Friday, September 23, 2011
Seven States Join the U.S. Justice Department in Federal Court, Seeking to Block the Merger of AT & T and T-Mobile
AT & T proposed its $39 billion plan to buy T-Mobile USA. The deal will give AT & T a 40.6% market share in the cell phone industry, and will concentrate 80% of U.S. wireless customers in two companies – AT & T and Verizon wireless, thus creating a duopoly in the mobile service market. Not surprisingly, the acquisition is challenged by the Department of Justice, jointed by seven states, including New York, Massachusetts and California, under the Federal Antitrust Law.
Section 7 of the Clayton Act, an anti-merger statute, prohibits mergers that may substantially stifle competition “in any line of commerce, in any section of the country.” The Act especially disfavors horizontal mergers. A horizontal merger is a merger between two direct competitors who compete with each other in the same line of business and in the same geographic market. A horizontal merger will have adverse anti-competitive effects because it will eliminate competition between two merging parties, and will likely increase market shares and assets of the merged enterprise. The merger will be illegal per se, unless the merger will not create or tend to create a monopoly. Market concentration and market shares of two merging companies are the determinative factors in a horizontal mergers analysis. High market concentration and dominant market shares will establish a prima facie violation of the Act.
The merger between AT & T and T-Mobile is a horizontal acquisition because the two companies compete directly with each other in the cell phone market, and both provide a national-wide service, with market shares of 28.5% and 12.1%, respectively. The merger will allow AT & T to dominate the market, enable it to set prices and instill a fear in the smaller competitors. Consequently, it will lessen the competition and create a prima facie case that the merger is unlawful. In addition, the merger will create an industry where the top two companies handling 80% of the service. The high concentration may encourage AT & T and Verizon to seek a deal for their mutual advantage at the cost of consumers, and discourage new enterprises from entering into the wireless service business. Before the merger, the cell phone market has been already concentrated, with Verizon and AT & T claiming over 50% of U.S. wireless consumers. In an already highly concentrated market, the courts will condemn any merger that increases concentration, even if that increase is minimal. The merger will be enjoined unless AT & T can provide clear evidence that the merger will not adversely affect the competition in the cell phone industry.
AT & T can argue that the extremely competitive wireless market will prevent the merger from substantially stifling the competition. It can point out that, despite the wireless service industry in the United State being concentrated in Verizon and AT & T, the competition between Verizon and AT & T is vigorous and it is impossible for them to reach any mutual advantage agreement. At & T can further argue that the merger will only put AT & T at a more competitive position. As a result, the merger will encourage the competition.
This pro-competitive argument will not likely survive the scrutiny. A pro-competitive effect on a horizontal merger will justify the merger only when two merging firms were weak before the merger, and will not result in a dominant market. The evidence shows that: both AT & T and T-Mobile are strong and aggressive competitors, both have a significant amount of market shares in the wireless industry, neither of them are failing, and the merger will produce a dominant market as AT & T will be the No. 1 provider of mobile services. The merger will not only effectively eliminate a competitor, but will likely force a higher price on T-Mobile customers with an inferior service, the effects of which the Act was enacted to prevent.
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