The Urge to Merge: Possible Implications from the AT&T-Time Warner Ruling

A recent US court ruling green-lighting the merger between AT&T and Time Warner marked an historic event that some say could open the door to more merger-and-acquisition (M&A) activity ahead. Sara Araghi, CFA, vice president, research analyst, Franklin Equity Group, and Marc Kremer, CFA, research analyst, Franklin Templeton Fixed Income Group, discuss some of the possible implications.

Here are some highlights of the views of speakers represented in the podcast:

  • Sara Araghi: There’s a lot of speculation there will be more media deals in the future. And while new in the United States, internationally, we’ve had convergence happening for a while. I think we should think about concentration within industries. What does that mean in terms of the health of an industry when you actually have more M&A?
  • Marc Kremer: It does seem like the favorable AT&T-Time Warner ruling opens the door for more M&A activity and consolidation. I think that some companies certainly seem ready to use the benefits of recent US tax reform as well, such as repatriation of foreign cash, to bolster the business positions when they can.
  • Sara Araghi: I believe that all of the convergence that is happening, whether its content and distribution or even wireless and wireline convergence, is a function of the rise of the internet companies.
  • Marc Kremer: When somebody who has been in an industry a long time decides to sell or merge their company, that perhaps means that the industry really is undergoing some different pressures.

The full transcript of the podcast follows.

Host/Richard Banks: Hello and welcome to Talking Markets with Franklin Templeton Investments: exclusive and unique insights from Franklin Templeton.

I’m your host, Richard Banks.

Ahead on this episode, we focus on the possible implications of the US court ruling in favor of AT&T’s bid to merge with Time Warner. Here to discuss it all are Sara Araghi, vice president and research analyst with Franklin Equity Group, and Marc Kremer, vice president and research analyst with Franklin Templeton Fixed Income Group. Leading the conversation is Franklin Templeton’s Lee Rosenthal. Lee, take it away.

Lee: Thank you, Richard. Let’s start with this ruling and the significance of it. Sara, we’ll start with you. Why were so many people interested in this case?

Sara: This case was very important because it was the first big merger that was being decided on under the Trump administration with a new DOJ [Department of Justice] chief. It was a vertical merger. It had gone to court. And so, the reason this was important was the fact that we had to see what the decision would be. It would then set potential precedent for vertical mergers down the line. So it was really the first high-profile case.

Lee: You mentioned the term vertical mergers. Explain more about that, what that means.

Sara: So vertical mergers are when two businesses that are various parts of the supply chain are merging rather than two businesses that are in the same area within a supply chain. So an example on the AT&T and Time Warner is AT&T is the distributor of content through their platform, Time Warner is the supplier of that content. And so, bringing those two together, they both provide two different areas of the supply chain coming together and essentially consolidating those two businesses together. Horizontal is the other version which is two businesses that are exactly in the same area.

Lee: We’re going to talk more about the implications of this merger and potential other vertical mergers. But Marc, let’s bring you in here, Sara referred to the way content is distributed versus owned. What’s the significance here in this space in what AT&T is trying to do, and what other companies are trying to do?

Marc: AT&T already had access to Time Warner programming as a customer of Time Warner, but they believed that they could bolster their competitive position—improve things like subscriber retention and diversify their revenues by actually buying Time Warner. Consumer video consumption habits have really changed over the last several years as mobile, in particular, has become a more important part of a customer’s delivery services. In addition, the real growth in advertising has been in digital ads since those can often be customized to individual users. So AT&T believes that knowing where their customers are and what they’re viewing will enable them to target advertising to those customers—that it’s more relevant to them and more useful for their advertisers.