EU Rejects GE Acquisition of Honeywell
The European Union, showing its increasing clout, formally rejected General Electric Co.'s proposed $42-billion acquisition of Honeywell International Inc. Tuesday, all but scuttling the largest industrial merger ever.
The decision, widely expected despite some last-minute concessions by GE, marked the first time a merger between two U.S. companies has been blocked by European regulators after having cleared U.S. scrutiny.
The Competition Commission, a 20-member panel representing 15 European countries, voted unanimously to reject the deal, which it said would have created a company with too much control of the world’s market for jet engines and aircraft electronics.
The merger “would have severely reduced competition in the aerospace industry and resulted ultimately in higher prices for customers, particularly airlines,” European Competition Commissioner Mario Monti said.
The fallout was immediate at Honeywell headquarters, where the board ousted Chairman and Chief Executive Michael Bonsignore, saying it expects to implement a strategy to “enhance share-owner value as an independent company.” Bonsignore will be replaced by Lawrence A. Bossidy, former chairman and chief executive of AlliedSignal Corp., before it merged with Honeywell.
Although the decision is not likely to have much effect on small or mid-size deals, some analysts predict that the rejection could put a chill on other mega-deals that would require European review and even perhaps prompt a retaliatory move by U.S. regulators.
“I wouldn’t be surprised if a European company trying to make an acquisition in the U.S. runs into trouble,” said Paul H. Nisbet, aerospace analyst for JSA Research Inc., a Newport, R.I., research firm for institutional investors. “For the smaller acquisitions, this would not have a great deal of impact. It is the blockbuster deals that are going to get a jaundiced view, much more so than before.”
The rift already was widening as President Bush stepped into the fray last month saying he was concerned by the way the European Commission was handling the proposed merger. Though the White House had not lobbied directly for the deal, Treasury Secretary Paul H. O’Neill had said a rejection would be “off the wall.”
The latest decision brought reminders of the 1997 merger of aerospace giants Boeing Co. and McDonnell Douglas Corp., which the European Union opposed but ultimately approved after a transatlantic trade dispute almost erupted.
“I could see the whole thing being raised again, and it could get pretty ugly,” said Thomas Meagher, an analyst with Fairfax, Va.-based BB&T; Capital Markets.
On Tuesday, there was little sign that longtime GE Chairman and Chief Executive Jack Welch was giving up on the deal, although he is faced with ending his 20-year reign sooner than anticipated. Welch had extended his retirement date by a year to oversee the combination in what he called his last great accomplishment.
GE said it was disappointed by the decision but was not yet ready to scuttle the merger, saying it was considering “all of our options,” including an appeal.
An appeal to the European Union’s Court of First Instance can take years. Analysts said an appeal would have little or no chance of success.
Of the 14 mergers that were rejected in the last decade, the court has considered six appeals. It has sided with the commission in three of the cases, one was withdrawn and two are still pending, including a deal between Worldcom and Sprint, which was rejected by both the U.S. and European regulators a little more than a year ago.
“I feel profound regret at this setback for the thousands of GE and Honeywell employees who worked so hard for the last eight months in an attempt to make this deal happen,” Welch said.
If GE decides to appeal, the move could prevent any attempt by Honeywell to find another merger partner pending resolution of the case.
Analysts were speculating that Honeywell may want to hook up again with United Technologies, the company that first attempted to acquire Honeywell before it was outbid by GE. The Hartford, Conn.-based maker of helicopters and jet engines helped persuade the European Commission to block the GE/Honeywell combination.
In reaching its decision, the European panel said it was particularly fearful of GE “bundling” its jet engines and avionics to leverage sales and using its aviation leasing and financing company, the largest in the world, to steer business to itself and stifle competition.
Europe’s argument reflected a divergent view of the merger from U.S. regulators, who were more concerned about the deal’s effect on consumers than on competitors.
GE said it believed the combination would have “clearly benefited consumers in terms of quality, service and prices.”
In a last-minute effort to address European concerns, GE offered to sell a portion of its holdings in GE Capital Aviation Services, the leasing and financing arm of the company, to the public. But the European Commission, which wanted GE to sell a minority stake to a competitor, said the concession didn’t go far enough.
“In adopting this decision, the commission concluded that the merger would create or strengthen dominant positions on several markets and that the remedies proposed by GE were insufficient to resolve the competition concerns resulting from the proposed acquisition of Honeywell,” the commission said.
Though companies considering multibillion-dollar deals may get skittish over the latest decision, most companies won’t be affected because the commission reviews only deals that involve at least 5 billion euros, or about $4.3 billion, in global turnover, of which at least $215.9 million is in EU states.
On the other hand, U.S. regulators can weigh in on any mergers valued at $50 million or more, as well as smaller deals when niche areas of competition are involved.
On the New York Stock Exchange, shares of GE and Honeywell changed slightly as investors anticipated the decision. GE fell 69 cents to close at $49.51, while Honeywell rose 99 cents to $35.10.
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GE’s Honeywell Bid
December 1999: AlliedSignal buys Honeywell in a deal valued at about $14 billion, adopts Honeywell name.
Oct. 22, 2000: General Electric agrees to buy Honeywell for $45 billion in stock.
Jan. 10, 2001: Honeywell stockholders approve takeover of the company by GE, now worth $36.96 billion, putting deal in the hands of federal regulators.
Feb. 5: GE files planned takeover of Honeywell with European Union competition authorities for regulatory approval.
May 3: Justice Department approves GE’s $42-billion purchase of Honeywell after companies promise to sell Honeywell unit that makes military helicopter engines and to allow new competition in maintenance and overhaul of Honeywell aircraft engines and auxiliary power units.
June 13: GE offers to sell assets that generate $2.1 billion in revenue to win approval from European Union.
June 14: GE and Honeywell make what they say is “final offer”: GE would divest itself of Honeywell aerospace assets that generated $2.2 billion in revenue in 2000 and would limit the operations of GE Capital Aviation Services.
June 15: President Bush says he is “concerned” that Europeans have rejected the deal.
June 25: EU advisory committee recommends that European Competition Commissioner Mario Monti accept the advice of the merger task force to reject the deal.
June 29: Honeywell CEO Michael Bonsignore offers to slash $1.7 billion from the company’s price to compensate GE for extra divestitures needed to satisfy EU concerns.
July 3: EU blocks GE bid for Honeywell, saying merger would create or strengthen dominant positions of GE and remedies proposed by GE were insufficient to resolve competition concerns. Monti says merger would have resulted in severely reduced competition in aerospace industry and resulted ultimately in higher prices for customers, particularly airlines.