Legal Topic of Company Mergers, Focusing on AT&T and Verizon - Research Paper Example

 Legal Topic of Company Mergers, Focusing on AT&T and Verizon Abstract In order for a company to operate effectively, it must respond to external factors (legal, social, and ethical responsibilities) that oversee the industry in which the company operates. The paper explores legal topic of company mergers spotlighting AT&T and Verizon. The analysis of the paper is grounded on the law, ethics, and social responsibility principles. The discussion concludes that the system of dual review in telecommunication mergers by federal agencies leads to problems such as delay, redundancy of the process owing to increased probability of rejection on the grounds of illegality. Legal Topic of Company Mergers, Focusing on AT&T and Verizon Introduction Law, ethics, and social responsibility principles form a critical part of an organization’s survival. The three factors are essential during company mergers as they lay the foundation of the process, besides determining its success. The topic of legal mergers is significant as all companies are subject to legal responsibilities, and are expected to follow the law impacting on organization’s activities such as acquisition process. Mergers in the telecommunication industry are distinct as they are reviewed by two federal agencies. Mergers in most industries are only subject to antitrust review by the Department of justice (Carstensen & Farmer, 2008). Telecommunication mergers, on the other hand, are additionally subject to review by the Federal Communications Commission (FCC) under the commission’s public interest standard. Organization responsibility towards the society and its well being is referred to as corporate social responsibility. Companies should be socially responsible by closely working with stakeholders such as employees, customers, communities, and governments so as to ensure that the company fulfils its obligation in reducing negative impacts on society and maximizing contribution to critical issues such as environmental sustainability (Gaughan, 2011). Companies have a considerable role to play in improving the lives of all of their clients, workers, and shareholders by sharing the wealth created. Companies are expected to meet certain social responsibility requirements so as to maintain a favourable public image. Business ethics infers the principles and standards that outline acceptable conduct within business organizations. Employees should possess a shared vision of abiding by the company’s code of ethics and policies guiding business conduct. Business practices should be governed by the established ethical codes of conduct (Gregoriou & Rennebooog, 2007). Ethical framework represents a system of principles fashioned at aiding organizations in establishing the ground rules for ethical practice. Merger/Acquisition A merger is a form of acquisition occurring when a business assumes the assets plus the liabilities of another business. The acquiring firm usually retains its identity, while the business to be acquired stops to exist. Business mergers demand approval by majority shareholders, besides satisfying the requirement of legal provisions (Hamburg & Brotman, 2006). Some of the advantages flowing from mergers include attaining economies of scale, combining complementary resources, attaining tax advantages, and minimizing inefficiencies. The sources of gains from acquisitions encompass aspects such as revenue enhancement from enhanced market share, cost reductions, minimizing cost of capital, lowering taxes, and changing capital requirements. Legal Section A. Introduction to Legal Section Mergers and acquisitions are governed by the set state, and federal laws to ensure that the mergers do not violate antitrust laws. State law lays out the process for the endorsement of mergers and lays out judicial oversight for aspects such as terms of mergers. State law also directs the degree to which the administration of a target company can protect itself against a hostile takeover via various financial and legal defences. Most mergers and acquisitions are friendly negotiated transactions owing to the present legal defences. Federal governments direct corporate consolidations, in order to ensure that the combined size of the new organization does not deliver a monopolistic power, as to be illegitimate as per the Sherman Antitrust Act (Hamburg & Brotman, 2006). AT&T made several post-consolidation wireless acquisitions such as purchase of Cellular One, Wayport, Qualcomm, and Centennial. In 2008, AT&T announced buyout of Centennial Communications Corporation subject to regulatory approval and approval of Centennial’s stockholders. In 2009, AT&T entered an understanding with Verizon Wireless to sell off centennial service areas pending the successful merger of AT&T and Centennial. AT&T intended merger with T-Mobile USA caused controversy as it would make AT&T attain the biggest market share. The envisaged acquisition was poised to enable AT&T build a strong wireless network resulting to enhanced services and lower prices for consumers (Stucke & Grunes, 2012). The plans to pursue the merger hit fierce regulatory opposition. Regulators questioned the effects of such a deal on both competitors and consumers. The United States alleged that enhancement in concentration was “presumed to increase market power.” The United States was expected to prove that the merger net effect would significantly minimize competition. The United States is expected to demonstrate that such a merger will produce a firm commanding an excessive market share of the designated market, and a considerable increase in market concentration. In the event that the government satisfies initial burden, defendants must demonstrate that market shares give an inaccurate account of the merger’s potential impact on competition. In their response, AT&T and T-Mobile argued that the United States has an exceptionally high burden (Stucke & Grunes, 2012). Internet companies were sceptical of the merger since it left them with reduced counter parties to negotiate with in delivering both content and applications to customers. The merger would leave the internet companies dependent on few corporations, which could batter the wireless competition. Companies such as Sprint opposed the merger for perceived violation of antitrust laws by creating a duopoly in the market. Sprint filed the lawsuit in an attempt to fight to preserve competition on behalf of both consumers and the wireless industry. The Justice Department and the Federal Communications Commission also instituted legal proceedings to interdict the merger based on antitrust concerns (Gotts, 2001). The opposition to the merger was grounded in the assertion that the merger of AT&T would hurt competition significantly. The lawsuit read that post merger AT&T along with Verizon (VZ) would make it harder for other companies within the wireless market to obtain wireless devices. The claims that the merger would raise the costs for roaming and infrastructure were dismissed. B. Statement of Relevant Legal Principles and Rules of Law The U.S and plaintiff states alleged in their Complaint that the proposed merger violated section 7 of the Clayton Act. The Act stipulates that no person shall purchase, directly or indirectly if the result of such acquisition may be significantly to minimize competition, or tend to pursue a monopoly. A merger that results to a firm controlling an undue percentage market share, and yields a significant enhancement in the concentration of firms in that the market, is intrinsically likely to minimize competition substantially. Subsequently, in line with the Clayton Act legislative intent, such transactions are presumptively illegal under section 7 (Gotts, 2001). For instance, in the case United States vs. Philadelphia National Bank, the court argued that a merger yielding a single firm controlling 30% of a market trending toward concentration was presumptively illegal. C. Legal Analysis The 2010 revision to the U.S. Horizontal merger guidelines incorporates Congressional intent stipulating that merger enforcement should interdict competitive challenges in their incipiency and that certainty regarding anticompetitive effect is improbable, but not mandatory for a merger to be deemed to be illegal. The 2010 guidelines stipulate that, in discussing coordinated effects, that the previous level of predictive causation is extrajudicial. The revision outline that with regard to the Clayton Act’s incipiency standard, agencies have the opportunity to challenge mergers that in their judgement present a real danger of harm via coordinated effects; even devoid of distinct evidence outlining precisely how the coordination likely would take place. Values and ethics refer to the principle or code of conduct that govern business transactions. Business ethics goes beyond legal issues and contributes to the establishment of trust and confidence in business relationships. Organizations should establish ethical standards and avail compliance systems designed to maintain appropriate conduct in all areas of the organization. Business mergers that result to a firm controlling an undue percentage market share can be regarded as against ethical business practices. Conclusion Companies can successfully create sustainable competitive advantage via enhanced business practices and corporate citizenship. Enforcement under the Clayton Act must factor in any trend towards concentration, especially in cases where the merging parties are the dominant players within their relevant markets. Under the U.S. law, there is a significant presumption of illegality in instances where the firms’ market share is substantial in a market with significant entry barriers. References Carstensen, P. & Farmer, B. (2008). Competitive policy and merger analysis in deregulated and newly competitive industries. Cheltenham, UK: Edward Elgar. Gaughan, P. (2011). Mergers, acquisitions, and corporate restructurings. New Jersey, NJ: John Wiley & Sons. Gotts, I. (2001). The merger review process: A step-by-step guide to Federal merger review. Chicago, IL: ABA Books. Gregoriou, G. & Rennebooog,L. (2007). Corporate governance and regulatory impact on mergers and acquisitions: Research and analysis on activity worldwide since 1990. Waltham, MA: Academic Press. Hamburg, M. & Brotman, S. (2006). Communications Law and practice, Volume 1. New York, NY: ALM Media. Stucke, M. & Grunes, A. (2012). The AT&T/ T-Mobile merger: What might have been? Journal of European Competition Law & Practice 3 (2): 196-205. Read More