"If a company becomes very efficient after a merger, the Europeans are not going to allow it,"
---
Mr Tough Guy
Deborah Hargreaves and Peter Spiegel question the latest concessions won from GE over its bid for Honeywell
Published: June 28 2001 18:46GMT | Last Updated: June 28 2001 18:51GMT
Not many people get the better of Jack Welch, General Electric's chief executive. But Mario Monti, the European Union's competition commissioner, appears to have done so. GE's suggestion late on Monday that it would sell a stake in its aircraft leasing arm to try to get EU approval for its $41bn (£29bn) takeover of Honeywell is a tacit admission by Mr Welch that Mr Monti has the upper hand.
Mr Monti has been accused by GE and US politicians of using either outdated or unprecedented legal theories when he threatened to block the takeover, the largest industrial takeover ever. Mr Welch, for example, has famously dismissed Mr Monti's main objections to the last deal of his career as having been outside US antitrust canons for 75 years. Paul O'Neill, US treasury secretary, piled in this week, calling the EU's theories "off the wall". But in GE's quest for EU approval, which has become a tale of brinkmanship, the com-pany's offer of a structural break with Gecas - the aircraft leasing business - recognises Mr Monti's main objection.
But is Mr Monti right? US regulators seem to think not - and with the US appeals court ruling in favour of Microsoft yesterday, the ideological gap separating the EU commissioner and the US appears to be widening. The Commission has insisted it is obliged to investigate complaints about the US software company's behaviour in the EU but yesterday's decision will leave it unsure as to how to proceed.
One of Mr Monti's main concerns with the GE-Honeywell deal is the ability of the resulting conglomerate to use its extraordinarily wide array of aviation products to give it unfair leverage. An airline could be offered a discount on a GE engine, for example, if the company also agreed to take Honeywell avionics, a practice known as bundling. The potential for GE here would be huge: not only is it dominant in engines but, as well as Honeywell's leading position in avionics and aerospace products, GE has a significant position in the financing, purchasing and leasing of aircraft to its customers. The fear is that the global company would simply squeeze out competitors by sheer breadth of offerings.
Mr Monti stresses that the EU's objections do not just involve bundling. Like the US Department of Justice, which signalled its approval last month, he is concerned about overlaps in some markets and so-called vertical integration, which could give the combined company a commanding market share.
For US critics, GE's ability to offer a wider product line more cheaply shows the deal is in fact beneficial. Mainstream antitrust theory in the US, particularly since the 1970s, has held that the size of the company created by a merger has little relevance; bringing down prices is good for consumers and any deal that does so is, by definition, pro- competitive. "If a company becomes very efficient after a merger, the Europeans are not going to allow it," says Kevin Arquit, a competition expert who was shortlisted to head the Department of Justice's antitrust division. "In the US, that would be a reason to approve the deal."
Robert McTamaney, an antitrust partner at Carter, Ledyard & Milburn in New York, adds: "The theory of portfolio bundling was discredited a generation ago in the US."
Ironically, though, officials from the Department of Justice explained bundling theory in detail to their European counterparts at the outset of the GE-Honeywell investigation. The Department of Justice looked at the possibility that bundling might occur in the aerospace market but could not make a case stick, particularly because no airline would agree to testify in court against the deal.
But the Commission embraced the bundling theory and ran with it. It also developed its case against the vertical integration aspects of the deal - the power of GE's aircraft leasing and purchasing arm to influence the type of equipment airlines and air-framers, makers of aircraft bodies, choose to install on their airplanes. The Commission's statement of objections states: "Gecas is therefore used by GE to influence the outcome of airlines' airframe purchasing decisions and act as a promoter of GE-powered airframes to the detriment of GE's engine manufacturer competitors and eventually results, through the use of its disproportionate power, in excluding competing engine sales."
European antitrust lawyers say that bundling theory and the review of vertical integration factors in mergers are not unusual. In a letter to Senator Jay Rockefeller, chairman of a subcommittee responsible for aviation issues and an outspoken critic of the EU's handling of the case, Mr Monti says: "There is indeed no clear-cut rule in antitrust economics suggesting that only over lapping mergers are anti-competitive; and the economic literature is full of examples illustrating the effects of vertical mergers and tying or bundling practices on the market." In fact, parts of the US case against Microsoft were based on the idea that the company had bundled products.
However, whether the bundling and vertical integration arguments apply to GE-Honeywell is more controversial. GE hired leading US economists to attack the Commission's theories. Carl Shapiro, a professor at the University of California at Berkeley and a former chief economist at the Department of Justice, rejects the EU's arguments on bundling. "I feel most strongly that the merger task force was unable to come up with any evidence of product bundling - or packaged discounts - taking place in this industry," he says. The Commission's arguments centre on the fact that no company previously has had the power to bundle in the way a combination of GE and Honeywell would. Mr Shapiro dismisses this concern as being too speculative.
Mr Shapiro also dismisses the Commission's concerns about the vertical aspects of the deal - namely the activities of Gecas.
Gecas's market share in the purchase of new aircraft is about 8 per cent. International Lease Finance Corporation, a rival leasing company, has a slightly higher market share. The Commission recognises in its statement of objections to the deal, that Gecas's market share is smaller than usually associated with traditional notions of "market power". But it claims that the influence of GE's aircraft leasing arm extends beyond its share of the market and it is able to tilt the market in favour of GE engines.
Mr Shapiro disagrees. "True, Gecas buys only GE engines, but other leasing companies and airlines balance that out by buying more from others," he says. "Their purchasing patterns are just not big enough to swing a whole market."
But the biggest and perhaps longest-lasting difference between the US and Europeans may be a matter of approach. Much as with bundling theory, US officials long ago dismissed complaints by competitors. Indeed, many argue they are a sign that a deal is pro-competitive. An anti-competitive deal, after all, would allow the merging company to raise prices, thus allowing others in the market to raise prices. Instead, analysis of most US mergers focuses on how they will affect consumers.
"Competitor complaints are inversely correlated with benefits to consumers," says Timothy Muris, chairman of the Federal Trade Commission, the Department of Justice's sister antitrust agency. "Buyers tend to be a much more reliable source and the US antitrust authorities rely heavily on buyers [in] evaluating the impact of proposed mergers."
It is a point echoed by GE but Brussels has insisted on taking a much broader view, arguing that a reduction in competition is bad for consumers in the long term. Indeed, competitor complaints are at the core of the EU's review process.
The argument is not likely to win over his US critics. "I don't ascribe ill motives to Mr Monti," says Mr McTamaney, "but I do ascribe poor legal reasoning."
news.ft.com |
