On 14 December 2005 the European Commission received an early Christmas present. The EU’s Court of First Instance (CFI) upheld the Commission’s decision of four years earlier, which had prohibited the proposed merger of General Electric (GE) and Honeywell on the grounds of its anticompetitive effects on the aircraft engine market.
After a series of batterings at the hands of the CFI back in 2002, when the Commission’s decisions prohibiting the Airtours-First Choice, Tetra Laval-Sidel and Schneider-Legrand mergers were all overturned by the CFI, the Commission now feels it has something to celebrate. It claims: “The court’s rulings confirm that the Commission was right to block the merger.”
True – up to a point. Certainly, the Commission escaped having yet another decision overturned. But in a few key areas, the CFI failed to uphold the Commission’s view.
In 2001, the Commission prohibited the proposed GE-Honeywell merger. It was concerned about the effects on competition of bringing together GE, which was particularly strong in the supply of engines for larger aircraft, and Honeywell, a manufacturer of avionics (aircraft equipment) and engines for smaller aircraft.
The Commission can feel pleased with aspects of the judgment. First, its basic conclusions have been upheld, primarily on the grounds that GE and Honeywell are competitors in certain markets – engines for large regional aircraft, engines for corporate jet aircraft and small marine gas turbines – and that the merger created or strengthened dominance in those markets. Whereas the three judgments in 2002 had held that the Commission’s analyses had been insufficiently rigorous, and therefore refused to uphold its prohibitions, the Commission can now feel somewhat vindicated.
Second, there is a political bonus. In prohibiting the merger, the Commission stuck its neck out by taking a different view from the US. The US Department of Justice had cleared the merger. Moreover, president George Bush had exerted political pressure for the deal to be cleared. The Commission resisted these pressures and the CFI has now backed it.
However, the CFI has not supported the Commission fully. In certain aspects, the CFI condemned the Commission’s analysis (just as it did in 2002), finding “manifest errors of assessment”.
More importantly, the Commission lost on the most controversial aspect of its decision – the finding that the merger was anticompetitive because of ‘portfolio power’ (also known as conglomerate effects). This is the economic theory that there is a competition problem where merging parties supply products which, even though they do not directly compete against each other, are still closely related. The theory was that the combination would create such a wide portfolio that the merged entity could leverage its power on one market to exercise power on related markets and that the merged entity would bundle sales of GE’s engines with Honeywell’s avionics products.
On both points, the CFI held that the Commission actually had to demonstrate that such effects were probable – simply having a wider range of products was not sufficient to cause concern.
The fact that a prohibition decision has been upheld is likely to boost the Commission’s confidence in blocking mergers and acquisitions on competition grounds. More than ever, companies will need to assess competition issues when planning M&A deals. On the other hand, the CFI’s statements on ‘portfolio power’ make it less likely that the Commission would block mergers on these grounds, so companies can be more confident that this will not be an insuperable hurdle to deals proceeding.
Michael Grenfell, partner, Norton Rose