- The Wall Street Journal states the DOJ has AT&T’s acquisition of Time Warner in its crosshairs. The report states the DOJ is considering a lawsuit to stop the merger.
- I beg to differ. I feel the deal is a lock to be approved. There is precedent.
- Concerned current and prospective shareholders should keep calm and be patient. The news signals the end of the negotiations is near. In the following article, I make my case.
“Time Warner has been halted after a 6.2% tumble on word the Justice Dept. is considering an antitrust suit to challenge AT&T's acquisition of the media company. AT&T has jumped 1% on the news. The DOJ is reportedly also in settlement talks with the companies that could lead to approval with conditions, the WSJ reports. But the department is preparing litigation in the case it does decide to pursue the matter.”
Here are my thoughts. If the DOJ were to file a lawsuit regarding the acquisition, this would be very bad news for the stock. Nevertheless, I'm not concerned in the least regarding the DOJ doing this. In the following sections, I will make the case that the DOJ will inevitably approve the acquisition for concerned dividend and income investors.
There is precedent
Comcast is the No. 1 provider of video and residential Internet service in the United States. It acquired a 51% stake in NBC Universal from General Electric (NYSE: GE).
DOJ regulators were quoted at the time as being concerned about many of the same concerns raised against the AT&T and Time Warner merger. The DOJ was quoted as stating that an all-powerful Comcast might stifle competition from new online video competitors. Furthermore, they were concerned about customer price increases as well.
Nevertheless, the deal went through after Comcast agreed to certain conditions. The conditions included relinquishing management rights of its minority stake in Hulu. Hulu is co-owned by News Corp. (NWSA), Walt Disney Co. (DIS) and NBC Universal. It did take several months of negotiations, which provided fodder for several disparaging headlines prior to the deal being approved.
I expect the same for this deal. The DOJ is basically showboating at this time to ensure no one thinks it is giving a pass to AT&T. The move also improves its negotiating position with the threat of a lawsuit hanging over AT&T’s head like the Sword of Damocles! Classic Trump negotiating tactic! In the end, the deal will get done. AT&T will have to make some promises regarding being fair to other content providers and ensure there are no immediate price increases.
No vertical acquisition ever denied by DOJ
AT&T and Verizon (NYSE: VZ) are the two big bullies in the wireless industry. If these two companies tried to merge, the DOJ would shoot it down in a heartbeat.
Nevertheless, the wireless industry at present is fiercely competitive. Margins are being pressured due to commoditization of the product. I see this highly competitive environment as a positive for getting the Time Warner deal done.
The DOJ must take into consideration that the big telcos need to vertically integrate in order to survive. It's really a no-brainer that the deal goes through. Can anyone name a vertical integration of two companies that was not approved by the DOJ? I could not. Case closed.
President Trump's regulatory reform stance
President Trump has continuously stated he wants less regulation. Trump constantly states that for every new regulation, two old regulations must be eliminated. If the DOJ were to disapprove the deal, this would fly in the face of everything he has been espousing. I don't see Trump backtracking on his promise for less, not more, regulation.
Some have said Trump may stop the deal due to his hatred of CNN. I have no concern whatsoever that President Trump has an issue with CNN. In fact, I believe that is actually a positive for the deal getting done. Trump doesn't want to appear to be taking out his personal issues on the company. He will have to recuse himself, so to speak. So what are dividend and income investors to do?
Don't let the ominous headlines regarding the DOJ blocking the deal worry you. The deal will get done, although there may be a few bumps along the way. Everyone's situation and risk tolerance is different, so I can't make a blanket statement on how you should position.
Nonetheless, a not-so-famous quote by one of my investing role models, Peter Lynch, seems quite apropos at this juncture for current dividend and income investors in AT&T. Lynch stated:
"The key to making money in stocks is not to get scared out of them."
That is how I feel about AT&T right now. The report of a potential lawsuit from the DOJ seems ominous, yet is actually good news, in my opinion. This means the end of the negotiating process has begun. I expect AT&T and Time Warner to sign on the dotted line regarding the DOJ's demands in short order and get on with business. Case closed.
One thing I've learned over time is to do the exact opposite of how I feel. Over time, I've learned that often the exact time I threw in the towel marked the bottom in the stock. Being able to pull the trigger and pick up shares at the point of maximum pessimism in a stock is one of the hardest things to do in investing, I surmise. This is why I always advocate layering into a position over time to reduce risk. And always have dry powder ready if an opportunity arises. I believe that time is now for savvy investors.
Please use this information as a starting point for your own due diligence and consult an investment adviser prior to making any investment decisions. Those are my thoughts on the matter. I look forward to reading yours.
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I am a self-made man and started out my career in the US Army's 10th Mountain Division as a Mountain Infantryman. I am a member of the DAV and a Disabled Veteran. I have managed my own portfolio for the past 30 years. This includes successfully navigating the 2000 and 2008 bubbles, so I completely understand the full cycle the market can take. People who know me in investing circles call me the "Bubble Surfer" for my ability to preserve capital during times of duress. My professional background has provided me with an intimate knowledge of corporate financial statements and how companies actually make money. This expertise and wisdom is the value I wish to share with you. Here is a profile of me featured in the Globe and Mail detailing my career.
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