The Justice Department filed 138 antitrust cases in federal courts from 1999 to 2008 and lost just four of them.
The Justice Department’s rejection of AT&T’s proposed purchase of T-Mobile USA will test new federal guidelines on challenging mergers, as well as the companies’ resolve in forming the nation’s largest wireless carrier. Colleges, universities, and consumers, meanwhile, will be watching the battle to see how it plays out—and what the landscape for wireless service will be as a result.
The Justice Department on Aug. 31 took the unusual step of filing a lawsuit to try to block AT&T’s $39 billion purchase of T-Mobile USA, arguing that the proposed merger would lead to higher wireless prices, less innovation, and fewer choices for consumers.
The move comes as more schools are integrating into their instruction smart phones, tablets, and other devices that connect over a 3G or 4G wireless network.
A courtroom battle is likely and could wring out information that the companies would prefer to keep private. Still, AT&T Inc. has a big incentive to fight: If the deal is called off, the company has to pay a $3 billion breakup fee and surrender some of its unused spectrum for wireless communications.
AT&T is promising to fight the Justice Department’s decision, which could produce the biggest antitrust showdown since business software maker Oracle Corp. squared off with the federal government seven years ago. That dispute, triggered by the government’s decision to block Oracle’s proposed purchase of rival PeopleSoft Inc., exposed several well-kept corporate secrets and required Oracle CEO Larry Ellison to testify before a packed courtroom.
In the end, Oracle pulled off something few companies have done in the past 30 years: It persuaded a federal judge that the Justice Department didn’t have grounds to block its PeopleSoft deal. Oracle closed its $11.1 billion takeover four months after getting the favorable court ruling.
Usually, not even the most powerful companies bother to fight government regulators in an antitrust dispute. Google Inc., for example, backed off in 2008 when the Justice Department threatened to sue to block a proposed internet search partnership with Yahoo Inc. Microsoft Corp., the world’s largest software maker, pulled out of a deal to buy Intuit Corp. in 1995 after the Justice Department objected.
The Justice Department filed 138 antitrust cases in federal courts from 1999 to 2008 and lost just four of them, according to the latest breakdown from the agency.
One reason that the Justice Department has such a good track record is because it rarely challenges a deal unless it’s very confident it can win, said Joseph Bauer, a University of Notre Dame law professor and antitrust expert.
Knowing AT&T would probably go to court, the Justice Department might have wanted to signal that it intends to get tougher on corporate marriages between rivals in markets with few other competitors.
A union between AT&T and T-Mobile USA would leave Verizon and Sprint as the only other major cell-phone carriers in the U.S. T-Mobile, a subsidiary of German telecom company Deutsche Telekom AG, is currently the No. 4 wireless carrier, while AT&T is second. Combined, AT&T would be the largest.
In a sign of its confidence, the Justice Department decided to strike down the deal even though it could have taken about three more months to study the pros and cons. The timing stunned AT&T, which said it didn’t get any advance warning.
“It was an aggressive and impressive move by the DOJ to take the battle right at AT&T,” said Daniel Wall, a San Francisco attorney who represented Oracle in its 2004 fight to win the right to buy PeopleSoft. “It sent a statement that the DOJ intends to fight this one all the way to the finish line.”
Wall said AT&T might have a tougher time proving its case than Oracle did against the Justice Department. In the PeopleSoft deal, Wall said, antitrust enforcers seemed to be manipulating the definition of the business software market. “This time, it looks to me that they have a pretty solid market definition,” Wall said. “They don’t appear to be playing games.”
University of Iowa law professor Herbert Hovenkamp said the Justice Department is following a set of new guidelines, issued late last year, that make it clearer when mergers should be challenged on antitrust grounds.
“I don’t think they are overreaching here,” Hovenkamp said. “If there is a broader message here, it’s that the government intends to enforce these new guidelines.”
Besides being forced to divulge potentially damaging information, AT&T will face other risks if it doesn’t settle with the Justice Department. Going to trial will take months, or even years—leaving the company in a legal limbo that could depress its stock price and cause customers and key employees to defect.
Also, as they try to prove their case, antitrust lawyers sometimes obtain confidential eMails that contain embarrassing snippets and present other evidence that can make companies look bad.
If AT&T persists, antitrust experts said that it’s better off going up against the Justice Department than the Federal Trade Commission, which also handles antitrust reviews.
That’s mainly because lawsuits with the Justice Department are contested in federal courts. By contrast, the threshold for the FTC to block deals is generally lower, and the ensuing legal skirmishes occur in administrative law proceedings that drag on longer.
In its civil antitrust lawsuit, the Justice Department said the merger would stifle competition in the wireless industry.
The deal, which is still under review at the Federal Communications Commission, would catapult AT&T past Verizon Wireless to become the nation’s largest wireless carrier, leaving Sprint Nextel as a distant third-place player and certain to struggle.
Morgan Reed, executive director of the trade group, Association for Competitive Technology, said AT&T has at least one key fact on its side: Deutsche Telekom has said it does not plan to continue to invest in upgrading the T-Mobile network to deliver faster wireless. That means “T-Mobile is not a competitor anymore,” Reed said.
“T-Mobile has already stepped away from the table,” Reed noted. “We’re at three nationwide wireless carriers no matter what.”
The association, which represents more than 3,000 small and independent application developers, believes the merger would benefit the wireless broadband industry.
In addition, the Justice Department lawsuit portrays T-Mobile as having been a strong competitor in the past, but merger analysis is forward looking, said Washington attorney Robert Bell, who has represented clients in mergers for over 25 years.
“To the extent AT&T can show there’s good reason to believe that T-Mobile is going to be a very different kind of competitor in the future—for example, weaker financially, less innovative—then the lawsuit becomes quite a bit different,” Bell said.
AT&T and T-Mobile compete nationwide in 97 of the largest 100 cellular marketing areas, according to the suit filed in U.S. District Court in Washington, D.C. They also vie for business and government customers.
The lawsuit says the acquisition would eliminate a company that has boosted competition with low pricing and innovation.
T-Mobile has the first handset using the Android operating system, Blackberry wireless eMail, the Sidekick smart phone, national Wi-Fi “hotspot” access, and a variety of unlimited service plans.
In a statement, Sprint said the Justice Department’s lawsuit “delivered a decisive victory for consumers, competition, and our country. By filing suit to block AT&T’s proposed takeover of T-Mobile, the DOJ has put consumers’ interests first.”
Federal Communications Commission chairman Julius Genachowski said the record before his agency “raises serious concerns about the impact of the proposed transaction on competition.”
Although the FCC’s separate review of the proposed merger is still ongoing, the agency has never approved a significant merger that is being challenged by the Justice Department.