Could Big Telecom Mergers Be Undone?

The once-certain merger process between the largest US telephone company, AT&T Inc., and former "baby Bell" and regional telephone carrier BellSouth, could perhaps be delayed further on account of a curious federal district judge. His hearings into why the AT&T/SBC and Verizon/MCI mergers were expedited by the Justice Dept. could raise skepticism about the viability of AT&T/BellSouth.

In a filing in US District Court yesterday, covered brilliantly by Anne Broache of CNET, attorneys for the Justice Dept. defended themselves against allegations that they slacked off on their reviews of the legality and competitive implications of the Verizon/MCI and AT&T/SBC mergers of 2005.

The filing apparently devoted most of its space to denouncing the allegations of citizens' rights groups whose opinions District Judge Emmet Sullivan had extended the proceedings in order to receive. However, it appears to have sidestepped a key issue which Sullivan apparently hasn't missed, and which may become another sticking point in the merger proceedings between AT&T and BellSouth.

At issue is a 2004 change to the Tunney Act, a part of federal law which was passed in 1974 to compel federal courts to certify that pending mergers were conducted in the public interest. In the wake of anti-monopoly proceedings against Microsoft in 2001, lawmakers began reviewing the language of the Act, and three years later passed an "amendment."

The amendment was literally a single word. The value of this word could very well be over $80 billion USD as the AT&T/BellSouth merger resumes the scrutiny it nearly skirted.

As the law was originally phrased, "Before entering any consent judgment proposed by the United States under this section, the court may determine that the entry of such judgment is in the public interest." This means, after the Justice Dept. passes what's called a consent decree - an advisory stating the conditions under which the DOJ would approve the merger, assuming it is approved - the court has the right to review that decree to make certain the DOJ is acting in the public interest.

The 2004 amendment replaced "may" in the above sentence with "shall," meaning the courts must review the consent decree rather than wave it on, sight unseen.

Taking the amendment quite literally, Judge Sullivan has continued his extensive review of the consent decrees in the AT&T/SBC and Verizon/MCI mergers, declaring as recently as November 30 that Verizon/MCI has not actually been validated, and is thus still pending.

"You say it's a done deal, a fait accompli," Reuters and CNET quote the judge as having told attorneys for what they thought were merged parties. "The merger's not finished, either. The merger has not been approved by this court."

The judge's extended review, which has been going on since last July, is being scrutinized for possibly having triggered the Justice Dept. to find a way to avoid a similar situation with AT&T/BellSouth. Though the amended Tunney Act states the court shall review the consent decree for a merger, it presumes that one exists.

A consent decree implies that the DOJ lays out conditions for the merger to proceed. Last October, the DOJ issued a press release stating it had approved the AT&T/BellSouth merger, and that it could go forward. In so doing, it took the unprecedented step of not issuing any consent decree at all, giving Judge Sullivan - who would have inevitably reviewed it - nothing to review.

That fact has caught the attention of incoming House Energy and Commerce Committee Chairman Rep. John Dingell (D - Mich.), who promised last month, almost immediately following the sweeping Democratic victories in the last mid-term election, to open up hearings into AT&T/BellSouth. Conceivably, those hearings could now be broadened to encompass the whole proverbial can of worms, examining the process by which the DOJ's approval of the last two telecom mergers was apparently accelerated.

This news comes as the Justice Dept. seeks to overhaul its own processes, in the interest of accelerating merger reviews even further. In its latest draft amendments to the 2001 Merger Review Process Initiative, the DOJ proposes changing its order of business in order to quickly set aside affairs that it would deem unimportant or unworthy of investigation, tapering the initial fact-finding period following the merger parties' so-called Hart-Scott-Rodino notification to the SEC, to as little as two weeks.

"The staff is encouraged to be as aggressive as possible during the initial 15- or 30-day waiting period in attempting to identify transactions that do not require further investigation," reads the current draft, "and to narrow and refine issues for transactions likely to progress to HSR second request inquiries."

The DOJ is free to amend its own practices, probably without judicial review; but if congressional hearings into antitrust matters convene next month, and if their purview is extended to cover telecom mergers that even stockholders may have thought already happened, matters such as why the DOJ is keen on expediting the triage process for public interest matters, may take the spotlight.