Wall Street’s M&A Sharks Are Getting Ready for a Feeding Frenzy of Hollywood Deals

Winston Cho
·6 min read

On Aug. 17, days after its strike passed the 100-day mark, the Writers Guild of America West issued a call for lawmakers and regulators to look into the deals of three Hollywood giants: Netflix, Disney and Amazon. “Pay and working conditions for writers have become so dire, and media conglomerates so unresponsive, that 11,500 writers went on strike,” stated the WGAW report. “Without intervention, these conglomerates will seize control of the media landscape, and the streaming era’s advances for creativity and choice will be lost.”

For decades, competition enforcers essentially rubber-stamped many so-called vertical mergers — the combination of firms in different parts of a supply chain, rather than direct competitors — under the theory that they lower production costs and ultimately lead to lower prices for consumers. This changed under the Biden administration’s Federal Trade Commission and Department of Justice, both of which have been seeking to rein in consolidation of major industries by a handful of companies.

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But if Hollywood’s writers are hoping that new efforts by regulators can chill the sort of megadeal vertical mergers that have been gobbling up the entertainment landscape, they may be kept waiting. In fact, the government might be kick-starting a new round of M&A frenzy by losing major cases.

In July, a federal judge denied the FTC’s bid for a preliminary injunction to stop the Microsoft-Activision deal. U.S. District Judge Jacqueline Scott Corley found that Microsoft’s ownership of the Bobby Kotick-led company won’t suppress competition in the game library subscription and cloud gaming markets, underscoring evidence that the transaction may actually lead to more access to popular Activision titles. Going back to its failure to block AT&T’s purchase of Time Warner in 2019 and major deals by Meta and Change Healthcare in 2022, the government has lost every suit challenging a vertical purchase. (The DOJ’s win in blocking the sale of Paramount book publisher Simon & Schuster to Penguin Random House in October was a proposed horizontal merger among direct rivals, a more legally dicey prospect.)

“You only send a message if you win,” says Beth Wilkinson, the lead lawyer for Microsoft. “Now, they have such bad case law on vertical mergers that it’s almost impossible to stop a case like that.” The attorney adds, “I predict that acquisitions will go up in the next two quarters because companies are seeing that you can win against the FTC.”

The problem for the regulators lies in proving that a vertical acquisition will suppress competition. Unlike with so-called horizontal mergers, vertical mergers do not result in immediate changes to market share since they concern companies that primarily do different things. (Think: Amazon buying MGM for $8.5 billion last year.)

To stop a deal, the government has to establish in these cases that the merging parties will be incentivized to engage in anticompetitive behavior. “In theory, a vertical merger can’t give you a second monopoly,” says Rebecca Allensworth, an antitrust professor at Vanderbilt University Law School. “The courts swallowed for years that the company must be doing something good for consumers.”

Microsoft may have helped lay a road map for companies that are contemplating vertical purchases but are concerned about regulatory scrutiny by engaging in a process known as “litigating the fix.” To get the deal across the finish line, the tech giant agreed to keep Call of Duty on Sony’s rival platform PlayStation for 10 years; committed to bring the game onto another rival, Nintendo’s Switch; and entered into several contracts to set up Activision content on cloud gaming services with competitors. It also reached a labor neutrality agreement with the Communication Workers of America to secure its approval of the transaction.

Amid this regulatory backdrop, beleaguered companies in the media and entertainment industry may again look to dealmaking. Speculation about Disney chief executive Bob Iger hanging a possibly-for-sale sign on Disney’s TV businesses circle the company as its stock hovers at its lowest levels in nearly a decade. An acquisition or strategic partnership with ESPN for Apple to anchor its sports offerings on its fledgling streaming service is a “no brainer,” wrote Wedbush analyst Dan Ives.

Last year, overall merger activity sharply dipped following quarters of record activity, a result of inflation and uncertainty over regulatory concerns. That’s expected to change in light of key court losses by competition enforcers in cases challenging deals, as well as the Federal Reserve signaling that soaring interest rates will level off. “Large corporates, armed with balance sheets healthier than those seen in previous recessionary periods, continue to contemplate strategic acquisitions in the back half of 2023, pending macroeconomic conditions,” wrote accounting firm PwC in its midyear deal outlook.

“There’ll be some consolidation,” noted entertainment attorney and Los Angeles film czar Ken Ziffren on Aug. 16 at an event hosted by the Beverly Hills Bar Association.

In the WGAW’s August antitrust report, the guild took specific aim at Disney’s purchases of Pixar, Marvel and Lucasfilm, as well as Netflix’s acquisitions of production house Albuquerque Studios, animation shops Scanline VFX and Animal Logic, and intellectual property catalogs Millarworld and The Roald Dahl Story Co. And the guild claimed that Amazon has parlayed its practices as a tech company into entertainment, aggressively acquiring other companies, kneecapping competitors with “tolls” and allegedly underpaying union residuals.

“New platforms and creative concepts are taking hold and consumer behavior is changing,” says Edward Lee, a partner at Kirkland & Ellis who advised mogul Vince McMahon in WWE’s pending merger with UFC. “As long as that continues, you can expect continued M&A in media and entertainment. Regulators will certainly have a view on that, but there will be a lot of deals attempted.”

Despite a string of losses, competition enforcers still have vertical transactions in their sights. The FTC and DOJ unveiled in July new guidance for merger review — which the WGA has backed — that signals deeper scrutiny of deals between companies that don’t compete directly against one another. Unlike the previous version, the guidelines say that acquisitions that restructure supply chains, allowing a firm to control access to products or services to lessen competition, may violate antitrust laws. They also don’t differentiate between horizontal and vertical purchases, stating that mergers “should not entrench or extend a dominant position.”

Lee notes, “Traditionally, there was more of a recognition around some of the economic benefits that vertical deals can present without increasing market share. The current people in charge at the agencies see the world differently.” But without a major court win for enforcers, executives may not be too concerned.

A version of this story appeared in the Sept. 6 issue of The Hollywood Reporter magazine. Click here to subscribe. 

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