EU is blocking major US merger

If two American companies decide to merge, and US antitrust regulators approve the deal, they go ahead and merge, right? Wrong.

In today's globalized world, European and other foreign regulators can block an American deal if the parties do much business abroad. And the European Union appears ready to kill General Electric's planned $42 billion takeover of Honeywell International, heralded as the biggest industrial merger in history.

If GE continues to reject European demands that the deal be changed, and the European Commission does not back down in the next three weeks, it will be the first time Brussels has scuppered a merger between US companies that Washington has approved.

That prospect has some US politicians worried.

"I think this is something that's troubling, something we need to look at," Sen. Phil Gramm told CNBC, the business news TV channel. "It's a very real question - what power the EU should have in dealing with two companies that are fundamentally American companies."

European officials say it is perfectly normal. "What matters is where the companies do business, not where they are located," says Amelia Torres, spokeswoman for the EU competition commissioner, Mario Monti. "If they do business in Europe, they have to abide by European rules."

Those rules sometimes reflect a transatlantic difference of approach. European investigators, for example, pay more heed than their American counterpoints to arguments by rival companies that they would suffer from their competitors' mergers.

Last year, GE generated about $25 billion of its $130 billion worldwide revenues in Europe, where it employs 85,000 people, according to Jeffrey Immelt, GE president.

Mr. Monti, a Yale educated Italian economics professor, has the final say over any deal if the merging parties have a combined global turnover of more than $4.25 billion and European sales of $225 million each.

That gives Monti and his 100- strong team of investigators considerable power over US firms - and that power is set to grow, says Bert Foer, president of the American Antitrust Institute, a Washington-based think tank.

"Companies have to conform their behavior to the strongest boss," he says. With the new US administration expected to take a less interventionist antitrust line, "if the US backs away and the European Commission steps forward, what it says will increasingly decide things."

American and European regulators generally agree about proposed mergers that come up for their review. European authorities almost always approve deals involving US firms, and some analysts say the GE-Honeywell affair is a one-off.

But the case has revealed disparate styles that some antitrust lawyers say could cause friction in the future.

The European Competition Task Force tends to give greater weight than US regulators to the opinion of third parties who would be hurt by a merger, antitrust experts say. Two of GE's competitors, Rockwell International and United Technologies, played a leading role in lobbying EU officials against the Honeywell takeover, according to people close to the negotiations.

"Because the timing is so tight, there is a limit to what investigation the commission can do on its own," says Nils von Hinten-Reed, an antitrust expert with London Economics, a consultancy firm. By law, the commission must rule on any merger application within five months. "Inevitably they put what one party says against what the other party says."

The EC's Ms. Torres defends the hearing that the commission gives to merging companies' rivals. "We are not working in a vacuum," she argues. "And we are well capable of distinguishing between genuine competition concerns and attempts to get a free ride" by complainants.

European and American antitrust regulators appear to be diverging over economic theory, too. The EC objects to aspects of the GE-Honeywell deal because it fears that GE could use its aircraft leasing arm -the largest purchaser of aircraft in the world -and its financial subsidiary to sway aircraft manufacturers to choose not just GE jet engines, but Honeywell avionics, too.

The US authorities saw no reason to fear such "bundling" of products. GE's CEO, Jack Welch, issued an angry statement last week, saying that "the European regulators' demands ... differed sharply from antitrust counterparts in the US and Canada.

"This shows you are never too old to get surprised," he added.

Mr. Welch buttressed his public outburst with a private call to Andrew Card, President Bush's chief of staff, to generate some political heat. Mr. Bush said publicly during his European tour that he was "concerned that the Europeans have rejected" GE's plans.

Commerce Secretary Don Evans, in Paris, boosted the deal as "a very positive kind of step for free trade."

Monti reacted sharply on Monday, saying he "deplore[d] attempts to misinform the public and to trigger political intervention."

The dispute has raised fears of a new transatlantic trade war, such as was narrowly averted in 1997, when heavy political pressure from then-President Bill Clinton persuaded the EC and Boeing Corp. to compromise over the aircraft giant's merger with McDonnell Douglas, which Brussels was threatening to block.

Europe has influenced other US deals. Last year Monti refused to accept Worldcom's merger with Sprint -a deal that the US Justice Department also opposed -and the Europeans forced AOL to make concessions when it bought Time Warner for $165 billion.

The EC's influence, and apparently stricter stance, could appeal to American companies who don't want their rivals to merge, say antitrust lawyers. "To the extent that they see greater opportunities in Europe" to block deals by lobbying Brussels regulators, "they will make use of them," says Mr. Foer.

But this is a two way street, officials point out. Last year, for example, the European Commission approved the French company Air Liquide's plan to take over the British firm BOC, but the deal was nixed by US regulators.

The commission has also killed European merger proposals, such as Volvo's bid to merge with truck-builder Scania.

Most deals of all sorts go through, though. The Commission has reviewed some 1,700 merger applications since 1989 and prohibited only 14 of them, according to Ms. Torres. One of the deals it killed involved at least a US company.

As they study planned mergers, European investigators work closely with their US counterparts, sharing files and staying in daily e-mail contact, according to officials on both sides. "We should not let this [GE-Honeywell] case overshadow the fact that we work extremely well together," says Torres. "Mr. Monti is optimistic that our cooperation will continue to be fruitful."

The GE case, however, "reflects a growing rift between the US and the EU on antitrust," suggests Foer. "There is no question that the Europeans are closer to where we were in the 1960's and 70's, more interventionist, than we are now.

"They are going to be giving more headaches to large companies trying to grow substantially larger," he adds.

(c) Copyright 2001. The Christian Science Monitor