A host of problems facing the AT&T / Time Warner merger highlight potential hurdles for future large mergers and acquisitions.
On Oct 22, 2016, telecommunications major AT&T announced plans to acquire broadcasting company Time Warner in a deal valued at $85 billion. If the proposed takeover is carried out, it would be the second-largest merger and acquisition (M&A) transaction in the media industry, second only to the merger of AOL and Time Warner, according to Dealogic.
The AOL-Time Warner merger ended in failure; it remains to be seen whether or not the AT&T-Time Warner deal will prove to be more long-lasting. As in all cases, this depends on how effectively the two companies combine their operations. However, the success of the deal – and indeed, even the completion of the transaction – also hinges on the regulatory and political environment and on economic factors.
Executive opposition
Fears that regulatory factors would stand in the way of the deal pulled down both companies’ shares in the immediate aftermath of the announcement, and have already stopped several planned mergers. Both major candidates in the Presidential race and their supporters expressed scepticism about the planned merger between AT&T and Time Warner. Hillary Clinton – widely perceived to be business’ favoured candidate – stated that the deal warranted a closer look. Senator Tim Kaine and the campaign’s spokesman expressed arguments in favour of more, rather than less, competition. These sentiments echo the Democratic party’s traditional distaste towards big businesses.
Typically, Republicans have been more tolerant of mergers but Donald Trump is an exception. He suggested that the deal would be a threat to democracy and stated if he became President, he would try to split up NBC and Comcast (the reasons that motivated this merger are similar to those behind the AT&T-Time Warner deal).
Some of Trump’s opposition may be political posturing, given his criticism of the media in general. In contrast, some of the concerns expressed by Hillary Clinton’s campaign are valid. While AT&T and Time Warner do not directly compete with each other, the merger would hurt distributors of content. This could lead to an unfavourable decision from the Department of Justice.
If the new administration that takes over in January retains President Obama’s tough stance against potentially anti-competitive mergers, this may have negative implications for other mega-deals in the pipeline. Deals motivated by tax considerations are likely to be particularly vulnerable. In the spring, the Treasury took steps to discourage inversions – a practice whereby companies attempt to move tax domiciles to benefit from lower taxes. The new rules meant that the proposed merger between pharmaceutical companies Pfizer and Allergan failed to materialise. If the merger had been successful, Pfizer would have paid taxes in Ireland, which offers companies more favourable tax treatment than the US does.
Political considerations for mergers
Some of the criticism against the AT&T-Time Warner deal may also be attributed to the global rise in populism. In many countries, there are concerns that past policies have disproportionately benefited big businesses at the expense of other groups, such as workers in developed economies. These views are increasing being expressed by politicians on both sides of the spectrum. If these sentiments gain ground, it may result in regulation becoming more unfriendly towards mega-mergers. Moreover, several groups have also voiced their distrust of the accommodative monetary policies pursued by central bankers in the developed world. In the US, these parties include Donald Trump and the “Fed Up” movement.
These accommodative policies have been a catalyst for M&A activity, as companies have taken advantage of low rates to fund large deals cheaply. The reversal of these policies may make it expensive for companies to issue bonds to finance takeovers.
AT&T plans to finance its purchase of Time Warner in this way. After the deal, markets punished the company’s bonds due to worries that the deal would result in AT&T becoming heavily indebted. Moody’s warned that an increase in leverage could result in the company’s credit rating being downgraded.
Looking forward
A variety of problems could make this increase in leverage may be especially painful. For instance, there has been frequent speculation that the Fed will raise interest rates, which may discourage future mega-deals, especially if accompanied by a general global slowdown. For its part, the IMF highlighted a variety of threats to global growth in latest version of the World Economic Outlook, including the fallout from the Brexit vote, a slowdown in China and a disorderly withdrawal of supportive monetary policies. If any of these factors materialise, it may discourage further mergers.
At the same time, the future economic environment may be more favorable to mergers, especially if the hurdles mentioned above make the Fed reluctant to raise interest rates. But this reluctance may provide additional fuel to power the U-turn from globalisation and business-friendly policies towards populism; thereby increasing the likelihood of political and regulatory roadblocks to future mega-deals such as the proposed deal between AT&T and Time-Warner. Time will tell whether this deal will be recorded in the hall of fame of successful mergers or if it will be a part of the list of 2016’s failed mergers.
