Justice Department sues to block AT&T-Time Warner Merger

The U.S. Department of Justice sued AT&T Inc. (AT&T) on November 20, 2017 to block its $85.4 billion acquisition of Time Warner Inc. (Time Warner), saying the deal would “greatly harm American consumers.”

 

AT&T is one of the nation’s largest internet and telephone providers and the largest satellite company and television distributor in the United States. Time Warner ranks among the largest content suppliers, including content from HBO, Warner Bros., TNT and CNN.

 

The Justice Department is arguing that the deal violates antitrust law because it would sufficiently harm consumers and weaken competition. Since AT&T would be able to charge more for licensing of valuable programming, consumers would most likely face higher prices for cable or satellite television subscriptions. Furthermore, the merger would slow the industry’s transition to online video and other new distribution models.

 

AT&T argues that the government’s lawsuit is a “departure from decades of antitrust precedent” because of AT&T and Time Warner do not compete with each other. Vertical mergers like this are routinely approved because they benefit consumers without removing a competitor from the market. AT&T contends that there is no legitimate reason for its merger to be treated differently. Moreover, AT&T contends that it needs media content in order to compete against internet firms for digital advertising dollars and subscribers.

 

This is the first merger blocked during the Trump Administration. AT&T speculates that the attention comes as a result of President Trump’s criticism of CNN since taking office. Whether or not President Trump played a direct role in the Justice Department’s attempt to block the deal is a subject of debate. But the move maybe indicate that the Trump administration will look closely at other big mergers.

 

Before the lawsuit, the Justice Department asked AT&T to sell off some assets. AT&T rejected the Justice Department’s demand to divest DirecTV or Time Warner’s Turner Broadcasting – which contains news network CNN.

 

At this time, AT&T is still continuing to talk with the government to negotiate a settlement. But as the process continues, there will be little opportunity for AT&T to settle the case. A lengthy, drawn-out court battle could cause AT&T and Time Warner to give up on the deal. AT&T stated that the company was prepared to defend itself in the court.

Justice Department sues to block ATT Time Warner Merger (PDF)

Trump Administration’s NAFTA Rules for Cars that Run on Hot Air

Recent negotiations to renew the North American Free Trade Agreement reached an impasse this past October, when the Trump administration put forward new rules of origin that Canada and Mexico have dismissed as unworkable and “insane,” holding that the administration’s position is inflexible. These concerns come at a time when many parties fear President Trump will follow through with his promise to pull the United States out of NAFTA.

 

Current NAFTA guidelines allow for tariff-free trade between Mexico, Canada, and the United States as long as 62.5% of all manufactured vehicle components are from the three members states. The administration’s recommended changes include increasing that number to 85% for NAFTA member states, with an added caveat that 50% of all those components come from the U.S. Consistent with campaign promises to bring back manufacturing jobs, the administration’s position looks to return jobs to the states by increasing the regulatory demands on NAFTA members.

 

The extent to which the administration’s proposed regulations would achieve this end, however, is heavily contested. Should automakers in Mexico and Canada fail to meet the new regulations, they would be subject to a 2.5% tariff on completed cars, which they might perceive as cheaper than the increased production costs that follow from the administrations U.S. centric policies. If that is the case, automakers might shift production from Mexico or Canada to other countries that would likewise be subject to the 2.5% tariff, albeit where other production costs might be cheaper. This strategy was possibly employed by Ford Motor Co. in a recent decision to move Focus production to China instead of Mexico.

 

The administration’s new regulations have also been met with considerable opposition from automotive industry groups, who contend that the current regulations are beneficial to the industry. One such group, Driving American Jobs, a coalition of major auto manufacturers, has decried the administration’s proposals, attributing much of the recent resurgence in the American automotive manufacturing industry to the success of NAFTA. Not all interested parties oppose the new regulations, however, as labor unions and blue collar workers, notably in states in which the President won the popular vote, support President Trump in denouncing NAFTA.

 

The administration’s approach is certainly no less frustrating for NAFTA Members than it is worrisome. It is not clear at present what the President’s ultimate goal with respect to NAFTA is; whether he intends for the new regulations to catalyze dissolution or whether the administration poses them in earnest remains to be seen.

Trump Administration’s NAFTA Rules for Cars that Run on Hot Air (PDF)

SoftBank’s Potential Investment in Uber: Outlook and Effects

Uber has cleared the way for a multi-billion dollar investment by Softbank, a Japanese telecommunications company. SoftBank hopes to obtain 14% ownership by issuing a tender offer to current stockholders, and buying $1 billion in new shares issued by Uber.

 

SoftBank would agree to a deal only if Uber resolved some of its governance issues. Correspondingly, Uber’s board agreed to adopt a traditional one vote per share policy. This policy limits the power of Uber’s early investors – including its out-of-favor former CEO, Travis Kalanick – who held a ton of power in the company via “super voting rights.” In addition, Uber expanded its board of directors from 11 to 17, and brokered a deal for one of its influential shareholders to suspend a lawsuit against Kalanick.

 

Uber believes SoftBank’s investment will help it grow in emerging markets. SoftBank, which unconventionally invests in companies that compete in the same industry as part of its aggressive investing strategy, owns more than 30% of Ola. Uber and Ola are rivals in South Asia, but collectively have a 95% market share in India. SoftBank’s investment in Uber thus opens up the possibility of M&A activity. If permitted by India’s antitrust laws, such a deal will allow Uber to thrive in a market that has previously brought Uber its fair share of headaches. SoftBank also owns significant stakes in other ride-sharing giants, including Didi Chuxing (China), Grab (Southeast Asia), and 99 (Brazil).

 

Perhaps the biggest winners in the deal are Uber’s employees. Over the last year, employees have had to endure extensive turnover to the company’s C-suite, public relations crises, and increased competition from Lyft. The SoftBank deal gives employees a welcomed opportunity to cash-out their stock options at a high price.

 

The city of San Francisco will also benefit from SoftBank’s lucrative investment. Uber employees who cash-out will have earnings taxed at .711%, the city’s income tax. While employees of several tech companies in San Francisco are exempt from city income taxes, Uber employees are not eligible for the “Twitter tax break” because the company is not headquartered in the area of San Francisco where the city agreed to exempt certain companies from income taxes.

 

This is far from a done deal. SoftBank maintains that it has not yet decided whether it will invest in Uber. In addition, even if SoftBank does issue a tender offer, the deal can still fall through if not enough stockholders agree to sell. Nevertheless, a deal seems likely, and there are a lot of parties that stand to benefit from it.

SoftBank’s Potential Investment in Uber Outlook and Effects (PDF)

Vulture Funds Target Venezuela

In light of Venezuela’s social and political unrest, bonds have plunged in value due to fear that the government will finally default on its bond payments. Venezuelan bonds have been popular amongst foreign investors due to the country’s oversees assets and stream of foreign exchange earnings. However, the country’s current state threatens their value, and increases the risk of owning these bonds.

The conditions for default have been developing quickly. Venezuela has missed about $350 million in interest payments over the past month, and defaulted on a power company’s bonds. The price of bonds has reached a low of 20 cents on the dollar.

These conditions create the ideal climate for funds, known as vulture investors, that specialize in the debts of near-bankrupt nations. These funds buy bonds from struggling countries at low rates and then pressure the countries through lengthy litigation into paying the bonds in full. Vulture investors have profited from past debt disasters, including the Argentina and Greece debt crisis. These vulture funds wait for the price of bonds to hit a certain price, usually 20 cents on the dollar, and then commit seriously to purchasing bonds.

The Maduro government is demanding that bond investors agree to a debt deal, but this will not be easy because of the country’s unpopular government and stalled legislatures. Furthermore, because of sanctions, Venezuela is unable to hire bankers and lawyers to help reach an agreement with creditors. However, investors hope that Venezuela’s wealth in natural resources will pull the country out of debt.

Vulture Funds Target Venezuela (PDF)

Square’s Cash App Moves into the World of Bitcoin

Square, Inc., the San Francisco-based merchant services and mobile payments company co-founded by Twitter CEO Jack Dorsey, recently expanded its Cash app to allow users to purchase and sell Bitcoin.

Square Cash is a popular payment app that lets customers instantly send and receive funds between users without connecting to a bank account. Square, the company’s original credit card processing platform, has allowed its merchant customers to accept Bitcoin as a form of payment since 2014. However, its Cash app has recently expanded into cryptocurrency by allowing a small number of users to buy and sell Bitcoin directly through the platform. While the new function is only in a beta testing stage, a Square spokesperson stated that it was introduced in response to customers’ interest in using the Cash app to buy Bitcoin, and that the company is looking forward to learning more about the exciting cryptocurrency.

Square CEO Dorsey has previously expressed his growing interest in the benefits of Bitcoin and the blockchain network. At an event at the Computer History Museum in August 2017, Dorsey described blockchain as the “next big unlock,” which he believes can be used to solve many of the world’s financial problems. Dorsey also revealed that he personally has invested in Bitcoin. While Dorsey’s fascination with Bitcoin is nothing new—he tweeted late last year that he “would love to see a digital currency thrive”—he had made no mention of Square working to integrate Bitcoin into their Cash app prior to the feature’s release in November 2017.

An anonymous creator going by the name of Satoshi Nakamoto released Bitcoin globally in 2009. Unlike traditional payment networks, the Bitcoin system is run by a decentralized network of approximately 9,500 computers around the world that monitor all Bitcoin transactions. The major cryptocurrency was designed to allow people to easily and securely transfer funds over the Internet without going through a third-party processor, thus greatly reducing fees and removing barriers from international transactions. Today, the value of one Bitcoin is equivalent to approximately $8,039 U.S. Dollars, and is predicted to continue rising past $10,000 by 2018.

Thus far, it appears that the Cash app’s new Bitcoin capability is sparking positive reactions, causing Square’s stock to jump after news of its release spread. The recent jump is illustrative of the company’s performance this year: Square’s shares have nearly tripled in 2017, as it has continued to beat earnings expectations and even outperform Twitter in market value for the first time. Consumers, analysts and fintech enthusiasts alike are eagerly anticipating how Bitcoin may continue to impact the global financial system, and particularly the role that Square Cash will play in increasing individuals’ accessibility to Bitcoin.

Square’s Cash App Moves into the World of Bitcoin (PDF)

Former CEO of Bankrupt Bitcoin Exchange May Become a Billionaire

Three years ago, Mt. Gox’s Chief Executive Officer, Mark Karpeles, became one of the most hated names in the Bitcoin and cryptocurrency world. Today, he may become one of the richest.

Based out of Tokyo, Mt. Gox once was the largest Bitcoin exchange, at one point handling 80% of all Bitcoin trades worldwide. In 2014, however, the platform declared bankruptcy, claiming it had lost around 850,000 Bitcoins to hackers. Since the alleged hack, Mt. Gox and Japanese authorities managed to recover 202,000 of the missing Bitcoins.

Japanese bankruptcy codes required registering the Bitcoins according to their market values at the time the proceedings began, which was around $500 per one Bitcoin. Today, the price of one Bitcoin has hit a record of over $8,000. This means that Karpeles, who owns 88% of Mt. Gox through his holding company, Tibanne, is looking to receive over one billion dollars in surplus once the platform’s creditors are payed off (at Bitcoin’s 2014 price of $500) and the capital gains are granted to Mt. Gox.

Karpeles is currently facing numerous charges in Japan, including data manipulation and embezzlement. These charges stem from a transfer Karpeles made from Mt. Gox user funds to his personal account and for increasing the value of his account on the exchange. Karpeles pleaded not guilty to the charges claiming that the increase was due to a legal, administrative exchange of the currency and that the remittance was a valid transfer of company revenue.

Unsurprisingly, Mt. Gox creditors are unhappy with the news of Karpeles’s serendipity and are publicly expressing their dismay. However, Karpeles is apparently attempting to make amends by expressing possible plans to revive Mt. Gox in order to remedy the 2014 disaster, which many believe was due to his poor managerial skills. Karpeles promises that he would have no role in the revived exchange.

Although Mt. Gox users were directly injured by the exchange’s fall from grace, Karpeles severely damaged the already tainted reputation of Bitcoin and crypto currency. The hack, loss of funds, and criminal charges, from what was once the largest Bitcoin exchange, did not help foster confidence in the legitimacy of the already tainted view of Bitcoin and cryptocurrencies.

Bitcoins and the like are finally emerging from unwanted association with illegal and black market activity and facing extensive regulatory obstacles. So even though the likelihood of Karpeles reviving Mt. Gox is quite low, and even if he will have “no role nor benefit at all, except for the fact people may hate [him] a little less,” maybe it is best Karpeles steer clear of any plans for a Mt. Gox comeback, for the sake of the Bitcoin community.

China’s Restrictions on Foreign Investment Hit Hollywood Hard (PDF)

Uber Data Breach Lawsuit

On November 21, Uber admitted it had paid $100,000 to hackers. In return, the hackers agreed to not disclose a breach of user data that had occurred in October 2016. This data included names, email addresses, and mobile phone numbers of users. It additionally contained the names and driver’s license numbers of 600,000 U.S. drivers.

Joe Sullivan, Uber’s Chief Security officer and deputy general counsel and Craig Clark, his deputy, were terminated for their role in the hack cover-up.

The announcement comes at a difficult time for Uber’s new CEO, Dara Khosrowshahi who was named CEO of the company in August. Khosrowshahi has been working to change Uber’s culture. After Uber was ousted from London, he emailed employees to share that “there is a high cost to a bad reputation.”

Following the announcement of the hacking cover-up, Khosrowshahi wrote in a blog post: “While I can’t erase the past, I can commit on behalf of every Uber employee that we will learn from our mistakes. We are changing the way we do business, putting integrity at the core of every decision we make and working hard to earn the trust of our customers.” In addition to the apology, Khosrowshahi offered free credit monitoring and theft protection to drivers and reached out to Matt Olsen, former general counsel of the National Security Agency and director of the National Counterterrorism Center, to strategize on more effective security measures.

Despite the change in tenor, Khosrowshahi still faces obstacles, as evidenced by the recent lawsuit filed in response to the hack. The complaint alleges that “Uber failed to implement and maintain reasonable security procedures and practices appropriate to the nature and scope of the information compromised in the data breach.” The lawsuit aims to attain class action status to represent both the drivers and riders whose information was stolen.

Uber could also face issues with European regulators. The UK Information Commissioner’s Office announced it was working with the National Cyber Security Centre to assess the damage of the breach as it pertains to UK citizens. In the future, breaches of this nature could have serious implications for companies due to the passage of the General Data Protection Regulation (GDPR). The law goes into effect in May of 2018 and Uber appears to have already broken three provisions: not properly protecting the data, not telling regulators about the hack, and not informing its customers until one year later. Fines could be up to 4% of global annual revenue.

It remains to be seen how Uber and its new CEO will handle both the US lawsuit and regulators in Europe.

Uber Data Breach Lawsuit (PDF)

GE to Shrink and Cut Costs

As the largest U.S. industrial group, General Electric has announced it will shrink to focus on its most profitable departments of power, aviation and healthcare, in an attempt to revive its stock which has fallen to its lowest price in over five years.

For several decades, GE has built itself into a conglomerate with departments in the media, energy, banking, aviation, railroad, marine engines and chemical industries. Thus, this is going to be a significant turning point in GE history. John Flannery, who took over as CEO on Aug. 1, said he was “looking for the soul of the company again” and would focus on “restoring the oxygen of cash and earnings to the company.”

Nowadays, investors on Wall Street are not in favor of conglomerates. They prefer to bet on focused businesses rather than a mixed portfolio. “Conglomerate discounts” often happen in companies involved in various businesses like GE.

Although the company may boost its sales and net income by combining uncorrelated business areas together, management and operations of the company may be inefficient without synergy. In addition, unlike a vertical or horizontal merger, when the company moves into diversified business sections, its ability and expertise in supervising different enterprises is necessary for its management.

Jeffrey Immelt, former CEO of GE, has made some expensive acquisitions in power businesses. As it turns out, they did not perform as well as expected in the slowing global energy market.

Apart from selling over $20 billion of its assets in the next year or two to increase its cash flow, GE also plans to cut dividends in half for its cost control and cutting policy. According to Howard Silverblatt, senior index analyst of S&P Dow Jones Indices, it is “the eighth biggest dividend cut in history among S&P 500 companies.” In addition, GE will lay off 25 percent of its corporate staff and cut its board members from 18 to 12.

GE to Shrink and Cut Costs (PDF)

Closing Arguments Made at GrubHub’s Worker Classification Trial

On October 30, 2017, closing arguments were made in front of a California federal judge by the lawyers representing the parties in the Lawson v. GrubHub, Inc. case. The case is over whether GrubHub improperly classified their meal delivery drivers as independent contractors. The defendant, GrubHub, is an online company that connects diners with local restaurants and offers food-ordering delivery services. The plaintiff, Raef Lawson, is an ex-GruHub driver that alleges he was improperly classified as an independent contractor when he delivered food for GrubHub.

Under the Borello test, a court held that classifying workers as either 1099 contractor or a W-2 employee depends on a control test. The test analyzes the company’s regular business, the skill required, the payment method, and the supervision of the work performed. By classifying workers as independent contractors, GrubHub, along with other gig economy companies like Uber, Lyft, and Postmates, are able to cut overhead costs by not paying taxes, overtime, benefits, and workers’ compensation.

The trial hinged on the extent to which GrubHub had control over its drivers. The burden is on employers to demonstrate the proper classification of its workers. GrubHub argued that its drivers could log on and off when they wanted, accept shifts voluntarily, and had complete control over method of delivery. Moreover, GrubHub drivers could even choose to drive for competing companies at the same time.

According to Lawson, GrubHub’s policies required its drivers to pay for their car’s expenses, fuel, parking, and cellular data services. Because of these expenses, his weekly pay went below the state’s minimum wage, violating labor laws.

Lawson’s case is the first gig economy labor case to go to trial, and a judgment in Lawson’s favor could mean changes for the gig economy. Fearing potential litigation, many gig economies, such as Munchery and Instacart, have pre-emptively re-classified their workers from 1099 contractors to W-2 employees. One analysis estimated that for Uber to re-classify its drivers in California alone would cost over $200 million.

A judgment is expected in the coming weeks and the industry will be watching closely. When presiding Judge Jacqueline Corley was asked how she will make her decision, she answered, “The tricky part is trying to fit in this gig economy to existing labor rules. It’s a unique situation that’s hard to figure out.”

Closing Arguments Made at GrubHub’s Worker Classification Trial (PDF)

Foiled by Foil: China’s Hopes for “Market Economy” Status

The U.S. Department of Commerce recently issued a 162.24% anti-dumping tariff on aluminum foil imports from China. The announcement is unsurprising given President Trump’s rallying cry for tariffs against Chinese imports since the campaign trail. However, the outcome is significant because it marks the Trump administration’s decision to continue treating China as a non-market economy (NME). In response, China has cited the new tariffs as an impetus to request for additional consultations with the U.S. as part of its ongoing fight at the World Trade Organization (WTO) over its NME status.

Beijing argues that, under WTO guidelines, a new member is supposed to be certified as a “market economy” 15 years after ascension. Prior to certification, a member is considered an NME. These economies are often subjected to more stringent anti-dumping duties than other countries. The assumption is that prices are often distorted, state-controlled, and not a reliable benchmark.  As such, trading partners are given more flexibility in determining whether an NME is dumping and in calculating a corresponding tariff. For example, the U.S. generally applies an average duty of 162% against Chinese goods, compared with a 33% rate for goods from “market economies.” Following certification, a higher burden of proof is expected in order for a member country to accuse and retaliate against a country that is certified as a “market economy.” It is thus understandable that China is doing everything it can to acquire the “market economy” certification.

On the other hand, the U.S. and the E.U. argue that achieving “market economy” status was contingent upon China taking up liberalization practices. For example, the continual dominance of state-owned enterprises (SOEs) in China remains a key concern for both the U.S. and E.U. The WTO, however, has yet to take a stance on China’s SOEs. Meanwhile, China has filed a complaint in the WTO against both the U.S. and E.U. for continuing to deny China “market economy” status.

Despite the lack of status, China is now a frequent participant of the WTO dispute settlement system. Some have argued that China’s increased involvement in the WTO can be seen as a failure by the existing international economic order to control the rise of China. However, an alternative view is that China’s involvement in the WTO is evidence of successful efforts to integrate China and align its modus operandi with international norms. There are instances where Beijing has sought to diverge from existing international institutions. For example, China’s establishment of the Asian Infrastructure Investment Bank could be seen as a direct challenge to the current order led by the World Bank and a failure of the existing order to properly integrate emerging economies such as China. Therefore, China’s acceptance and active participation in the WTO should be celebrated and welcomed.

Foiled by Foil China’s Hopes for Market Economy Status (PDF)