Landmark decision on Europe’s 2001 block of GE-Honeywell deal could ease way to industry consolidation
Rather than putting the brakes on future mega-mergers, the upholding of the European Commission’s controversial 2001 decision to block the $45 billion merger of General Electric and Honeywell could make consolidation of the aerospace and defence industry easier.
This is the conclusion of legal analysts poring over the European Court of First Instance’s 14 December ruling on GE and Honeywell appeals against the EC’s July 2001 decision. Although the Court upheld the decision, they say, it rejected almost all the reasons the EC’s competition commissioner used to justify blocking the deal.
While the decision is seen as a boost for the EC, after the court overturned several of its merger denials, the decision “is far from a clear victory for the Commission”, says Catriona Hatton, partner at law firm Hogan & Harrison’s Brussels office. “The Commission in fact lost on almost every ground on which it had based its decision.”
For the companies involved, upholding of the European block on the merger is now a moot point. They have moved on since 2001 and both GE and Honeywell make clear they have no intention of reviving merger discussions. But the ruling was important to them because the Court criticised the legal theories used to justify the EC’s decision and, in doing so, may have cleared the way for future mergers and acquisitions.
The Court said the Commission was right to prohibit the deal because a merged GE/Honeywell would have had a dominant market position in engines for large regional jets and business jets as well as small marine gas turbines. But the Court also said the EC made “manifest errors” in applying controversial “conglomerate leveraging” and “tying/bundling” theories to its assessment of the merger.
Conglomerate theory, explains Hatton, argued that GE could use the financial strength of GE Commercial Aviation Services (GECAS) to gain dominance in Honeywell’s avionics and non-avionics markets. Bundling theory, she says, held that the companies could bundle the sale of their complementary aircraft engines and products in a way that would make it difficult for other manufacturers to compete.
“The Commission did not get its way on ‘portfolio power’ – the idea that, even where merging companies are not strong competitors of each other in exactly the same market, they could still be a risk [to competition] if the merger creates a wide range or portfolio of related products,” says Michael Grenfell, competition partner at international law firm Norton Rose.
The companies profess themselves “pleased” with the ruling, GE saying the Court had agreed with the company on a number of points, “including rejecting the European Commission theory of conglomerate effects resulting allegedly from GE’s financial strength, vertical integration and bundling”. Honeywell says the Court’s conclusion that the EC’s bundling theory was flawed and incorrect “is important to the future ability of global companies to enhance their businesses through acquisition”.
Aerospace and defence companies like EADS have been watching the case carefully, and analysts expect the decision to make European mergers more, not less likely. One reason is the discrediting of the Commission’s “portfolio power” argument. “This means that companies involved in such mergers can proceed with greater confidence – although they will still need to take account of the issue,” says Grenfell.
The EC’s blocking of the GE/Honeywell merger, after it had been approved by the US Department of Justice (DoJ), created a transatlantic furore and sparked much debate on the differences in anti-trust regulation in the USA and Europe. The US argument ran along the lines that the DoJ favoured consumers, while the EC protected competitors, when assessing the competitive effects of a proposed merger. The USA did not see anything wrong with portfolio power or bundling if it reduced prices.
GE/Honeywell was the largest corporate merger ever to be blocked by regulators, and was seen as Brussels flexing its regulatory muscles. But the subsequent court reversal of decisions on three other merger cases forced the EC back on its heels. Those defeats led to major overhaul of the Commission’s merger review process, a more-rigours analysis and less-aggressive stance.
The Court’s judgement “is a big boost for the European Commission’s confidence in tackling merger cases”, says Grenfell. “Companies will no longer be able to rely on the Commission being quite as cautious as it was in the immediate aftermath of the European courts overruling their decisions a few years ago.”
But the substance of the Court’s ruling is likely to give the EC pause. “This is not a case where the Commission can declare victory,” says Hatton.
“While vindicating them in some respects in blocking this all-American merger, in others it is certainly a setback. The Court’s judgement raises the bar in terms of the burden of proof in blocking…future mergers where there is no significant overlap in activities,” she says.
For GE and Honeywell, the Court’s ruling could clear the way for other mergers. There is even speculation that United Technologies, whose move on Honeywell led to the GE take-over agreement, could restage its bid. But a more immediate effect, analysts believe, could be an unleashing of merger activity within Europe’s fragmented defence industry.
GRAHAM WARWICK / WASHINGTON DC
Source: Flight International
