Two Become One: The Biggest (Potential) Corporate Marriages of 2018

April 24, 2018

Introduction

Walt Disney made headlines back in 2012 when it bought Lucasfilm for $4.06 billion. This mega-deal brought the Star Wars franchise into a Disney library that already included the vast majority of the Marvel universe, excluding the X-Men and Spiderman, which are currently licensed to Fox and Sony, respectively. The Lucasfilm acquisition also included Industrial Light and Magic, a powerhouse in cinematic effects. It seems obvious that such a big-dollar deal with huge consumer impacts would be a matter of public interest. However, there are some mergers on the horizon for 2018 that are much larger than the Disney/Lucasfilm acquisition, yet seem to have gotten less public attention. Let us look at some of these planned mergers as well as some of the legal issues surrounding them.

$ Big Mergers Big Money $

Fans of Disney buying film studios should be excited for one proposed deal this year: Disney’s purchase of 21st Century Fox’s film studio. This deal is likely to top the Disney/Lucasfilm by over 12x the purchase price; $4.06 billion for Lucasfilm compared to $52 billion for Fox. However, 12x the price does not seem to equal 12x the attention. Apparently, the possibility of Avatar sequels—four of themas well as acquiring most of the remaining Marvel properties, just hasn’t yet excited filmgoers as much as lightsabers and Jedi knights did 6 years ago. That could change with upcoming releases of both “Avengers: Infinity War” (Disney/Marvel) and “Deadpool” (Fox/Marvel) as the summer film season heats up.

Another mega-deal is AT&T’s acquisition of Time Warner. Weighing in at a titanic $85 billion dollars, or 21x the Disney/Lucasfilm acquisition, this deal will likely be the largest of 2018, if it goes through. However, this deal especially faces political headwinds, which will be discussed below, including voiced disapproval from President Trump.

A third deal is the $69 billion dollar purchase of Aetna, the health insurance giant, by the drugstore/convenience store CVS. At only 17x the Disney/Lucasfilm deal, this acquisition creates more vertical integration in the health care sector and CVS is promising regulators that it will save big money for middle class families.

Finally, the biggest buyout that you probably haven’t heard of was actually just cleared by the Feds. Microchip is buying out Microsemi for $8.35 billion, or a measly 2.06x the Disney/Lucasfilm deal. An overview of the two companies helps explain, perhaps, why this merger was less media-friendly than “Disney Buys Star Wars.”

Microchip makes microcontroller, mixed-signal and analog semiconductors for a broad range of applications. Microsemi, which is based in Aliso Viejo, California, produces semiconductors and designs systems for companies in the aerospace, defense, communications and data center industries.

Now that we have covered a small portion of the big deals ahead for 2018, and placed them into the context of Star Wars, let us look at the legal implications. Antitrust laws are important here, so we will cover the laws, the administration of those laws, and the arguments that companies make to keep their deals alive.

The Laws

There are a few antitrust laws that get implicated in mega mergers and acquisitions. These include the Sherman Antitrust Act, the Clayton Act, and the Hart-Scott-Rodino Antitrust Improvements Act, which are located within Title 15, Chapter 1 of the United States Code. Another important source of law is the Federal Trade Commission Act, which is located within Title 14, Chapter 2, Subchapter 1. A couple of examples from the M&A deals above include the allegations under the Clayton Act found in the complaint against AT&T, and the success of the Microchip deal to pass through the Hart-Scott-Rodino waiting period.

There are two types of deals at the core of antitrust: horizontal integration and vertical integration. These terms describe how the end-company gains its advantages. Horizontal integration is the easiest to understand, and it occurs where a company owns all the versions of one business. An example might be where a hundred mom-and-pop drug stores combine to form one single drug store chain. The company now owns all the drug stores but they do not own the drugs themselves, which they must purchase from a pharmaceutical manufacturer, or the trucks that deliver the drugs to the drug store, which is probably done by a common-carrier like UPS.

Vertical integration goes the other way. Let us say you sell cars. One day the automobile manufacturer increases its prices, so you say to yourself: “I’ve got some money, I’ll make my own cars.” Now you’re making cars and selling them. Then the cost of steel goes up, so you buy a steel refinery. Then the cost of ore goes up, so you buy an iron mine. Now you own the entire supply chain from raw materials in the ground to finished product on the car lot.

Both horizontally and vertically integrated companies exist (think drug stores and oil companies, respectively). The question often isn’t so much whether to allow integration, but rather the degree to which it is allowable under the laws mentioned above and the degree to which it should be allowed. The arguments on both sides of this point have taken up fairly predictable forms.

The Arguments

Let us look at the AT&T/Time Warner case as an example. The complaint summarizes the industry well:

Popular television shows like The Big Bang Theory generally travel through three layers of production and distribution: A studio like Warner Bros. creates the show; a programmer like Turner or a broadcaster like CBS purchases the right to include the show on one of its networks; and a video distributor like AT&T/DirecTV or Comcast purchases the right to include the network in one or more packages that it sells to customers.

Compl. at ¶ 11.

Nobody disagrees that the purpose of this merger, or any merger for that matter, is to make the resulting company more efficient. The arguments tend instead to focus on the state of competition before the merger and likely effects of that efficiency after the merger.

The plaintiffs, who oppose the deal, argue that competitiveness is 1) already low, and/or 2) the resulting company will use the efficiency to raise prices to the detriment of the consumer. You can see that in the AT&T case where they invoke the “golden goose” language on the former point and the predictions on future negotiations for the latter. Id. at ¶¶ 1–5.

Companies argue, on the contrary, that 1) competitiveness is high and/or 2) the resulting company will use the efficiency to lower prices for the benefit of the consumer. In the AT&T case, the defendants point to increased competition from online platforms on the former and more-or-less assert the latter. Answer at ¶¶ 1, 3, 6, and 9. The next few months will show who the regulators believe.

Conclusion

Two-Thousand-Seventeen was a good year for M&A. Only time will tell what 2018 brings, but with big deals like the ones above on the horizon it looks to be another banner year!

Image Source: REUTERS/Kieran Doherty

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