Regulators Often Consider Market Concentration When Determining Whether an M&A

question 31

Essay

Regulators often consider market concentration when determining whether an M&A will drive up prices and reduce consumer choice and product/service quality.
What is an acceptable level of concentration often is difficult to determine.
Concentration may be an outgrowth of the high capital requirements of the industry.
Attempts to limit concentration may actually work to the detriment of some consumers.
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United States antitrust regulators have moved aggressively in recent years to block horizontal mergers (i.e., those involving direct or potential competitors) while being more lenient on vertical deals (i.e., those in which a firm buys a supplier or distributor). These actions foreshadowed the likely outcome of the deal proposed by telecommunications giant AT&T to acquire T-Mobile for $39 billion in cash in early 2011. Despite the unfavorable regulatory environment for horizontal deals, AT&T expressed confidence that it could get approval for the deal when it accepted a sizeable termination fee as part of the agreement if it did not complete the transaction by March 2012. However, the deal would never be completed, as U.S. antitrust regulators made it clear that a tie-up between number two, AT&T (behind Verizon), and number four, T-Mobile (behind Sprint), would not be permitted.

On December 20, 2011, AT&T announced that it would cease its nine-month fight to acquire T-Mobile. AT&T was forced to pay T-Mobile’s parent, Deutsche Telekom, $3 billion in cash and a portion of its wireless spectrum (i.e., cellular airwaves) valued at as much as $1 billion. T-Mobile and AT&T did agree to enter into a seven-year roaming agreement that could cost AT&T another $1 billion. The announcement came shortly after AT&T had ceased efforts to fight the Justice Department’s lawsuit filed in August 2011 to block the merger. The Justice Department would not accept any combination of divestitures or other changes to the deal, arguing that the merger would raise prices to consumers and reduce both choice and service quality. Instead, the Justice Department opted to keep a “strong” fourth competitor rather than allow increased industry concentration.

But T-Mobile’s long-term viability was in doubt. The firm’s parent, Deutsche Telekom, had made it clear that it wants to exit the mature U.S. market and that it has no intention of investing in a new high-speed network. T-Mobile is the only national carrier that does not currently have its own next-generation high-speed network. Because it is smaller and weaker than the other carriers, it does not have the cash or the marketing clout with handset vendors to offer exclusive, high-end smartphones to attract new customers. While competitors Verizon and AT&T gained new customers, T-Mobile lost 90,000 customers during 2011.

In response to these developments, T-Mobile announced a merger with its smaller rival MetroPCS on October 3, 2012, creating the potential for a stronger competitor to Verizon and AT&T and solving regulators’ concerns about increased concentration. However, it creates another issue by reducing competition in the prepaid cell phone segment. MetroPCS’s low-cost, no-contract data plans and cheaper phones brought cellphones and mobile Internet to millions of Americans who could not afford major-carrier contracts. While T-Mobile announced the continuation of prepaid service, it has an incentive not to make it so attractive as to cause its own more profitable contract customers to shift to the prepaid service as their contracts expire. While T-Mobile also announced plans to develop a new high-speed network, it will be late to the game.
Some industries are more prone to increasing concentration because of their high capital needs. Only the largest and most financially viable can support the capital outlays required to support national telecom networks. While the U.S. Justice Department has sent a clear signal that mergers in highly concentrated industries are likely to be disallowed, it is probable that the U.S. cellular industry will become increasingly concentrated despite disallowing the AT&T/T-Mobile merger due to the highly capital-intensive nature of the business.


Justice Department Requires VeriFone Systems to Sell Assets
before Approving Hypercom Acquisition


• Asset sales commonly are used by regulators to thwart the potential build-up of market power resulting from a merger or acquisition.
• In such situations, defining the appropriate market served by the merged firms is crucial to identifying current and potential competitors.
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In late 2011, VeriFone Systems (VeriFone) reached a settlement with the U.S. Justice Department to acquire competitor Hypercom Corp on the condition it sold Hypercom’s U.S. point-of-sale terminal business. Business use point-of-sale terminals are used by retailers to accept electronic payments such as credit and debit cards.

The Justice Department had sued to block the $485 million deal on concerns that the combination would limit competition in the market for retail checkout terminals. The asset sale is intended to create a significant independent competitor in the U.S. The agreement stipulates that private equity firm Gores Group LLC will buy the terminals business.

San Jose, California-based VeriFone is the second largest maker of electronic payment equipment in the U.S. and Hypercom, based in Scottsdale, Arizona, is number three. Together, the firms control more than 60 percent of the U.S. market for terminals used by retailers. Ingenico SA, based in France, is the largest maker of card-payment terminals. The Justice Department had blocked a previous attempt to sell Hypercom’s U.S. point-of-sale business to rival Ingenico, saying that it would have increased concentration and undermined competition.

VeriFone will retain Hypercom’s point-of-sale equipment business outside the U.S. The acquisition will enable VeriFone to expand in the emerging market for payments made via mobile phones by giving it a larger international presence in retail stores and the opportunity to install more terminals capable of accepting mobile phone payments abroad.
-What alternative actions could the government take to limit market power resulting from a business combination?

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Definitions:

Factory Overhead

All indirect costs associated with manufacturing, such as utilities, rent, and maintenance, excluding direct materials and direct labor.

Cost-Reimbursement Contract

A type of contract where the purchaser agrees to pay the supplier for all actual costs incurred plus a fee or profit.

Selling Price

The amount of money consumers pay to purchase a product or service, set by sellers based on costs, market demand, and competition.

Allocation System

A method of distributing resources, costs, or revenues among various departments, products, or activities based on predetermined criteria.