Sprint-T-Mobile merger

Upton Sinclair wrote “The Jungle” in a bygone populist era. In the hope of fomenting a socialist revolution, he attacked a full range of business practices of the time. He heaped particular scorn on the business trusts of the era, which “were a gigantic combination of capital, which had crushed all opposition, and overthrown the laws of the land, and w[ere] preying upon the people.”

But, as Sinclair himself later conceded, he succeeded only narrowly—his descriptions of the disgusting genesis of processed food were the only thing that sparked popular outrage and attendant government intervention. As he famously put it, “I aimed at the public's heart and by accident I hit it in the stomach.”

Today, the media tells us that we're living in a Second Gilded Age, in which wealth inequality is accompanied by and countered with surging populism, some of the sort that Sinclair sought to tap. One target is “bigness” in business.

Over the last half of the 20th century and the ascendancy of the “Chicago School” of economics, government regulators came to focus less on the size of business enterprises than on the effects of business practices on consumer prices.

In academic literature, a counternarrative has emerged—the New Brandeis (or, more derisively, “Hipster Antitrust”) movement, which argues that bigness often does entail badness. Now, whether this movement has legs remains to be seen, but there's no doubt that something is afoot and that large-scale mergers and acquisitions face much more scrutiny now than was the case a decade or two ago.

Take the proposed Sprint-T-Mobile tie-up. A year after the merger announcement, the $26 billion deal has yet to obtain regulatory approval from the Antitrust Division of the U.S. Department of Justice. Indeed, just last month, Makan Delrahim, the division's head, indicated that he is still undecided about the merger.

The holdup grows out of concerns of the sort articulated in a letter that a group of Democratic senators sent to the Federal Communications Commission and DOJ, all of which stem from the fact that—postmerger—there would be only three nationwide mobile carriers (AT&T and Verizon being the other two). As a consequence, so the naysayers argue, higher prices, stifling of innovation, and massive job losses would inevitably follow.

Sprint and T-Mobile argue otherwise, suggesting that the merged entity will be in a position to offer broadband in underserved rural areas, to create jobs, and to deploy 5G technology more expeditiously. The latter point, though not a clear tipping point, is plainly of interest to the DOJ. For as Delrahim recently told CNBC, “With 5G and other technologies, you're going to be able to use that phone for more than just communicating with your best friend or texting. You're getting your media, you're getting video—we want to be sure to encourage that, but ultimately, is there going to be a price effect when those two combine?”

Lurking in the background here are a number of historical wrinkles, some ancient, some recent. First, there's a lingering suspicion of concentration in the telecommunications space, dating back at least as far as Sinclair's complaints about the Telegraph Trust and the decadeslong dominance of the Bell System.

Second, there is precedent for blocking mobile-carrier mergers: AT&T's proposed acquisition of T-Mobile in 2011, which was followed a few years later by a rumored but unconsummated merger attempt between Sprint and T-Mobile.

Finally, the DOJ has in some sense boxed itself in, given that it so vigorously challenged the vertical merger (i.e., involving parties in different, even if somewhat related, lines of business) between AT&T and Time Warner. For many decades, the government had essentially allowed all vertical mergers to pass muster. The point here is that if the DOJ will challenge a vertical merger, then it must almost of logical necessity challenge a horizontal merger (i.e., between competitors), especially when a socially critical industry is involved and the market is already in the hands of very few players.

Nonetheless, the DOJ may have a way out that is not inconsistent with sharp scrutiny of megamergers. This is so because, as Delrahim obliquely suggested in a recent Fox Business interview, Sprint has raised its current financial woes as evidence in support of the “failing firm defense.” Under this defense, the merging parties claim that competition won't be harmed because one of them would not survive to compete anyway. It's a difficult defense to sustain, but we know it's in play.

When Sinclair concluded that “The great corporation which employed you lied to you, and lied to the whole country—from top to bottom it was nothing but one gigantic lie,” he captured the populist sentiment that big is inherently bad. And so we have before us in the Sprint-T-Mobile merger one of the oldest dramas in American business playing out. Was Robert Bork right in decreeing that mergers almost always lead to lower prices? Or is this the wrong question to ask, as the New Brandeis School argues in positing that institutions can become so large that they distort not just markets, but the fabric of American life?

There are no easy answers, but watching the pendulum swing is valuable in itself.

Randy Gordon is a partner in the Dallas office of Barnes & Thornburg and executive professor of law and history at Texas A&M University.