Archives For mergers & acquisitions

There are a lot of inaccurate claims – and bad economics – swirling around the Universal Music Group (UMG)/EMI merger, currently under review by the US Federal Trade Commission and the European Commission (and approved by regulators in several other jurisdictions including, most recently, Australia). Regulators and industry watchers should be skeptical of analyses that rely on outmoded antitrust thinking and are out of touch with the real dynamics of the music industry.

The primary claim of critics such as the American Antitrust Institute and Public Knowledge is that this merger would result in an over-concentrated music market and create a “super-major” that could constrain output, raise prices and thwart online distribution channels, thus harming consumers. But this claim, based on a stylized, theoretical economic model, is far too simplistic and ignores the market’s commercial realities, the labels’ self-interest and the merger’s manifest benefits to artists and consumers.
Continue Reading…

By Geoffrey Manne and Berin Szoka

Everyone loves to hate record labels. For years, copyright-bashers have ranted about the “Big Labels” trying to thwart new models for distributing music in terms that would make JFK assassination conspiracy theorists blush. Now they’ve turned their sites on the pending merger between Universal Music Group and EMI, insisting the deal would be bad for consumers. There’s even a Senate Antitrust Subcommittee hearing tomorrow, led by Senator Herb “Big is Bad” Kohl.

But this is a merger users of Spotify, Apple’s iTunes and the wide range of other digital services ought to love. UMG has done more than any other label to support the growth of such services, cutting licensing deals with hundreds of distribution outlets—often well before other labels. Piracy has been a significant concern for the industry, and UMG seems to recognize that only “easy” can compete with “free.” The company has embraced the reality that music distribution paradigms are changing rapidly to keep up with consumer demand. So why are groups like Public Knowledge opposing the merger?

Critics contend that the merger will elevate UMG’s already substantial market share and “give it the power to distort or even determine the fate of digital distribution models.” For these critics, the only record labels that matter are the four majors, and four is simply better than three. But this assessment hews to the outmoded, “big is bad” structural analysis that has been consistently demolished by economists since the 1970s. Instead, the relevant touchstone for all merger analysis is whether the merger would give the merged firm a new incentive and ability to engage in anticompetitive conduct. But there’s nothing UMG can do with EMI’s catalogue under its control that it can’t do now. If anything, UMG’s ownership of EMI should accelerate the availability of digitally distributed music.

To see why this is so, consider what digital distributors—whether of the pay-as-you-go, iTunes type, or the all-you-can-eat, Spotify type—most want: Access to as much music as possible on terms on par with those of other distribution channels. For the all-you-can-eat distributors this is a sine qua non: their business models depend on being able to distribute as close as possible to all the music every potential customer could want. But given UMG’s current catalogue, it already has the ability, if it wanted to exercise it, to extract monopoly profits from these distributors, as they simply can’t offer a viable product without UMG’s catalogue. Continue Reading…

Judge Douglas Ginsburg (D.C. Circuit Court of Appeals; NYU Law) and I have posted “Dynamic Antitrust and the Limits of Antitrust Institutions” to SSRN.  Our article is forthcoming in Volume 78 (2) of the Antitrust Law Journal.  We offer a cautionary note – from an institutional perspective – concerning the ever-increasing and influential calls for greater incorporation of models of dynamic competition and innovation into antitrust analysis by courts and agencies.

Here is the abstract:

The static model of competition, which dominates modern antitrust analysis, has served antitrust law well.  Nonetheless, as commentators have observed, the static model ignores the impact that competitive (or anti-competitive) activities undertaken today will have upon future market conditions.  An increased focus upon dynamic competition surely has the potential to improve antitrust analysis and, thus, to benefit consumers.  The practical value of proposals to increase the use of dynamic analysis must, however, be evaluated with an eye to the institutional limitations that antitrust agencies and courts face when engaged in predictive fact-finding.  We explain and evaluate both the current state of dynamic antitrust analysis and some recent proposals that agencies and courts incorporate dynamic considerations more deeply into their analyses.  We show antitrust analysis is not willfully ignorant of the limitations of static analysis; on the contrary, when reasonably confident predictions can be made, they are readily incorporated into the analysis.  We also argue agencies and courts should view current proposals for a more dynamic approach with caution because the theories underpinning those proposals lie outside the agencies’ expertise in industrial organization economics, do not consistently yield determinate results, and would place significant demands upon reviewing courts to question predictions based upon those theories.  Considering the current state of economic theory and empirical knowledge, we conclude that competition agencies and courts have appropriately refrained from incorporating dynamic features into antitrust analysis to make predictions beyond what can be supported by a fact-intensive analysis.

You can download the paper here.

From Competition Policy International (via The Blog of Legal Times):

Matt Reilly, former Assistant Director of the Federal Trade Commission, is joining Simpson Thacher & Bartlett. Reilly will partner the firm’s Antitrust Practice and be based in its D.C. office. His move comes after 13 years at the FTC, where he was the lead litigator in high-profile cases like the agency’s challenge to the Whole Foods-Wild Oats merger. From 2007, Reilly served as head of the Mergers IV decision.

Congratulations to Matt — formerly head of Mergers IV — and to Simpson Thacher.

The DOJ’s recent press release on the Google/Motorola, Rockstar Bidco, and Apple/ Novell transactions struck me as a bit odd when I read it.  As I’ve now had a bit of time to digest it, I’ve grown to really dislike it.  For those who have not followed Jorge Contreras had an excellent summary of events at Patently-O.

For those of us who have been following the telecom patent battles, something remarkable happened a couple of weeks ago.  On February 7, the Wall St. Journal reported that, back in November, Apple sent a letter[1] to the European Telecommunications Standards Institute (ETSI) setting forth Apple’s position regarding its commitment to license patents essential to ETSI standards.  In particular, Apple’s letter clarified its interpretation of the so-called “FRAND” (fair, reasonable and non-discriminatory) licensing terms that ETSI participants are required to use when licensing standards-essential patents.  As one might imagine, the actual scope and contours of FRAND licenses have puzzled lawyers, regulators and courts for years, and past efforts at clarification have never been very successful.  The next day, on February 8, Google released a letter[2] that it sent to the Institute for Electrical and Electronics Engineers (IEEE), ETSI and several other standards organizations.  Like Apple, Google sought to clarify its position on FRAND licensing.  And just hours after Google’s announcement, Microsoft posted a statement of “Support for Industry Standards”[3] on its web site, laying out its own gloss on FRAND licensing.  For those who were left wondering what instigated this flurry of corporate “clarification”, the answer arrived a few days later when, on February 13, the Antitrust Division of the U.S. Department of Justice (DOJ) released its decision[4] to close the investigation of three significant patent-based transactions:  the acquisition of Motorola Mobility by Google, the acquisition of a large patent portfolio formerly held by Nortel Networks by “Rockstar Bidco” (a group including Microsoft, Apple, RIM and others), and the acquisition by Apple of certain Linux-related patents formerly held by Novell.  In its decision, the DOJ noted with approval the public statements by Apple and Microsoft, while expressing some concern with Google’s FRAND approach.  The European Commission approved Google’s acquisition of Motorola Mobility on the same day.

To understand the significance of the Apple, Microsoft and Google FRAND statements, some background is in order.  The technical standards that enable our computers, mobile phones and home entertainment gear to communicate and interoperate are developed by corps of “volunteers” who get together in person and virtually under the auspices of standards-development organizations (SDOs).  These SDOs include large, international bodies such as ETSI and IEEE, as well as smaller consortia and interest groups.  The engineers who do the bulk of the work, however, are not employees of the SDOs (which are usually thinly-staffed non-profits), but of the companies who plan to sell products that implement the standards: the Apples, Googles, Motorolas and Microsofts of the world.  Should such a company obtain a patent covering the implementation of a standard, it would be able to exert significant leverage over the market for products that implemented the standard.  In particular, if a patent holder were to obtain, or even threaten to obtain, an injunction against manufacturers of competing standards-compliant products, either the standard would become far less useful, or the market would experience significant unanticipated costs.  This phenomenon is what commentators have come to call “patent hold-up”.  Due to the possibility of hold-up, most SDOs today require that participants in the standards-development process disclose their patents that are necessary to implement the standard and/or commit to license those patents on FRAND terms.

As Contreras notes, an important part of these FRAND commitments offered by Google, Motorola, and Apple related to the availability of injunctive relief (do go see the handy chart in Contreras’ post laying out the key differences in the commitments).  Contreras usefully summarizes the three statements’ positions on injunctive relief:

In their February FRAND statements, Apple and Microsoft each commit not to seek injunctions on the basis of their standards-essential patents.  Google makes a similar commitment, but qualifies it in typically lawyerly fashion (Google’s letter is more than 3 single-spaced pages in length, while Microsoft’s simple statement occupies about a quarter of a page).  In this case, Google’s careful qualifications (injunctive relief might be possible if the potential licensee does not itself agree to refrain from seeking an injunction, if licensing negotiations extended beyond a reasonable period, and the like) worked against it.  While the DOJ applauds Apple’s and Microsoft’s statements “that they will not seek to prevent or exclude rivals’ products form the market”, it views Google’s commitments as “less clear”.  The DOJ thus “continues to have concerns about the potential inappropriate use of [standards-essential patents] to disrupt competition”.

Its worth reading the DOJ’s press release on this point — specifically, that while the DOJ found that none of the three transactions itself raised competitive concerns or was substantially likely to lessen the competition, the DOJ expressed general concerns about the relationship between these firms’ market positions and ability to use the threat of injunctive relief to hold up rivals:

Apple’s and Google’s substantial share of mobile platforms makes it more likely that as the owners of additional SEPs they could hold up rivals, thus harming competition and innovation.  For example, Apple would likely benefit significantly through increased sales of its devices if it could exclude Android-based phones from the market or raise the costs of such phones through IP-licenses or patent litigation.  Google could similarly benefit by raising the costs of, or excluding, Apple devices because of the revenues it derives from Android-based devices.

The specific transactions at issue, however, are not likely to substantially lessen competition.  The evidence shows that Motorola Mobility has had a long and aggressive history of seeking to capitalize on its intellectual property and has been engaged in extended disputes with Apple, Microsoft and others.  As Google’s acquisition of Motorola Mobility is unlikely to materially alter that policy, the division concluded that transferring ownership of the patents would not substantially alter current market dynamics.  This conclusion is limited to the transfer of ownership rights and not the exercise of those transferred rights.

With respect to Apple/Novell, the division concluded that the acquisition of the patents from CPTN, formerly owned by Novell, is unlikely to harm competition.  While the patents Apple would acquire are important to the open source community and to Linux-based software in particular, the OIN, to which Novell belonged, requires its participating patent holders to offer a perpetual, royalty-free license for use in the “Linux-system.”  The division investigated whether the change in ownership would permit Apple to avoid OIN commitments and seek royalties from Linux users.  The division concluded it would not, a conclusion made easier by Apple’s commitment to honor Novell’s OIN licensing commitments.

In its analysis of the transactions, the division took into account the fact that during the pendency of these investigations, Apple, Google and Microsoft each made public statements explaining their respective SEP licensing practices.  Both Apple and Microsoft made clear that they will not seek to prevent or exclude rivals’ products from the market in exercising their SEP rights.

What’s problematic about a competition enforcement agency extracting promises not to enforce lawfully obtained property rights during merger review, outside the formal consent process, and in transactions that do not raise competitive concerns themselves?  For starters, the DOJ’s expression about competitive concerns about “hold up” obfuscate an important issue.  In Rambus the D.C. Circuit clearly held that not all forms of what the DOJ describes here as patent holdup violate the antitrust laws in the first instance.  Both appellate courts discussion patent holdup as an antitrust violation have held the patent holder must deceptively induce the SSO to adopt the patented technology.  Rambus makes clear – as I’ve discussed — that a firm with lawfully acquired monopoly power who merely raises prices does not violate the antitrust laws.  The proposition that all forms of patent holdup are antitrust violations is dubious.  For an agency to extract concessions that go beyond the scope of the antitrust laws at all, much less through merger review of transactions that do not raise competitive concerns themselves, raises serious concerns.

Here is what the DOJ says about Google’s commitment:

If adhered to in practice, these positions could significantly reduce the possibility of a hold up or use of an injunction as a threat to inhibit or preclude innovation and competition.

Google’s commitments have been less clear.  In particular, Google has stated to the IEEE and others on Feb. 8, 2012, that its policy is to refrain from seeking injunctive relief for the infringement of SEPs against a counter-party, but apparently only for disputes involving future license revenues, and only if the counterparty:  forgoes certain defenses such as challenging the validity of the patent; pays the full disputed amount into escrow; and agrees to a reciprocal process regarding injunctions.  Google’s statement therefore does not directly provide the same assurance as the other companies’ statements concerning the exercise of its newly acquired patent rights.  Nonetheless, the division determined that the acquisition of the patents by Google did not substantially lessen competition, but how Google may exercise its patents in the future remains a significant concern.

No doubt the DOJ statement is accurate and the DOJ’s concerns about patent holdup are genuine.  But that’s not the point.

The question of the appropriate role for injunctions and damages in patent infringement litigation is a complex one.  While many scholars certainly argue that the use of injunctions facilitates patent hold up and threatens innovation.  There are serious debates to be had about whether more vigorous antitrust enforcement of the contractual relationships between patent holders and standard setting organization (SSOs) would spur greater innovation.   The empirical evidence suggesting patent holdup is a pervasive problem is however, at best, quite mixed.  Further, others argue that the availability of injunctions is not only a fundamental aspect of our system of property rights, but also from an economic perspective, that the power of the injunctions facilitates efficient transacting by the parties.  For example, some contend that the power to obtain injunctive relief for infringement within the patent thicket results in a “cold war” of sorts in which the threat is sufficient to induce cross-licensing by all parties.  Surely, this is not first best.  But that isn’t the relevant question.

There are other more fundamental problems with the notion of patent holdup as an antitrust concern.  Kobayashi & Wright also raise concerns with the theoretical case for antitrust enforcement of patent holdup on several grounds.  One is that high probability of detection of patent holdup coupled with antitrust’s treble damages makes overdeterrence highly likely.  Another is that alternative remedies such as contract and the patent doctrine of equitable estoppel render the marginal benefits of antitrust enforcement trivial or negative in this context.  Froeb, Ganglmair & Werden raise similar points.   Suffice it to say that the debate on the appropriate scope of antitrust enforcement in patent holdup is ongoing as a general matter; there is certainly no consensus with regard to economic theory or empirical evidence that stripping the availability of injunctive relief from patent holders entering into contractual relationships with SSOs will enhance competition or improve consumer welfare.  It is quite possible that such an intervention would chill competition, participation in SSOs, and the efficient contracting process potentially facilitated by the availability of injunctive relief.

The policy debate I describe above is an important one.  Many of the questions at the center of that complex debate are not settled as a matter of economic theory, empirics, or law.  This post certainly has no ambitions to resolve them here; my goal is a much more modest one.  The DOJs policymaking efforts through the merger review process raise serious issues.  I would hope that all would agree — regardless of where they stand on the patent holdup debate — that the idea that these complex debates be hammered out in merger review at the DOJ because the DOJ happens to have a number of cases involving patent portfolios is a foolish one for several reasons.

First, it is unclear the DOJ could have extracted these FRAND concessions through proper merger review.  The DOJ apparently agreed that the transactions did not raise serious competitive concerns.   The pressure imposed by the DOJ upon the parties to make the commitments to the SSOs not to pursue injunctive relief as part of a FRAND commitment outside of the normal consent process raises serious concerns.  The imposition of settlement conditions far afield from the competitive consequences of the merger itself is something we do see from antitrust enforcement agencies in other countries quite frequently, but this sort of behavior burns significant reputational capital with the rest of the world when our agencies go abroad to lecture on the importance of keeping antitrust analysis consistent, predictable, and based upon the economic fundamentals of the transaction at hand.

Second, the DOJ Antitrust Division does not alone have comparative advantage in determining the optimal use of injunctions versus damages in the patent system.

Third, appearances here are quite problematic.  Given that the DOJ did not appear to have significant competitive concerns with the transactions, one can create the following narrative of events without too much creative effort: (1) the DOJ team has theoretical priors that injunctive relief is a significant competitive problem, (2) the DOJ happens to have these mergers in front of it pending review from a couple of firms likely to be repeat players in the antitrust enforcement game, (3) the DOJ asks the firms to make these concessions despite the fact that they have little to do with the conventional antitrust analysis of the transactions, under which they would have been approved without condition.

The more I think about the use of the merger review process to extract concessions from patent holders in the form of promises not to enforce property rights which they would otherwise be legally entitled to, the more the DOJ’s actions appear inappropriate.  The stakes are high here both in terms of identifying patent and competition rules that will foster rather than hamper innovation, but also with respect to compromising the integrity of merger review through the imposition of non-merger related conditions we are more akin to seeing from the FCC, states, or less well-developed antitrust regimes.

One of the more significant papers in antitrust of late has been Professor Kaplow’s Why (Ever) Define Markets?  Kaplow provocatively argues that the entire “market definition/ market share” paradigm of antitrust is misguided and beyond repair.  Kaplow describes the exclusive role of market definition in that paradigm as generating inferences about market power, argues that market definition is incapable of generating reasonable inferences for that purpose as a matter of basic economic principles primarily because one must have a “best estimate” of market power previous to market definition, and concludes that antitrust ought to do away with market definition entirely.  As my description of the paper suggests, and Kaplow recognizes, it is certainly an “immodest” claim.  But it is a paper that has evoked much discussion in antitrust circles, especially in light of the recent shift in the 2010 HMGs toward analysis of competitive effects and away from market definition.

Many economists were inclined to agree with the basic conceptual shift toward direct analysis of competitive effects.  Much of that agreement was had on the basis that the market definition exercise aimed to do a number of things directed toward identifying the potential competitive effects of a merger (identifying market power is certainly one of those things), and that if we had tools allowing for direct inferences we ought to use those instead.  Kaplow’s attack on market definition, however, was by far the most aggressive critique.

Greg Werden has now posted an excellent paper in response, “Why (Ever) Define Markets?  An Answer to Professor Kaplow.”  Here is the abstract:

Professor Louis Kaplow has argued that market delineation in antitrust should be abandoned because it is not useful in assessing market power or evaluating competitive effects. This article takes issue with that view, explaining that market delineation serves purposes overlooked by Professor Kaplow. Most importantly, market delineation separates active forces of competition from those in the background. This separation is significant in the application of economic models and in the narrative of presenting an antitrust case. This article also explains why Professor Kaplow’s proposed analyses dispensing with market delineation would break down in important circumstances.

The entire paper is worth reading.  It provides an important perspective on the debate over the value of market definition not only from an economic perspective, but also with respect to the role of market definition in the law.  I summarize a few of the key points and basic arguments of the paper for readers.

Werden first begins by attacking the presumption in Kaplow’s argument that the exclusive purpose of market definition in the modern antitrust paradigm is to infer market power from market share.  For example, Kaplow claims that “the entire rationale for the market definition process is to enable an inference about market power.”  Werden claims, I think correctly, that Kaplow’s premise is incorrect.  While Werden makes the point that courts use market definition to infer market power even in the absence of market shares, the more important argument is that courts have long recognized the high shares themselves do not establish market power — indeed, the law requires the market power be “durable.”  The durability requirement, in turn, requires some analysis of entry conditions before a court can infer market power and, as Werden points out, market delineation is a useful tool for understanding which products — upon entry — would be sufficiently close substitutes as to preclude a firm from charging supra-competitive prices.  Similarly, of course, courts use market definition to cabin where the relevant antitrust injury might occur.

Keith Hylton makes a related, but distinct, argument about the value of market definition in his paper on the 2010 HMGs published in a symposium in the Review of Industrial Organization (note: Professor Kaplow has a shorter article in the Review of IO symposium previewing his arguments in the longer Harvard Law Review piece; I also have an article (with Judd Stone) on the new Guidelines’ treatment of efficiencies in the same issue).  Hylton objects to the change in focus in the new HMGs on the grounds that courts have used the market definition exercise for a number of valuable functions involving the trading off of error concerns in merger analysis:

In implementing the discretionary test of Brown Shoe, courts have traditionally required a definition of the relevant market. In order to determine whether competition appears to be structurally or operationally intense, or whether entry is easy, courts first have to define a relevant market. The definition of a relevant market has involved a fact intensive inquiry that trades off many concerns, in addition to the strict concern of finding a market which could be monopolized by the defendant (through an acquisition or through some anticompetitive conduct). When courts determine a relevant market, they are taking into account the consequences of that decision for the competitive process itself. If defining a market too narrowly will lead to the replacement of the market process of industrial rationalization with an administrative process, or discourage innovation incentives, courts are likely to take those costs into account. They are aware of the possibility that they could err in the decision, and will therefore tend toward a market definition that minimizes the costs of errors.36 The FTC’s standard would relegate the market definition component of a merger dispute to a lesser status. In so doing, it would constrain the ability of courts to make the tradeoffs that currently go into a market definition finding.37

Werden acknowledges that market definition can be avoided in some cases, such as consummated mergers with evidence of actual anticompetitive effects after the acquisition, or in some cases involving unilateral price effects.  Note that while Werden would likely dispense with market definition in some of these cases, the role Hylton ascribes to market definition as applied by the courts would still provide value in both of these types of cases.  Werden also makes the key point that Kaplow’s “direct” analysis of market power assumes that “all of the competitive action is confined to a single homogenous good, and his analysis goes awry when the sellers of the good have a significant strategic interaction with the sellers of close substitutes.”

A related point is that Kaplow’s analysis implicitly uses perfect competition as a competitive benchmark for inferring market power.  Indeed, the analysis presumes that all sellers other than the producer at issue “behave as price-takers.”   As Werden points out, the direct analysis of market power Kaplow prefers establishes market power as a matter of degree measured by the Lerner Index (i.e. the price – cost margin).  For a number of reasons, setting perfect competition as a competitive benchmark can be problematic; but for present purposes, note that to the extent that courts use the market definition inquiry to incorporate considerations wherein a firm might have high margins but yet face intense competition rendering it incapable of harming the competitive process, this would be yet another valuable function of that market definition inquiry.

Werden ends the paper by offering up some examples of the differences between the “conventional” approach and Kaplow’s analysis that are helpful.  You can go to the paper to read them — but Werden’s key point, as I read the paper, is that market definition is useful not only for allowing the assignment of market shares, but also for separating the important elements of the competitive story of a proposed merger (for example) from unimportant elements.   The distinction between those important and unimportant elements can inform modeling choices in unilateral effects cases, or the likelihood of post-merger coordination, and focuses courts on the competitive process to be investigated for potential harm.  His conclusion in response to Kaplow is direct:

Placing less emphasis on market delineation and market shares would be for the best in many antitrust cases, but market delineation serves analytical and narrative purposes not served by other tools.  Professor Kaplow’s proposal to abandon market definition would bring chaos to antitrust litigation.

Please go do read the whole thing.  There is some narrow sense in which I find the debate trivial.  Courts are highly unlikely to adopt Professor Kaplow’s proposal.  There are a number of barriers to eliminating market definition and there is no demand to do so from courts or agencies.  But that would be far too narrow a viewpoint on the issues raised by the paper.  The debate over market definition in the 2010 HMGs, and now spurred by Kaplow’s provocative and well argued paper, is very useful in helping us understand exactly what we aim to achieve through market definition.  The role of market definition in antitrust analysis is much more flexible under the new Guidelines — even if all agree that the agencies must define markets.  How flexible courts and agencies are and should be with respect to market definition does depend precisely upon the answer to the questions Werden tangles with in his paper, i.e. what does market definition accomplish, how well does it accomplish it, and when might we rely upon other tools to accomplish those ends?

Sports Illustrated:

The Federal Trade Commission has concluded and closed a six-month, nonpublic investigation of Zuffa LLC., the owners of the Ultimate Fighting Championship, and will not take further action at this time, an FTC spokesperson confirmed to SI.com on Tuesday.

According to closing letters to parties involved that were made public Tuesday, the FTC Bureau of Competition investigation focused on Zuffa’s March 2011 acquisition of Explosion Entertainment LLC., which owned the rival Strikeforce promotion, and whether the purchase violated Section 7 of the Clayton Antitrust Act or Section 5 of the Federal Trade Commission Act.

Section 7 of the Clayton Act  “prohibits mergers and acquisitions when the effect may be substantially to lessen competition, or tend to a create a monopoly,” according to FTC guidelines.

Section 5 of the Federal Trade Commission Act prohibits “unfair or deceptive acts or practices in or affecting commerce.’’

“No action has been taken in regards to this part of the investigation,” said the FTC spokesperson, though he said the governmental agency reserves the right to revisit the matter in the public’s interest.

Zuffa purchased Explosion Entertainment, established by Scott Coker and Silicon Valley Sports and Entertainment, a sports franchise company, for a reported $40 million. Coker became the general manager for Strikeforce, which plans to hold six events on Showtime this year.

A remarkable set back for the unilateral effects enforcement agenda at the agencies to be sure.

 

One of the most controversial merger policy decisions during the Bush administration was the DOJ’s failure to bring a complaint against the Whirlpool/Maytag merger.  Indeed, the decision was even criticized by Carl Shapiro, the economic expert retained by the DOJ on the case.   Jonathan Baker and Carl Shapiro summarize this conclusion as follows:  “The March 2006 decision by the DOJ not to challenge Whirlpool’s acquisition of Maytag was a highly visible instance of underenforcement.”   Orley Ashenfelter, Daniel Hosken and Matthew Weinberg have now posted a working paper that estimates the price effects of the merger.  Using scanner data, the authors compare the prices of Whirlpool and Maytag appliances to price changes in the appliance markets most affected by the merger to other markets less or not affected.  They find large significant price increases for clothes dryers and dishwashers, but not for refrigerators and washing machine.

As I have posted before, I was disappointed that the DOJ filed against AT&T in its bid to acquire T-Mobile.  The efficacious provision of mobile broadband service is a complicated business, but it has become even more so by government’s meddling.  Responses like this merger are both inevitable and essential.  And Sprint and Cellular South piling on doesn’t help — and, as Josh has pointed out, further suggests that the merger is actually pro-competitive.

Tomorrow, along with a great group of antitrust attorneys, I am going to pick up where I left off in that post during a roundtable discussion hosted by the American Bar Association.  If you are in the DC area you should attend in person, or you can call in to listen to the discussion–but either way, you will need to register here.  There should be a couple of people live tweeting the event, so keep up with the conversation by following #ABASAL.

Panelists:
Richard Brunell, Director of Legal Advocacy, American Antitrust Institute, Boston
Allen Grunes, Partner, Brownstein Hyatt Farber Schreck, Washington
Glenn Manishin, Partner, Duane Morris LLP, Washington
Geoffrey Manne, Lecturer in Law, Lewis & Clark Law School, Portland
Patrick Pascarella, Partner, Tucker Ellis & West, Cleveland

Location: 
Wilson Sonsini Goodrich & Rosati, P.C. 1700 K St. N.W. Fifth Floor Washington, D.C. 20006

For more information, check out the flyer here.

Yale’s George Priest authored an op-ed in the WSJ on September 6th in which he raised a few of the arguments discussed here at TOTM over the past several weeks regarding the proposed AT&T / T-Mobile merger.  For example, we’ve focused upon the tension between the DOJ complaint’s theories of competitive harm (coordinated and unilateral effects) and the reaction of Sprint’s stock price.  Along these lines, Priest writes:

If the acquisition would lead to increased prices and lower quality products as the Justice Department has claimed, Sprint would be better off after the acquisition. Sprint would be able to add subscribers, not lose them, because of AT&T’s higher prices and lower quality. Sprint would oppose the acquisition—as it has—only if it thought that the merger would put it in a worse position by increasing the competitive pressures that it already faces.

The market—though not the Obama administration—understands this point. On the day that the Justice Department announced its opposition to the acquisition, Sprint’s share price rose 5.9%, reflecting investors’ belief that Sprint will be in a better competitive position without the acquisition.

As we’ve pointed out, Sprint’s stock price reaction is simply not consistent with the DOJ theories.  To find a theory of harm more consistent with the market reaction, critics of the merger have abandoned the DOJ’s theories in favor for a new one — that the merger will facilitate future exclusion of rivals from access to critical inputs like backhaul or handsets.

The AAI’s Rick Brunell makes this point in our comments.  The basic point is that under an exclusion theory Sprint benefits from the challenge to the merger because it prevents its future exclusion.   Brunell also argued in that comment that Verizon’s stock price movement supported exclusion theories of the merger, pointing out that its stock price fell 1.2% (with a .7% drop in the S&P 500) upon announcement of the challenge.

We challenged the economic logic of Brunell’s claim that Verizon’s non-reaction was consistent with exclusionary theories in a follow up post.  Put simply, assuming the merger will result in successful exclusion of rivals in the future, Verizon would be a gigantic winner from its successful completion:

The relevant economics here are not limited to the possibility that post-merger AT&T would successfully exclude Verizon.  Think about it: both Verizon and the post-merger firm would benefit from the exclusionary efforts and reduced competition.  However, Verizon would stand to gain even more!  After all, it isn’t paying the $39 billion purchase price for the acquisition (or any of the other costs of implementing an expensive exclusion campaign).  Thus, an announcement to block the would-be exclusionary merger — the one that would allow Verizon to outsource the exclusion of its rivals to AT&T on the cheap — wouldn’t happen.  Verizon stock should fall relative to the market in response to this lost opportunity.  The unilateral and coordinated effects theories in the DOJ complaint are at significant tension with the stock market reactions of firms like Sprint (and its affiliated venture, Clearwire).  The exclusion theory predicts a large decrease in stock price for Verizon with the announcement.  None of these comfortably fit the facts.  Verizon more or less tracks the S&P with a slight drop.  What about the smaller carriers?  Take a look at the chart.  MetroPCS barely moved relative to the market (in fact, may have increased relative to the market over the relevant time period); Leap is down a bit more than the market.  Here, with the smaller carriers there is not a lot of movement in any direction.  But, contra NB’s comment (“Verizon, a larger and far more significant competitor, had its stock drop sharply in that same period you show Sprint “surging”. MetroPCS’s stock also dropped.”), Verizon’s small fall relative to the market is nowhere near the magnitude of the positive effect on Sprint and Clearwire.

In other words, contra Brunell and other proponents of the exclusion theory, its not just that Verizon has “nothing to fear” from exclusion but that it has much to gain from it.  If the merger is likely to exclude Verizon’s rivals at a price tag of at least $39 billion paid with its chief competitor’s dollars, the announcement of a challenge should have resulted in a substantial loss for Verizon not one barely detectable beyond market trends. Excluding rivals and gaining market power with other people’s money is good work if you can get it.  If proponents of the exclusionary theory believe exclusion is worth $39 billion for AT&T and is the purpose of the merger, surely they also believe it is worth something quite significant to Verizon who would reap the benefits of exclusion and get it for free.

Unfortunately, AAI (through Brunell) ignores this point in a Letter to the Editor to the WSJ filed in response to Priest’s op-ed:

Mr. Priest ignores the fact that Sprint would be harmed if the merger enhanced AT&T’s (and Verizon’s) ability to exclude Sprint from the market (or raise its costs) through increased control over the best handsets, roaming and backhaul services that Sprint needs to compete effectively in the market, as Sprint alleges in its own lawsuit challenging the merger. Sprint also benefits, from the merger’s demise, as a potential acquirer of T-Mobile.

Mr. Priest also ignores the stock-price movement of Verizon, AT&T’s chief rival, which has no reason to fear exclusion from the market, and would be harmed the most if the merger made AT&T a more efficient competitor. In the two days following the merger announcement in March, Verizon’s stock price jumped 3.1% (compared to the S&P 500’s increase of only 1.1%), while in the two days after the Justice Department’s suit was announced, Verizon’s stock fell by 1.2% (compared to a .7% drop in the S&P 500). Verizon has not opposed the merger.

Event studies of stock-price movements are notoriously inconclusive. However, the data here are entirely consistent with investors’ expectation that the merger will result in less price and quality competition in the industry and higher costs for AT&T’s smaller rivals, all to the detriment of consumers.

If you are keeping score at home: Priest 1  –  AAI 0.  Once again, the exclusion theories don’t seem to hold up to these data.  On the other hand, the DOJ theories are embarrassingly confronted by the response of the rival’ stock price surging upon the announcement of a challenge.  For what its worth, I agree with Brunell that event studies are not dispositive of a merger’s likely effects — though query what data available to predict merger outcomes are?  But event studies and stock-price movements produce valuable information.  In this case, financial market responses cut against the the exclusionary theory favored by AAI and Sprint and the conventional DOJ theories.