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AT&T: David Vs. Goliath

Mar. 02, 2018 8:41 AM ETAT&T Inc. (T)TWX84 Comments


  • Makan Delrahim recently quipped that there was "a reason that David beat Goliath" in reference to the Department of Justice case against AT&T over its Time Warner merger.
  • We question who "David" and who "Goliath" are in this case, and conclude that it depends on your perspective.
  • We see the merger as going through on the grounds of a vertical integration that does not limit competition, with Delrahim's own words likely to be used against him.
  • The worst-case scenario from our perspective is that the merger is conditional on asset sales and/or spinoffs.
  • AT&T is a buy with or without Time Warner.

For what feels like an eternity, but in reality has been about 18 months, we have been following the ongoing saga of the controversial AT&T (NYSE:T) and Time Warner (TWX) merger. Other than making some quips here and there in our last few articles about how we are operating under the assumption that the merger will NOT go through when making our 2018 projections for both companies, we are of the opinion that the merger WILL go through. In this column, we address the conundrum that is the "David versus Goliath" situation with AT&T versus the Department of Justice. We discuss reasons for and against the merger, and the fiscal implications of such a merger. It is our thesis that the worst case scenario is a merger that includes asset sales/spinoffs, but AT&T is a buy regardless of Time Warner.

Who is David, and Who is Goliath?

We are sure that readers are familiar with the fable of David and Goliath. There are various interpretations of the story, but we subscribe to the one that presents David as a confident and brave soul who battled against near impossible odds to take on the mighty warrior Goliath by outsmarting him and using the physics of stone throwing to ultimate claim victory. In the end, those who witnessed the feat were greatly encouraged by the massive underdog defeating a mighty warrior against all odds.

Source: Marsabitimes.com

So, why is this relevant to AT&T and the Department of Justice? Well, the Department of Justice Chief Makan Delrahim recently quipped that David beat Goliath for a reason when responding confidently about defeating AT&T in court. CNBC's David Faber took this quip as 'trash talking'. Delrahim went on to say:

"In the U.S. we now have thousands of vertical merger experts, who somehow think we haven't enforced

This article was written by

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Analyst’s Disclosure: I am/we are long T. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (84)

The beginning was interesting, I stop at 'fable'.
Quad 7 Capital profile picture
Well, we have addressed that issue here in the comments, thanks to historians better than I (and one ashamed churchgoer here for using the term), but please understand that the CONTENT of the article is what is paramount---the case, what we see happening for and against the merger, etc.
The merger is opposed for purely political reasons. Time Warner (TW) owns CNN which was and is critical of Trump. This is political score settling and retaliation. A year ago Kushner met with the TW CEO and told him as much. Story is here:

Yeah, but CNN isn't going to go out of business if AT&T buys TWC, so AT&T is the only one getting punished here. Makes no sense.
Quad 7 Capital profile picture
Not sure we agree with that sentiment entirely. Really does it make a difference who owns CNN if the content isn't going to change?
Vandooman profile picture
Companies make money if they are well-managed. We have no idea how well T will manage a content company. They could even alienate other distribution channels. I also question why a content company would have so much debt and such a high dividend. The mix of businesses will be radically different, not a bad thing, but not a utility to be leveraged to the gunnels. In fact I would deem the dividend as inappropriate to the business mix and maintaining it might even be a dereliction of duty on the part of directors. Content is an opportunity but also is riskier.

It will be interesting to see the bond rating 2-3 years from now.
Quad 7 Capital profile picture
DO not forget, that the content side of the business is going to be managed by current Time Warner team, with some small turnover. Most of what made Time Warner a success will remain
g.dimit profile picture
A merger with Time Warner could open a Huge opportunity for AT&T searching for growth in different sectors other than Telecon.
The Company could become a very large Conglomerate & expand in areas was Impossible to explore Before.

The Company will do well as it Stands. But would be a hole a lot Better with Time Warner Merger.
64transformation profile picture
T has been dead money since 2008 and the author tries to get the dividend arguement to make up for that? everyone pays a dividend... please...T needs to win..and it really only matters what the Judge thinks.
Quad 7 Capital profile picture
To be fair, we actually addressed $T as dead money:


Take a look, wasted time??
jimbo162 profile picture
AT&T has again become a monster. The fed's split them up into regional phone companies 20 years ago for this same reason....too much power and influence. Now piece by piece they are becoming ever bigger. Personally i don't like them or comcast. Both love constantly raising rates while offering a poor customer satisfaction experience. I prefer more choices, lower costs, better service...not less.
Quad 7 Capital profile picture
I hear you on that, but those spinoffs return value to shareholders too. As a consumer, another story
peapaw profile picture

Sadly your preferences are not compatible with each other in today's world.
Quad 7 Capital profile picture
If you find a company that moves in that direction or is, let us know!
Felix Schrodinger profile picture
Good read. Am Long T, so I am somewhat biased and agree with your prognostication of a successful merger. A concern going forward is interest rate environment changes and AT&T current debt load and increasing it to fund this merger may put the current dividend yield at risk. Also, how do you see the new company weathering in a (20-25% market correction ) Bear Market environment?
Quad 7 Capital profile picture
Yield protection will help the name uphold through the pain. In a 25% market selloff we think AT&T still stays above $30. Even at those levels, what a massive buying opportunity. As for the debt, we addressed that here:http://bit.ly/2FLnB1N and think its a major issue, we are concerned
jimbo162 profile picture
OMG-don't think i have ever seen a public concern with 144 billion in debt with 85 billion more with TW? Quad how in the world can they service that kind of debt? Do you realize how big a hole this will dig into earnings. It seems to me a massive spinoff would then be necessary to avoid chapter 11?
Quad 7 Capital profile picture
Asset sales will help. That's the first start.
NV_GARY profile picture
Quad 7 Capital profile picture
Appreciate the read NV_gary. Think your comment didn't come through though
Both T and VZ to grow as there will always be new innovations.
Quad 7 Capital profile picture
Would rather own $T given first net and 5G
Shangrila Value profile picture
Thanks. What's your opinion on investing separately in Time Warner?
D.Graves profile picture

See the 13th comment down from the top, i asked that question more or less already, Quad 7 Capital was nice enough to answer with part of his article he wrote previously on this.
Quad 7 Capital profile picture
Correct. Please review that comment and the link if you have access. $TWX $T strong
The only winner of a lawsuit that takes longer then a yr are the lawyers cheers long t
billinsd profile picture
T is my largest holding.
I honestly dont understand the Government opposing this deal.
While I am pro Trump,I just dont see why he is against it,especially because he is a business man.
That being said, uncertainty hurts share prices and markets,so both sides owe it to investors to get this thing done ASAP.
If this becomes a lengthy ego filled expensive battle only investors get hurt,widows and orphans.
Git her done,or be gone.
Quad 7 Capital profile picture
Whether the President opposes or not, the antitrust chief and the Department cannot sue over nothing. There has to be merit or a judge would toss the case? We will see.
Snowfirel profile picture
Cool article Quad, don't think Trump is against it any more, he change his mind, that is, the Dems going after T now, they are probably jealous of T.
Quad 7 Capital profile picture
Thank you we hope to see your comments on future articles by following us, and/or visiting us at quad7capital.com
My big question-------if DOJ loses the case do they appeal and string T and TWX along for another extended period?
Quad 7 Capital profile picture
I dont think the prosecution can appeal??? Only a defendant can??? Any legal experts here? We do not know....Good question
peapaw profile picture
If this were a criminal case which it is not DOJ could not appeal an acquittal. This is a civil action so the government can appeal if they lose, question is would they?
Quad 7 Capital profile picture
$T $TWX #DOJ would have egg on their face.
Basit Saliu profile picture
Win or Lose, AT&T have a fantastic future!
Agree Basman. Always like your posts. I believe at the end of the day TW deal will get done but with conditions similar to the Comcast/NBC-Universal deal. These conditions may hurt in the short term as they did Comcast but long term strategy should remain intact.
Basit Saliu profile picture
everyone loving the Basman posts. haha thanks bro.
It will be interesting to see if DOJ avoids behavioral remedies.
Basit Saliu profile picture
It in two weeks and goes on for 30-60 straight days. Any chances of settlement with AT&T owning just Turner [#1 cable networks group] will selling Warner Bros. and HBO? Anyway I cannot wait!

Here is an another interesting article http://bit.ly/2FMnkvw

Go AT&T!
Quad 7 Capital profile picture
We believe the worst-case scenario is asset sales, of which some of the pieces like CNN, TBS, TNT could be included.
It is a vertical merger PERIOD! And now will always be tainted by the smell of Trump. PERIOD!
Quad 7 Capital profile picture
Well, won't address the latter point but yes, vertical integration...should be a go!
Moats and Income profile picture
Agree T will prevail based on two facts...

1) As mentioned in this article, content viewing options have dramatically changed thanks to Netflix, Amazon, YouTube channels, etc., so the DOJ is using an old anti-competitive argument...

2). Explain why why AT&T wants to be is different from what Comcast/NBC Universal already is?

Those are two torpedos to the DOJ’s case...and it only takes one to sink the ship...;)
Quad 7 Capital profile picture
We did not consider item 2---good point
We just attended a two-day seminar by a recognized academic Jewish historian that included David's career and Israeli geography. He and Goliath were factual, not mythical, just as factual as AT&T and Julius Caeser. I object to your references although your stock analysis is OK.
Quad 7 Capital profile picture
That sounds like a very interesting seminar. Recall the first time hearing the story at church camp as a young child. It was fun to reconnect, thanks to being an analyst, shareholder, and Delrahim's analogy!
TCG,llc profile picture
Let's be clear - 'David' is the FCC and 'Goliath' is AT&T as the government is no longer BIG, rather pro-business. Therefore, I don't see how this merger doesn't go through NOT to say that I'm for it. I'm against for many reasons where the main - consumers! Consumers have been shafted by corporate and the government since the breakup of "Ma Bell" of which the monopoly wasn't a good thing.
Talk of AT&T(T) being a 'buy?' For whom? The soon to be retired investor seeking wealth preservation through risk-averse portfolio management strategy? Yes, because (T) is an equity stock by classification ONLY and NOT by performance! The only ammunition that (T) presents are dividend growth (making it a better option to beat inflation) and a better option than a bond.
Quad 7 Capital profile picture
Do you have specific data (beyond what is presented here) about the negative impact to consumers? That would be good to see.

As for the stock...yes its great for income in retirement....but it is also a great stock to put into an IRA and let it compound for 50 years for younger investors
TCG,llc profile picture
Any data (of which there's plenty) will show a negative impact on consumer options where prices inevitably rise as a consequence but again we know this - its been the narrative for decades.

Of course (T) is a great asset within one's portfolio - it's a risk mitigator, just doesn't rise in equity. (T) is inexpensive enough to purchase many where doing so adds great dividends in multiples.
Quad 7 Capital profile picture
Would be a TOP stock if the dividend growth was supplanted with even 2% annual stock price growth. Should be a $50 stock on that criteria, maybe higher. But its weighed by debt and uncertainty
Thus is more like Hulk Hogan vs Andre the Giant. Two behemoths going at each other, complete with wrestling promos
Quad 7 Capital profile picture
The key question however is what songs will each party choose as their entrance theme
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