Should absence of harm be sufficient for merger approval?

After Charter and Time Warner Cable announced their intention to merge, Federal Communications Commission Chairman Tom Wheeler released a statement noting that “an absence of harm is not sufficient” to approve a merger. But it should be. Why would the government block a merger it believes isn’t bad?

Perhaps Wheeler felt the need to backpedal after reportedly calling Charter and Time Warner Cable CEOs last week to assure them that he’s not opposed to all mergers. Even so, his statement again raises the question of how the FCC evaluates mergers.

{mosads}In any merger, the firms involved must expect the merger to yield private net benefits. Otherwise, they wouldn’t do it. Private benefits could flow from two sources: improved efficiencies (lower costs) or increased market (pricing) power.

“Absence of harm” would imply that a merger does not increase market power, meaning that the expected benefits are due to efficiencies from economies of scope or scale. That would be a good thing, since it means the merger would improve economic efficiency and productivity, which are crucial to long-term economic growth. However, taking the chairman’s statement at face value, he would likely reject such a merger.

Perhaps Wheeler actually meant that he believes a public interest test requires the FCC to extract promises from the firms to devote resources to one or more of the commission’s objectives. The commission knows that the merging firms should be willing to pay an amount up to the benefits generated by the merger.

So maybe Wheeler was simply restating what everybody already knows: At the FCC, mergers typically live or die based on what the parties agree to give behind closed doors. Maybe he was just putting the parties on notice that the bidding process is about to begin.

But a merger should not be approved or rejected based on how it can be used to achieve various FCC goals. Antitrust authorities evaluate the competitive effects of a proposed merger and weigh them against the efficiencies created by the merger. Based on that analysis, antitrust officials might choose not to challenge the merger, ask for targeted concessions to mitigate any potential concerns, or work to block the merger. (And in the absence of harm, they don’t even need to worry about efficiencies. If the merger turns out to be a terrible business deal, well, that’s the shareholders’ problem.).

Although different administrations will emphasize different aspects of antitrust review and be more or less inclined to approve mergers, the general analytical framework is understood and respected and evolves based on analytical thought. And, contrary to what some might think, the variation across administrations is relatively small.

The FCC, by contrast, uses no analytical framework and merger review seems to change based on whim. Last week, the chairman apparently felt he needed to give tacit approval to a yet-unannounced merger. This week he’s acting as if he needs to undo damage caused by drunk-dialing Time Warner CEO Rob Marcus and Charter CEO Tom Rutledge.

In reality, the FCC will go through a formal merger review process and its results will be more complex than a finding of good or bad. But the commission should be clear about where it sets the bar for approval, and blocking the merger should require showing that the merger would be harmful.

During the editing process, Time Warner CEO Rob Marcus was incorrectly identified as Time Warner’s COO; the error has been corrected.

Wallsten is vice president for research and senior fellow at the Technology Policy Institute.