On Friday this past week, AT&T (NYSE: T), the world's largest telecommunications company, completed its $85.4 billion mega-merger with mass media conglomerate Time Warner (NYSE: TWX).
The deal will make AT&T the third-largest entertainment company by revenue, larger than media rival Netflix (NASDAQ: NFLX). AT&T now owns a wide array of television stations including HBO, TBS, TNT, the Cartoon Network, and CNN, as well as the rights to major sports leagues and lucrative film franchises like "Harry Potter." AT&T CEO Randall L. Stephenson promised to "bring a fresh approach to how the media and entertainment industry works for consumers, content creators, distributors and advertisers."
The Justice Department had challenged the merger, which it felt would limit consumer choices and raise prices for services, on antitrust grounds. But on Tuesday, federal judge Richard J. Leon ruled in favor of the companies without imposing any conditions or instructing either company to divest from any assets. The Justice Department had six days to seek an emergency stay of the deal, which would have delayed the merger by four to six months, but did not seek one. The agency could still seek an appeal of the merger at a future date, though experts say they would be unlikely to win, and Judge Leon even cautioned them against it in his ruling.
AT&T and Time Warner deal is a vertical merger, meaning that the companies do not produce competing products: Time Warner produces media content, while AT&T distributes it. These vertical mergers tend to survive regulatory scrutiny, like e-retail giant Amazon's (NASDAQ: AMZN) recent purchase of grocery chain Whole Foods and drugstore CVS' (NYSE: CVS) purchase of insurer Aetna (NYSE: AET).
Regulators instead tend to go after horizontal integration, preventing one company or group from owning too large a share of a specific industry. For example, in 2016 a federal judge prevented the merger of office supply retailers Staples and Office Depot (NASDAQ: ODP). That the Justice Department chose to challenge the vertical merger of AT&T and Time Warner at all is a deviation from the norm. The last time the Justice Department successfully prevented a vertical deal was in the 1970s, when it halted Ford Motor Co (NYSE: F) from buying assets from auto parts manufacturer Autolite.
Although the judge's decision was limited in scope, it might be seen as ushering in a merger-friendly atmosphere. Major media companies will likely try to take advantage of this atmosphere and merge so that they can better compete with online entertainment giants like Netflix, Youtube (NASDAQ: GOOGL), and Amazon. Comcast is expected to make a bid for 21st Century Fox's television assets, setting the stage for a bidding war with Disney, for instance. Shares of companies involved in mergers also rose in light of the judge's ruling: T-Mobile (NASDAQ: TMUS), which hopes to merge with rival Sprint (NYSE: S), gained 1.5% in after-hours trading, while Sprint gained 1%. CVS and Aetna rose, as did Express Scripts (NASDAQ: ESRX) and Cigna (NYSE: CI).