competition in 99 out of the top 100 wireless markets.
In a desperate final effort, AT&T offered to divest as much as 40% of T-Mobile subscribers to other competitors in order to keep the deal alive, but in the end, the company realized the government was not going to play ball and dropped their offer.
Uncle Sam does not hate all M&A
Of course, there are plenty of deals that do win approval. Right now, AT&T is working its way through another takeover bid, this time paying $49 billion for DirecTV. AT&T said in its latest earnings call that it expects to receive approval as early as June. According to The Wall Street Journal, the AT&T and DirecTV deal is vastly different from Comcast-Time Warner.
"AT&T's deal, meanwhile, would join its regional pay-TV business with DirecTV's satellite operation, which lacks a robust broadband offering. The divergence in fortunes signals that regulators are more worried about providing choice in Internet access and new, online video options than they are about concentration in pay TV," the article said.
So it is not that the government hates all major deals, it just did not like the idea of Comcast and Time Warner Cable controlling a huge swathe of the Internet and cable connections in the U.S.
Meanwhile, rumors are spreading that Charter Communications is in the process of making its own bid for Time Warner, which would be its second attempt in as many years. Time Warner has another suitor to entertain -- assuming regulators give their blessing.