The U.S. Department of Justice grabbed headlines in 2018 with investigations or challenges of three large vertical transactions, each with distinct outcomes: AT&T-Time Warner, CVS-Aetna, and Cigna-Express Scripts. The resolutions of these three deals leave certain only the fact that where there are vertical transactions of interest, antitrust enforcers will scrutinize them carefully.
The DOJ’s challenge of the AT&T-Time Warner merger was the first litigated challenge to a vertical merger in nearly 40 years. DOJ’s main theory of antitrust harm was that AT&T’s acquisition of Time Warner would allow the combined entity to profitably increase the price of Time Warner television program content to AT&T’s downstream, horizontal television distribution rivals. After trial, the court rejected the DOJ’s claims that Time Warner’s content was “must have” and concluded that AT&T would not be able to raise prices on rival distributors, thus clearing the transaction and rebuking the DOJ.
The DOJ appealed the district court’s ruling. That appeal is still pending. In the appeal, the DOJ acknowledged that “[m]ost vertical mergers (like most horizontal mergers) are indeed procompetitive or competitively neutral” but argued “[t]his merger’s combination of Turner’s competitively significant programming content with the vast distribution footprint of DirecTV, among other circumstances, makes this the exceptional vertical merger whose effects are to lessen competition substantially, in violation of Section 7 of the Clayton Act.”
Meanwhile, the DOJ cleared CVS’s combination with Aetna, another decidedly vertical transaction combining a large retail pharmacy with a large health insurance provider, with a requirement to divest overlapping assets in Medicare Part D business lines. This transaction is particularly interesting because while the DOJ cleared it, the federal judge charged with approving that the settlement is in the public interest has expressed some deep skepticism and refused to sign off. While the transaction has closed, the particulars of its future are murky and the judge’s inquiry is expected to continue well into 2019, so stay tuned for additional developments.
The DOJ also cleared Cigna’s acquisition of Express Scripts, finding that the deal would be unlikely to substantially lessen competition for the sale of Express Scripts’ pharmacy benefit management (“PBM”) services. The DOJ also found that the acquisition would not harm competition for the sale of PBM services to Cigna’s health insurance rivals. Key to the DOJ’s analysis was the finding that the presence of at least two large and several smaller PBM companies would preserve competition post-merger.
Scrutiny of vertical transactions has increased, and clients contemplating such transactions should proceed carefully and in close consultation with counsel.