Washington has become the merger capital of the world. With a spate of multibillion-dollar deals under review, the Federal Communications Commission (FCC), the Federal Trade Commission (FTC) and the Department of Justice (DOJ) are proving grounds for companies seeking to buy or be bought. High-profile transactions have ushered the obscure rules of mergers out of the shadows and onto the political stage, where success is measured in more than economic terms.
{mosads}A recent Wall Street Journal article identified a wave of mergers that are testing the limits of antitrust laws. From beer to appliances to airlines and the media, it appears that concentration and convergence are the order of the day. “Go big or go home” is a mantra among merger advisory experts who readily cite scale as the competitive advantage in a competitive global market. While bigger may not always be better for consumers, growth through acquisition can be a winning strategy for investors and the bottom line.
A merger typically begins when a corporation announces its intention to absorb or absolve another company’s assets, personnel, facilities, debts and obligations. When publicly traded companies take this step, an array of federal statutory and regulatory rules arise, including an obligation to notify the FTC and DOJ in advance. Depending on the size of the transaction and the parties involved, federal regulators look to the Clayton Antitrust Act to determine its ultimate effect on competition, markets and consumers. The Securities and Exchange Commission (SEC) invariably will play a role in such reviews, and if the deal involves foreign, defense, trade or sensitive matters, the Department of Homeland Security and Department of State, or other federal agencies, could take a look as well. The general standard of review for the FTC is to prevent “mergers and acquisitions that are likely to reduce competition and lead to higher prices, lower quality goods or services or less innovation,” and those that “will harm consumers.”
In days gone by, a corporate merger was a marriage between two companies who decided, for better or for worse, that it was in their interests to join together. But like modern-day notions of marriage, mergers too have changed. No longer just unions between one company and another, mergers have become multi-stakeholder enterprises involving a coterie of disparate parties with varying, and often conflicting, goals and objectives.
Nowhere is this more pronounced than in the media and communications sector, where convergence, consolidation and competition are robust, and a cottage industry has emerged to capitalize on hapless companies awaiting regulatory approval from the FCC. Aside from the regulators and companies themselves, consumer groups, competitors, investors, state and local governments, and Congress have delved into recent media mergers, each seeking to influence the outcome. Such has been the case with several of the highest dollar transactions. The high- (or low-) water mark in this continuum was exemplified by the Stop Mega Comcast Coalition, which combined groups from the far right and the far left joined in regulatory combat by their mutual disdain for Comcast. Now it appears the Charter Communications-Time Warner Cable merger could face similar, though less vociferous, opposition.
When it comes to transactions involving licenses and authorizations under the Communications Act, Congress has directed the FCC to determine whether proposed mergers would serve the “public interest, convenience and necessity.” This broad and somewhat amorphous standard allows the FCC considerable leeway in its review of communications mergers. The public interest standard encompasses such considerations as diversity, localism, innovation, and providing new or additional services to consumers, in addition to the congressional goal of “promoting the widespread dissemination of information from a multiplicity of sources.”
Through its focus on the public interest, the FCC review is considerably more open, transparent and inclusive than the antitrust merger reviews conducted by the FTC and DOJ. But it is this glasnost element that has become problematic. When a public company seeks to merge, its very soul is laid bare for the world to see. Its profits, plans, policies and practices are open to scrutiny from anyone who can prove the slightest interest in the proposed transaction. But not every inquiry is well-intentioned.
Media mergers have become the platform of choice for nascent competitors, consumer groups, community activists, civil rights organizations, investors, local elected officials and just about anyone with an axe to grind or angle to play. Some interlopers have mastered the art of merger mischief and manipulation and the power of the public record, where well-worded opposition can turn the tide of regulatory and public opinion. They know that a company seeking a multibillion-dollar merger is at the mercy of not only the regulators, but also outside activists who can put forth demands that would be laughable but for a pending merger review. They also know that a Fortune 500 corporation does not relinquish control of its bargaining power to regulators and intervenors every day. With each mega-merger under review, the demands have grown bolder, including cash payments, high-level jobs and consultancies, board seats, sweetheart sales, preferential programming, vanity productions, and hiring quotas, to name a few. To avoid the appearance of paying ransom, companies deftly structure the concessions as “voluntary commitments” to reflect their corporate responsibility, citizenship and contribution to societal goals.
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Federal regulators end up imposing either structural or behavioral conditions on most mergers. Structural conditions typically require companies to divest or spin off assets to ensure that the new entity is neither too large nor too dominant in the market. Behavioral conditions require post-merger companies to engage in, or refrain from, practices that are consistent with the public interest. This authority gives both the FTC and FCC enormous power to shape the profile of a company — and often an industry — for years or decades to come. Conditions, commitments and concessions are now de rigueur for media mergers, and aspiring companies should be prepared to pay the price.
This new reality requires companies to consider factors well beyond shareholder value. It requires them to develop a new set of strategies, resources and advisers to deal with the merger review process itself, distinct from the economic or public interest elements of the deal. Companies must learn how to engage individual interest groups on their own terms if they want their support — or to avoid their opposition. While these concessions may be de minimis in the context of a multibillion-dollar deal, they nevertheless rob the company of a piece of its soul.
When it comes to navigating the merger maze in Washington, companies should be guided by the lessons of the recent past: There are no permanent friends, and no permanent enemies, only permanent interests.
Hoffman is chairman of Business in the Public Interest and adjunct professor at Georgetown University. He is a former chief of staff and senior legal advisor at the Federal Communications Commission (FCC) and was involved in several media mergers.