Follow Up: CVS – Aetna Merger Could Be Challenged

In a follow up to earlier pieces on this topic, the mega-deal that merged CVS and Aetna in the healthcare sector totaling about $70 billion could be challenged in federal court. The federal judge, Richard Leon, on Monday indicated that he could stop the activity of both companies to join forces and keep them as separate entities while he weighs the consumer impact of the merger.

This is out of the ordinary as the merger has met approval through the Justice Department and the federal court proceeding is often a mere formality. It should also be noted that Judge Leon is the same court officer which presided over the controversial AT&T / Time Warner merger proceedings; that was a recent topic here on Frank’s Forum, because of the content sharing issues taking place in that industry.

It is not a coincidence that Judge Leon, who has received plenty of criticism for his handling of the AT&T/ Time Warner merger, is now considering putting the brakes on this CVS/Aetna planned consolidation. The conflict of interest issue can be raised very easily in the case of CVS/Aetna because of what each entity specializes in separately.

The merger of a major healthcare/retail pharmacy company with a major health insurance carrier presents plenty of ethical concerns that could mollify the public interest. The concern is that Aetna-insured patients, whether it is individual policies or employer-provided policy coverage will be forced to fill prescriptions for medication at CVS locations exclusively.

A related concern for the consumer is when their employer-provided coverage changes to Aetna from another carrier, which then could force them into an prescription arrangement with CVS after the individual has a long-term routine and trust with another pharmacy. A similar concern was raised during the discussions of the merger in some forums online regarding rural areas that will require the consumer to drive farther to a CVS location if they are insured through Aetna, and in areas of the U.S. where CVS does not have a large presence.

In fair balance, some proponents of the merger state that it will provide better care for less cost. The addition of Aetna to their ranks will help CVS gain leverage with PBMs for the negotiation of pricing on prescription medications, which I covered in an earlier related piece.

The federal court could make this situation both very interesting and very difficult for those involved at CVS and Aetna. Judge Leon used words like “less convinced” that the merger was not an anti-trust violation. That is a very bold statement on the record and certainly could be motivated by the flack that the judge received in the AT&T decision.

Americans have long been concerned by anti-trust or monopolies because they represent, at the core, a break from our national ideals of competition in the marketplace as well as limiting consumer choice. The American consumer favors both choice and competition to create favorable conditions for price and service. The limitation of either of these market forces is looked upon rather negatively in the court of public opinion.

Both CVS and Aetna have to be alarmed that they are potentially being painted with the monopoly brush, and that this deal could unravel in the eleventh hour, unhinged by a judge who is essentially trying to rectify a previous miscalculation with the AT&T decision, which looks more like a monopoly with each passing day.

The central question is whether or not the combination of CVS and Aetna is within the best interest of the consumer. It is starting to look like that answer may alter one of the largest healthcare mergers in American history.

(some background courtesy of Reuters, CBS Market Watch, and CNBC)

Follow Up: AT&T Content Ownership & The Impact On The Consumer

The debacle which was the AT&T merger with Time Warner, which is now known under the name Warner Media, has been a topic featured on this blog several times in the past. The detrimental effect it would have on competition in the media landscape is also a topic that has been part of my prior work on this merger.

It was widely reported that an outage of HBO occurred last week for customers of Dish and Sling TV services. It is hard to believe that AT&T / Warner Media had no role in engineering this outage to damage the competition with AT&T owned DirecTV standing to gain potential subscribers as an outcome.

This type of disruption or potential withholding of content is precisely what the Department of Justice was concerned about relative to AT&T merging with Time Warner. This potential misuse of the control of content or content ownership to damage the competitors of DirecTV was a central focus of the DOJ lawsuit in this merger earlier this year.

In that court proceeding, one judge made the decision to allow the merger to proceed, no jury was involved. The judge sided with AT&T in “buying” their version of the case that they wanted to reinvent AT&T for the long haul. The government argued that the merger would impact competition because it would give AT&T too much influence and control over content. The government argued that AT&T would use that control to provide favorable pricing for their own enterprise, DirecTV, at the expense of Dish, Fios, Comcast, and other cable television providers. It was a conflict of interest that the government was concerned about with this merger.

The exact situation has played out and could become a factor when the content of certain premium HBO programs comes up for distribution as well as the March Madness NCAA basketball tournament which Turner Sports (part of Warner Media) has the rights to broadcast. The new AT&T/Warner Media could jack up the prices on that content to the competition, while at the same time create advantageous promotional pricing for DirecTV in order to siphon off subscribers from their competitors.

DirecTV Now is a service that allows people to stream content without having a satellite dish attached to their residence. The service is opening up a new subscriber base to the DirecTV platform with less equipment and front-end costs. The development is one that can be viewed as positive, and the reviews are good overall for the service to this point. In some ways, this advancement will help competition because it gives the consumer another option if they are not a candidate for a satellite dish and they may feel locked in to one cable television provider.

However, this service can become problematic if AT&T influences the content available on this service and withholds that content from their competition in some way. This ties in to the other big media news of the Warner Media streaming app-based service that is built and being pushed to launch ahead of the long-awaited Disney app launch. Warner Media is trying to beat Disney to the punch on getting their streaming service up and going in the marketplace.

The question within the media industry at this point is whether that is a smart strategy by Warner Media if they rush the service to market and then have some glitches that lead to customer disappointment.

In the event that the outage or the disruptions that have involved Warner Media content and the competition for DirecTV in the marketplace are, in fact, valid that is a sad state of affairs for the whole industry. This has led to some analysts with greater knowledge of the industry space than myself to produce some insightful commentary pieces on the potential for the Department of Justice to reintroduce legal proceedings to reverse the merger.

That would certainly create a ripple effect throughout the media, telecommunications, and cable/satellite TV services industries all at the same time. The counterpunch to that effort was a group of businessmen writing op-ed type pieces of their own to implore the court system to not entertain the reversal of the merger. It is going to get interesting.

The issue in my own view of this situation is not the streaming services being offered to provide more choices to the customer. The issue is that you cannot set the playing field up in a way that is going to unfairly treat competition in the marketplace or set the rules up so that one party gains from them and everyone else is at a competitive disadvantage. That is what I want all the readers out there to think about in this circumstance; because those consequences will be felt across other industries that will have a much greater impact on your life than just being able to watch a program on your television set.

(Some background courtesy of Reuters, CNBC, CBS MArketwatch, and CNN)

Follow Up: Court Allows AT&T – Time Warner Merger

The merger proposal seeking to join AT&T and Time Warner has been surrounded by controversy almost from the time it was first announced. This proposed merger of a telecommunications and media distribution giant and one of the largest media content creation companies in the world has been the subject of several prior pieces on Frank’s Forum.

The blockbuster $85 billion merger was being held up by a lawsuit brought by the Department of Justice over anti-trust concerns. The government was very concerned about AT&T’s ownership of DirecTV and the impact that the merger with Time Warner would have on the costs for rival cable companies to carry channels such as HBO, CNN, TNT, and TBS.

The government was pushing for certain conditions such as having any disputes over high cable prices in light of the AT&T – DirecTV connection be directed to 3rd party arbitration to determine a fair judgement on price. The other condition centered upon blackout rights.

However, the judge in the case, Judge Leon, approved the merger without any conditions attached. The judge viewed the case strictly in terms of a vertical merger between two companies with different core strengths.

The precedent in anti-trust suits very often favors vertical mergers versus horizontal mergers. Some recent examples of horizontal mergers of two entities in the same type of industry are Office Depot and Staples and Walgreens and Rite Aid, both of those mergers failed due to anti-trust concerns over pricing of office supplies or pharmaceuticals, respectively.

The next steps for the government are unclear. The judge, Judge Leon, asked the Department of Justice to not appeal or seek a stay on the decision. His basis for this request is that both sides have spent an exorbitant amount in the case in legal fees and court fees in the “tens of millions”. The view of the court is that AT&T and Time Warner do not compete with one another currently and that the same opinion will be found by another court proceeding.

Some feel that the judge is right on point with this decision on this case. The other sentiment is that the conditions should have been attached to the decision to protect the consumer from hiked cable prices.

In my view, I maintain that the judge neglected to recognize the connection with DirecTV and the potential for the Time Warner properties in the cable television realm could be manipulated to make an unfair advantage for DirecTV. This becomes a bigger issue when certain customers cannot have a satellite dish where they reside. It could result in them paying more for cable or premium channels such as HBO.

The domino effect from this merger will impact potential merger opportunities in the works right now which have been featured on this blog in the past. The big story of the day on Wednesday is the impact this merger decision will have on the Comcast proposal for the assets of 21st Century Fox.

Comcast had stated publicly that they would not get involved in the bid for Fox unless the court gave the green light to AT&T in this case. Comcast was seeking to avoid a protracted lawsuit. The wild card here is that should Comcast make a bid for Fox, the government could get involved because they are both in the same business. The court could see a case for the government because it will be viewed as a horizontal merger, which could become a long slog in the courts for Comcast.

Disney and their bid for Fox has a slightly different perception because they view Disney as a content creator and entertainment company which does not have any expertise in delivering telecommunications services or with cable equipment. They are seen as having a potentially easier path to potentially obtaining Fox.

The stock price outlook for Comcast has been slashed by major investment banks and fell to about $30 per share this morning. This signals that if they do make a play for Fox and get in a bidding war with Disney, they will eventually have to buy back shares. The maneuvers have a direct impact on the valuation of the company.

This merger also brings new traction for CBS and Verizon as a potential opportunity to join forces in the future. CVS also gained from this decision because they are seeking to buy Aetna and this court decision on Time Warner proves that CVS has some viable evidence that this play for Aetna can be seen as a vertical merger opportunity.

This mega merger will make AT&T a much larger player in the media landscape which also brings to the forefront the battle between “old media” versus “new media”. The reality is that if old media outlets do not join together they will be destroyed by the new media giants such as Amazon, Google, Netflix, and Facebook.

The other reality is that the court looked at this merger with the perspective that cable television services will have to drop prices in order to compete with new media so they are going to allow it to move forward.

The next big prospective M&A prospects are Fox and CBS. The Viacom scenario was a disaster and CBS is looking to move forward to partner with someone else to gain competitive traction as other entities are getting larger.
The effects of this merger will be felt for a long time to come. The way that AT&T handles the marketing and promotion of the former Time Warner channels when they are provided to other cable TV providers such as Fios, Comcast, and Dish.

The domino effect on the other mergers in play right now will also create conditions where the precedent could be difficult for the government to try to protect against the anti-trust implications involved.

In the end, this merger sets the stage between old media versus new media and how that will play out will have a definite impact on the American consumer.

Follow Up: CBS, Viacom, A Lawsuit, & Verizon

In a follow up to the earlier coverage on this merger, the drama around CBS and National Amusements (parent company of both CBS and Viacom) took a disastrous turn on Monday. The board at CBS took a harsh tactic in the negotiations by suing National Amusements in a Delaware court to block the potential merger with Viacom.

The suit seeks to dilute the authority that National Amusements has in CBS by reducing their voting stock percentages and other high level business machinations which are involved in certain situations when a company is going into a defensive mode to avoid consolidation.

The lawsuit also involves CBS seeking the protection of the CBS Board of Directors from being altered by National Amusements at any point now or in the future. This is a maneuver intended on preventing Shari Redstone from removing certain board members at CBS who have indicated that they are against the Viacom merger, and having her “stack the deck” with people aligned with her in pushing through the merger.

Furthermore, the suit also seeks protection for CBS so that they essentially do not have to accept a “bad merger” deal. This news on the lawsuit comes from Forbes, CNBC, and USA Today. Redstone, has stated that she had no intention of making changes to the CBS board, and both sides are pointing fingers.

This situation is getting ugly, to say the least, and it is unusual too because National Amusements has a hand in both entities already. The normal circumstances of other mergers or acquisitions are between two sides that have no prior affiliation. The ruling of the court in this situation will provide some insight into the potential path that this merger will take in the months ahead.
The court ruling will also provide a legal precedent for the future for M&A activity of this type. In my earlier feature length piece on this merger, the variables were presented regarding the differences of strategic vision that Ms. Redstone and Les Moonves (who runs CBS) had regarding the future of the company.

The merger makes some degree of sense because the assets of Viacom, particularly the cable television outlets, would provide CBS with more content to control and also a wider footprint in cable TV. The recent industry report that was published yesterday touts that cable television revenues have increased by about 10% nationally would seem to indicate that this potential merger is timely for CBS.

However, in my experience covering M&A activity, I kept returning to the rationale behind why CBS would take the option on Monday to sue National Amusements (which some in the media call “the nuclear option”). The only scenario that made sense to me was that CBS had another deal forthcoming or another potential partner for a deal they were trying to work out in back channels.

The one potentially fit in my mind was Verizon, because it had been rumored before, and I wrote about that possibility in an M&A “roundup” type piece I did on media companies. The synergy between Verizon and CBS makes sense for both parties given the other acquisitions and consolidations surrounding both of those entities.

Verizon is under pressure from AT&T, who is attempting to merge with Time Warner, and the federal government has a lawsuit in place currently to block that merger. Comcast is in the process of a bidding war with Disney over the assets of 21st Century Fox as well.

In fact, some within the financial news media suggested that Verizon may have backed off from making a formal proposal to CBS because of the federal government response to the AT&T deal with Time Warner.

The news broke about three hours ago today that Verizon has had contact with CBS and that there is some renewed interest in a potentially deal. That makes sense given the steps that CBS has taken with the lawsuit here against National Amusements. They may not want to take the Viacom deal if they have a better deal with Verizon.

The rather limited cable presence of CBS (Showtime and a couple of smaller channels) would be enhanced by a partnership with Verizon. The network shows on CBS are tremendous ratings drivers, which along with the NFL and other sports content, makes CBS a desirable commodity for Verizon as they seek to keep up with their competitors in the marketplace.

The Verizon potential involvement could be the “wrench” that gets thrown in the CBS – Viacom negotiations that causes a rift that cannot be repaired. The decision of the court will loom over this merger and will be pivotal to which direction it takes in the months ahead.

In the meantime, if the AT&T lawsuit with the government gets resolved that will determine the strategic direction that Comcast will take in the bidding war with Disney over Fox and will provide guidance to Verizon as they determine their commitment to acquire CBS. It is similar to a giant game of dominoes, except that billions of dollars are at stake as well as the careers of many seasoned industry executives, and the fate of consumer choice hangs in the balance.

Follow Up: AT&T Plans To Buy Time Warner Hit Snag

In a follow up to a recent piece on this potential merger, the plans for AT&T to obtain Time Warner for $85 billion hit a snag on Wednesday. The government regulators involved have interceded and have stated that AT&T has to sell either CNN and other related network holdings within Turner Broadcasting , or sell their ownership stake in DirecTV in order for the deal to move forward.

This consolidation of ownership or control of so much content is the issue at hand for the federal regulators. The most honest assessment of this merger is that the control of content was always going to be an issue with this proposal.

The fact remains that AT&T would have too much control over both sides of the content pipeline in their proposed arrangement, that it can have drastic impact on price controls for the consumer.

The average viewer is now streaming more content than ever before, and AT&T has a master strategic plan to become a larger player in the streaming content side of the business. Their purchase of DirecTV started that process with the introduction of a streaming service for customers of that satellite service which has garnered fairly good reviews.

The more troubling aspect of the news today was the response by AT&T who have doubled down on their stance that they will fight any changes to the deal. They are bullishly against selling any assets and are essentially going to attempt to “push through” one of the largest telecommunications mergers in American history.

The pursuit of Time Warner by AT&T has been fraught with problems from the outset. In my view, I can understand why both sides want to get something done in the way of consolidation: Time Warner is struggling to keep their vast media empire relevant in a rapidly changing landscape where print media is dying, and television is becoming increasingly competitive. AT&T would gain a tremendous amount of content for their own service via DirecTV and would be able to charge other industry players for their content.

The major issue is that the merger would make AT&T too gigantic and put their hands into “too many pots” which is an anti-trust conflict in the purest form. AT&T could charge more for cellular phone service or for the apps for the content on the smart phones. AT&T could wield enormous influence over the carriage agreements of all the current Time Warner broadcasting mediums.

The divestiture of one of these assets as identified by the federal regulators is absolutely necessary when you consider the size of Time Warner and the diversification of AT&T. The “mega mergers” of recent years have all had some sort of pothole on the way to fruition.

However, in this case, we are left to consider this question: what if AT&T sells Turner Broadcasting and the deal still does not gain approval? What if the deal never is approved by the regulators?

I am not sure at this point who would be in position to purchase Turner Broadcasting while also maintaining approval from the regulators involved. The deal may never gain approval, that is a realistic possible outcome at this point. The most likely outcome would be that Time Warner is sold off in pieces to different competitors in each of the media spaces they operate within.

This is a developing situation and where it leads could have a massive impact on the consumer in the coming months. The growth of AT&T is alarming and the argument can be made that they should be stopped, it remains to be seen if that will take place.

Busy Signal: AT&T and Time Warner Proposed Merger

The news today of a potential merger between two giants in the media industry: AT&T and Time Warner brought with it both a wave of enthusiasm and skepticism in the financial markets and the multimedia/telecommunications industry. The enthusiasm was demonstrated on Wall Street, where Time Warner stock trading surged, with their stock price up around 13% at one point in today’s activity.

The skepticism comes on the part of some consumer groups who are concerned about what this merger might mean for costs of internet access, cellular phone and data plans, and satellite television services (AT&T merged with Direct TV previously). There is also some legitimate cause for regulators to reject this deal, so there is some caution in the industry that this merger may eventually come apart.

The proposed deal includes Time Warner’s film division and cable television division which includes channels such as TBS, TNT, CNN, as well as the crown jewel of premium cable networks, HBO. The deal is valued, according to sources, at $300 billion. It would be the largest merger in the media industry since Comcast completed the acquisition of NBC/Universal in 2011.

This trend would continue what I have deemed in other mergers as the “big getting bigger” scenario. Time Warner is a huge company with many different divisions and huge market presence in media of all forms. AT&T has a market cap of $233 billion and provides cellular phone, internet, telecommunications, and satellite television services to millions of consumers. The combined entity would be a goliath capable of competing with Comcast/Universal, which I maintain is one of the goals of this move today.

The trend of the average consumer looking to cut out their cable television service, or “cord cutting” as it is known, is something I have written about in the past, and it is an increasing trend. This trend is damaging the cable television providers and the cable networks from making revenue gains. This has particularly impacted Time Warner’s cable services division, and made this potential merger a way to partner with a larger company to expand their reach.

The trend toward streaming content is also a driving factor in this proposed merger, as AT&T has been actively pursuing the development of their own streaming content service which would be offered via the Direct TV platform. The combination with Time Warner would provide AT&T with more advantageous content streaming negotiations because they would be better positioned to control the content from TBS, TNT, CNN, and most importantly, HBO.

HBO has top rated content that is sought after by competing streaming services and cable and telco providers. This would put AT&T in the proverbial driver’s seat of those negotiations, but is the same reason why regulatory boards will have issues with this deal.

The Wall Street Journal reported that regulators have some regrets over the Comcast merger with NBC/Universal which they do not want to have repeated by this potential media industry transaction. The Time Warner properties in the cable network division also have exclusive rights (or partial exclusive rights) to sports content such as the NCAA Tournament in college basketball, NBA basketball games both regular season and playoffs, and Major League baseball both regular season and playoff games. This made the deal more attractive for AT&T because of the demand for live sports programming, but it will also make the regulatory scrutiny that much more heightened because that content is meant to be seen by everyone and not meant to be restricted to only certain providers.

This proposed merger, should it gain approval, would give AT&T a huge advantage in providing streaming content for their cellular phones and their new service with Direct TV customers. It would provide Time Warner with more outlets for their content and more consumers in parts of the country which they could not reach with their traditional cable television services. It would offset the loss of cable television consumers through the streaming rights agreements for their content that they will gain through millions of AT&T customers.

However, in the end, this media giant would have more control over more content and that should give both the industry and the consumer cause for concern. This merger should be stopped because it will provide too much control to one corporation, we saw what happened with Comcast and NBC, we cannot afford to let that happen again.

(background information and stats courtesy of CNBC, The Wall Street Journal, and CBS News)