U.S., European Arbiters Differ on Antitrust Matters

Through their different political, economic and legal lenses, U.S. and European antitrust regulators occasionally see the risks and rewards of mergers very differently.

Nowhere is that difference more visible than in the proposed linking of General Electric Co. and Honeywell Inc. The Justice Department has given its blessing while European Commission authorities are poised to block the move, providing an example of how even well-meaning judges of fairness and competition are influenced by the constituencies they serve.

Charged with evaluating any major corporate fusion for its potential to “create or strengthen a dominant market position,” the commission’s Merger Task Force has spotted possible disadvantages for European makers of jet engines and avionics.

But because U.S. regulators with the Justice Department and the Federal Trade Commission must ensure fairness only on their side of the Atlantic, the potential downside for European companies might not have caught the U.S. eye.

“There’s no institution that judges the global benefits and costs [of mergers], although these markets are now global,” said Ulrich Kamecke, a professor of competition policy at Berlin’s Humboldt University. “The Americans and the Europeans both take the natural perspective of what is good for their part of the world. It’s not really protectionism, but a natural inclination to ask, ‘Who is my guy in this case?’ ”

Governments of the 15 European Union states appoint the 20 commissioners who make up the executive body, and the positions usually are doled out to political backers. That makes them keenly aware of the potential electoral fallout if a corporate merger threatens businesses in the commissioners’ own backyards. That’s one reason why the full commission is expected to veto the GE-Honeywell deal when it meets for a final ruling here July 3.

It won’t be the first time the commission has quashed an alliance outside its borders, nor is it unprecedented for U.S. regulators to block an all-European takeover. Just last year, the planned merger of France’s Air Liquide and Britain’s BOC Group collapsed because of U.S. objections after it had won EU approval.

Still, the two teams of antitrust arbiters tend to agree more often than not and sometimes collaborate to spare firms the disruption of separate investigations.

The European Commission reviews far fewer proposals than its U.S. counterparts, said spokeswoman Amelia Torres, because the threshold for EU jurisdiction covers only mergers involving at least 5 billion euros, or $4.32 billion, in global turnover, of which at least $215.9 million is in EU states.

U.S. authorities can weigh in on any fusion involving at least $50 million and even smaller companies when niche areas of competition are involved, said Caldwell Harrop, an attorney for the foreign concerns sector of the Justice Department in Washington.

Of the 1,700-plus cases reviewed by the Merger Task Force in the 10 years it has existed, only 14 have been rejected and only one involved U.S. companies, Torres said. That sole spurning, the MCI Worldcom/Sprint deal rejected a year ago, now is making its way through an appeals process with the European Court.

Tuesday’s final vote on GE-Honeywell is expected to wield a deathblow to the merger. Competition Commissioner Mario Monti already informed the U.S. companies earlier this year of his concerns that the merger would allow them to “bundle” products and services into packages so attractive for aircraft manufacturers that competitors would be driven out of business.

GE’s main competitors in jet-engine production as well as Honeywell’s in avionics are mostly European companies, as is the only serious competitor to GECAS, GE’s aircraft leasing and financing subsidiary.

Despite the pull of political geography, analysts say the GE-Honeywell deal didn’t have to end up this way if GE had been willing to treat the Europeans with the same kind of deference it showered on Washington regulators.

The Americans got off on the wrong foot with Monti by ignoring the deadline for informing the commission of intent to merge. With GE having $130 billion in global turnover last year and 85,000 employees in Europe, it clearly exceeded the thresholds for commission review. The intended linkup was announced in October, but the commission was not informed until February, Torres said.

Informing the commission sets in motion Phase 1 of the review, limited to 30 days and an additional two weeks under extraordinary circumstances. Investigators request extensive financial information to evaluate the companies’ current market positions and also can inspect their premises.

At the end of the first phase, Monti can approve the deal, push it into the deeper scrutiny of a four-month Phase 2 investigation or recommend “undertakings” by the companies to address concerns about infringements on competition.

The undertakings conveyed to GE and Honeywell would have required the companies to sell off $4 billion in businesses. The U.S. companies countered with an offer to divest about half that much, but GE refused to reduce its 100% holding of the profitable GECAS operation.

Back-channel negotiations often have resolved such standoffs, as in the Boeing-McDonnell Douglas linkup in 1997. But GE Chairman Jack Welch’s presentation of his final offer a month before the commission’s July 12 deadline signaled the arm-wrestling was over.

“The main problem with the deal is that Jack Welch made a lot of mistakes in his approach toward Monti,” an aerospace executive at last week’s Paris Air Show said on the condition that neither he nor his company, which publicly supported the GE-Honeywell merger, was named. “Monti was a professor of economics. He’s from the Chicago School, and he doesn’t have a protectionist bone in his body. There should have been a way to finesse this deal.”

European financial media have suggested that Welch got cold feet, especially as U.S. economic indicators turned gloomy and the concessions would have trimmed the merger benefits.

Executives who have been through the commission wringer say the procedures are clear, flexible and, for the most part, fair.

“It’s a process you have to go through, and we eventually came to a conclusion that we felt was fair for us,” Boeing’s vice president for public relations, Lawrence L. McCracken, said of the eleventh-hour go-ahead on the merger with McDonnell Douglas.

But that experience was a nail-biter. Boeing learned only 24 hours before the start that it had commission approval. Thousands of UPS trucks already were rolling across the country with 100,000 “pizza-box” welcoming kits for employees with logos, pins and brochures about their new employer, McCracken recalled.

Others who successfully have negotiated the European labyrinth say the procedures are grueling, but no less so for companies within the EU.

Before the European Aeronautic Defense & Space Co., EADS, completed its four-way consolidation last year, “we had to do everything except drop our trousers,” said Rainer Ohler, a vice president for the Munich-based consortium.

“The difference between the processes in Brussels and the United States is that U.S. authorities look from the angle of the consumer,” he said, “whereas Brussels authorities look more from the competition point of view.”

EADS, which owns 80% of Airbus Industrie, had to spin off some French space activities, but it faced relatively few undertakings because a European consolidation had been expected as a counterweight to Boeing-McDonnell Douglas, Ohler said.

“The underlying philosophy of the two processes is the same. They are both looking at the same sorts of activities,” said Phil Soucy, a spokesman for BAE Systems, the conglomerate born of the merger two years ago of British Aerospace and Marconi Electronic Systems. “You can’t characterize one as more stringent than the other, they just come at it differently.”

The Justice Department’s review of the BAE deal required the companies to scan entire databases for e-mails and files mentioning the partners or competitors, said Robert T. Hastings, a company vice president.

“They were looking for evidence of market share before and after the merger,” he said. “They were looking for statements like, ‘Ha, Ha! Three years from now we’ll dominate the market!’ ”

Having found no such evidence of conspiracy, the Justice Department gave the go-ahead for the merger.

One difference in procedure between EU and U.S. reviews is that companies opposed to a merger can air their concerns in private with the commission. Any evidence the Justice Department or FTC needs to block a merger must come in open court testimony. That may discourage some companies from taking exception.

Though details of competitor submissions to the commission are confidential, Torres confirmed that many U.S. companies were among those urging the commission to veto the GE-Honeywell merger.

Pressures on major manufacturers to gain market share and synergies through mergers are especially strong in aerospace. “Nowadays there’s more U.S. content in an Airbus than in a Boeing 767,” Hastings said. “No one makes a national airplane anymore. It’s not possible.”

Corporate executives wax philosophical when asked if the regulatory environment keeps pace with globalization.

“Regulation itself is a historical process. When the first automobiles were invented, drivers had to hire someone to run ahead of them with a warning flag and a trumpet,” Soucy said. “It’s a constant process of reviewing and making sure what you’re doing still makes sense.”

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Deal Breaker

Expectations that European antitrust objections will scuttle GE’s purchase of Honeywell have slashed Honeywell’s share value since its mid-May peak of $53.50.

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Honeywell shares, weekly closes and latest on the NYSE

Tuesday: $36.20, up 60 cents

Source: Bloomberg News