Jul 13, 2018

How to "unwind" a mega-merger

Illustration: Sarah Grillo/Axios

The U.S. Justice Department yesterday said it will appeal a federal judge's ruling that allowed AT&T to acquire Time Warner.

Bottom line: It is technically possible to "unwind" a merger that has already closed, but it's very rare and can become quite messy.

Two Illinois-area hospitals merged in 2000 after receiving FTC approval, only to have a court rule seven years later that the deal had violated antitrust rules. The merger was unwound, but it was super messy.

  • More recently, a tech company called BazaarVoice had its completed, acquisition of PowerReviews reversed after a DOJ lawsuit, prompting a divestiture. In that latter case, BazaarVoice hadn't originally needed to get federal government approval because of the size of PowerReviews' revenue (even though the deal itself was valued at around $160 million).

This all seems ridiculous: Sure does, which is why a federal, pre-merger approval process was established in 1976 (i.e., Hart-Scott-Rodino). But I've heard rumor that not all government processes are perfect.

What happens now? A three-judge Appeals Court panel from the D.C. Circuit will hear the case, and likely rule by year-end. On the remote chance DOJ were to win, then it's expected that AT&T would appeal to the Supreme Court. One attorney I spoke with noted that a SCOTUS case likely would be heard by a court that includes recent Trump nominee Brett Kavanaugh, who has a long track record of favoring business in regulatory matters, making it highly unlikely DOJ could ever prevail in the end.

  • AT&T and DOJ have a standing agreement whereby AT&T is allowing the acquired Turner properties, but not the other Time Warner assets, to effectively run independently through the end of February 2019. Were an "unwind" ultimately required, this would make it easier to do. Were DOJ to win and AT&T to appeal to SCOTUS, expect both sides to seek an extension of that standing agreement.
  • In terms of everything else (e.g., internal investment, hiring, etc.), AT&T seems to be moving forward as if the deal won't need to be unwound.

Why is DOJ appealing? I've not heard a compelling answer on this. Some conspiracy theories are that it's to appease the White House and/or Rupert Murdoch (i.e., put the screws to Comcast), but it strains at least a bit of credulity to think DOJ rank-and-file (i.e., those who do the actual work) would go along with that, particularly because a negative Appeals Court ruling may weaken DOJ's hand in other vertical merger oppositions (note: it is apparently letting CVS/Aetna go through).

But if AT&T lost: It would need to divest the Time Warner properties, via some sort of government-overseen process. You can't actually put the toothpaste back in the tube, such as clawing back payouts to old Time Warner shareholders, but you can basically create a new tube.

Go deeper