FCC’s Bold Move on Mergers

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The chairman of the Federal Communications Commission, Kevin Martin, has scheduled a vote for tomorrow on the approval of two pending mergers of four major telecommunications companies – SBC with AT&T and Verizon with MCI. Although the vote may yet be postponed, the very attempt is a bold maneuver in a situation otherwise at a stalemate.


SBC announced its $16 billion acquisition of AT&T last January. A few months later, Verizon announced its acquisition of MCI, worth more than $8 billion. With capital tied up and business plans stalled in merger-approval limbo, both SBC and Verizon likely are anxious to close the mergers as soon as possible.


Before closing, each merger must be approved by federal regulators: the antitrust division of the Justice Department for competitive market conditions and the FCC for consistency with communications law and the nebulous “public interest.” Either can require divestitures or behavioral remedies as a condition of approval. Usually, the antitrust division reaches a decision – approval, consent decree, or court challenge – on a telecommunications merger before the FCC. But the Department of Justice has yet to reach a decision in either case.


The four FCC commissioners are apparently divided on the extent of conditions to seek from the merging telecommunications carriers. The two Democrats, Jonathan Adelstein and Michael Copps, appear to seek more conditions on the mergers than either of the two Republicans, Mr. Martin and Kathleen Abernathy. At least one of the Democrats must vote to approve a merger for it to pass.


It would be easy for Mr. Martin to wait for the White House to nominate, and for the Senate to confirm, two new Republican commissioners. The new commissioners should be in place by early next year. By then, the Department of Justice will likely have completed its proceedings, and the Republican majority could craft merger approvals without depending on support from the Democratic commissioners.


The merging parties and the Democrats may prefer, however, to have the FCC approve the mergers now rather than later, and Mr. Martin has indicated he may accommodate them. The Democrats recognize that they can exert a greater influence on the mergers in the next two months. They are in a delicate situation: trying to secure as many conditions now without provoking SBC and Verizon into seeking a delay until more sympathetic Republican commissioners arrive.


The FCC does not impose merger conditions unilaterally. The merging parties technically must “propose” the merger conditions and in so doing forfeit their opportunity to challenge the conditions in court. Thus, SBC and Verizon negotiate the conditions and can effectively refuse conditions until more commissioners are approved.


Moreover, if the FCC approves the mergers first, the justice department will have substantially less bargaining power to extract conditions in negotiating with the merging parties. The justice department tends to prefer structural remedies and divestitures to address anti-competitive concerns. Those remedies would appear strange if another federal agency, the FCC, had already approved the mergers with less onerous behavioral remedies.


The FCC has negotiated behavioral merger conditions for dozens of telecommunications mergers over the past 10 years, but in each case the justice department had previously approved the merger, including those involving SBC, Verizon, AT&T, and MCI. In practice, after a merger is approved, many of the behavioral conditions are forgotten, ignored, or both. Merging parties would much prefer a few toothless behavioral conditions from the FCC than large-scale divestitures from the justice department.


Still, there are risks for the merging parties. SBC and Verizon are in a classic prisoner’s dilemma: best off if the other company refuses to make any concessions. The worst outcome for either business is to receive less favorable merger conditions than the other. The FCC, being party to all negotiations, can potentially play off the anxieties of each company to extract additional concessions. That is presumably the negotiating strategy of the Democratic commissioners. The negotiations may yet fall apart.


Despite months of public comments, the conditions on these mergers, as with all FCC merger approvals, will be the subject of nonpublic negotiations. The details will not be known until the final order for each merger is published. If history is any guide, within a few years, if approved, the merger conditions will likely be forgotten. But for now, tomorrow’s FCC meeting promises great drama.



A former FCC commissioner, Mr. Furchtgott-Roth is president of Furchtgott-Roth Economic Enterprises. He can be reached athfr@furchtgott-roth.com.


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