The $42bn ($29.6bn) acquisition of avionics manufacturer Honeywell International looked like a deal made in heaven for General Electric, but despite the personal intervention of President Bush, it was blocked in Europe. So where did it all go wrong?
Last October Jack Welch, the iconic chief executive officer (CEO) of General Electric Company (GE), saw an opportunity to pluck the aerospace company from the hands of rival suitor United Technologies Corporation, and he needed just one chance to capture it. GE, one of the world's largest conglomerates with diversified industrial interests, saw Honeywell, with its global aerospace products and services, as the perfect bride. With just a 48-hour window to decide whether to proceed, Welch's pioneering spirit won out and GE did a deal to buy Honeywell for $42bn. The only thing standing between Welch and the crowning glory of his career was regulatory approval from the US Department of Justice and the European Commission. His dream, though, was crushed by the commission when it blocked the deal, the first time the regulator has turned down a merger of two US companies which was already cleared by the US authorities, since it took responsibility for antitrust matters in 1990.
The European lawyers came on board in October, but only after the merger contract was signed. GE instructed Clifford Chance partners Chris Bright (now at Shearman & Sterling) and Simon Baxter, who took charge of operations from the Brussels office. Bright says that no external competition advice was sought before the purchase was formalised simply because there was no time, although he insists that “internal reviews were made of competition advice and no conventional antitrust issues were identified”.
“You don't influence Monti through transatlantic megaphone diplomacy, or at least not the way you'd want to”
Simon Baxter, Clifford Chance
Baxter defends GE's decision to forge ahead, saying: “Jack Welch didn't get where he is today by saying, 'We've got to run it past legal'.” Both feel that, even if GE had taken European Union (EU) competition advice at this stage, it would not have made any difference to the merger.
The US Department of Justice was notified of the merger in October and GE went to see the European Commission informally at the same time, but the deal was not formally notified until 5 February. The commission then began an informal Phase 1 assessment of its investigations. The element of the merger decision that has caused the most consternation in the US is probably the involvement of GE's and Honeywell's competitors in the merger process. Bright in particular is angry about the extent of their influence in this investigation. “The decision shouldn't be based on mud-slinging by competitors,” he says.
Gotz Drautz, head of the Mergers and Acquisitions Task Force, was in charge of the commission's investigation, although the day-to-day responsibility fell to Gonzalez Diaz, who headed up Unit 2 of the taskforce. Drautz, who spoke to The Lawyer in the aftermath of the commission's decision, works out of a modest office in Brussels, off the appropriately-named Rue de la Loi. He is not an easy villain for the piece, being both gentlemanly and approachable. He says that questionnaires were sent out to all customers and competitors of both GE and Honeywell as a matter of course. There is, however, some disagreement as to at what stage the competitors became involved. Under the formal process, they were consulted from February onwards, but Baxter suspects that they were, in fact, informally involved from November.
“I had very early and strong complaints from American companies”
Gotz Drautz, Mergers and Acquisitions Task Force
Whatever date they got on board, the four main competitors identified by Drautz – Honeywell's alternative marriage partner United Technologies, Rockwell Collins, Rolls Royce and Thales – certainly shouted loudly. Drautz says that he “had very early and strong complaints, not just from Europe but also from American companies”. He defends the commission's stance over competitors, insisting that the commission is no fool. “We know, of course, that competitors have certain vested interests and may even have interests in divestments,” he says. “We look at competitor complaints in a sceptical way.”
Jim Davies of Freshfields Bruckhaus Deringer, who acted for Rockwell Collins, was naturally supportive of the commission's standpoint. “The main aviation competitor to Honeywell had serious concerns about the nature of the competitive landscape following the merger, and the EU Commission was right to investigate thoroughly,” he says.
Baxter believes that the volume and the type of complaints are actually what pushed the merger into formal Phase 2 investigations on 1 March. The synopsis of the official reason given by Drautz is that GE already had a dominant position in certain markets, and that the merger would extend this dominance to Honeywell products.
The move to Phase 2 was a shock for the GE legal team and gave Bright the first real inkling that the deal might not have legs.
During this phase, the lawyers were involved in their own M&A activity. Bright was lured away from Clifford Chance by US firm Shearmans for its London office (The Lawyer, 23 April). The split with Clifford Chance seems to have been unusually amicable, with Bright continuing to work out of its Brussels office and remaining good friends with Baxter.
Back in Brussels, Bright may have had a different firm's name on his business card but he nevertheless stayed on the deal, and the GE legal team was gearing up for a tussle with the European Commission. When they received the regulator's statement of objections on 8 May, it was a massive 155 pages long. According to Baxter, there was a large section devoted to bundling issues, a lengthy section on GE Capital, including Gecas (GE Capital Aviation Services, a finance and plane-leasing subsidiary), and a section on horizontal overlap. The good news was that the Department of Justice cleared the deal in the US later that month.
The D-day for the lawyers involved with the case was 29 May. The oral hearing lasted for two days, and GE was represented by its vice-chairman, general counsel, Clifford Chance lawyers, Bright and its team of economists. The team squared up to the competitors' representatives, who sat across the table from them. “These things are always tense – you're sitting directly opposite your tormentors,” recalls Baxter; but he insists that “the complainants weren't especially vociferous”. On day one GE put its case, with rebuttals by third party complainants the next day. Baxter points out, however, that not all competitors opposed the deal – he claims that Boeing and Airbus did not oppose it, an argument backed up by Drautz.
The role played by customers in the process is less clear. One of the key differences between the US and the EU regulatory systems is that the US operates in a very public forum, while the EU allows customers' complaints to be aired in private. The GE team had to leave the room while the details of customer complaints were heard, but it claims that, as far it knows, no customers attended the hearing. The GE team's frustration that all the ammunition came from competitors rather than customers is understandable, but other lawyers involved with the process maintain that customers were too scared of GE to come forward in the US and were offered a vital forum by EU anonymity.
Negotiations for a settlement began within a matter of days. While the GE legal team felt they won on some issues, others – particularly Gecas – just would not go away. Both Bright and Baxter are scathing about some of the economics behind the commission's strategy. Bright speaks of “novel and controversial economic theories”, and Baxter believes that GE had largely won the economic argument by the end. “The economic theory on which we were being attacked didn't stack,” he claims. “The commission found it hard to sustain later.”
Despite progress in some areas, the dream GE-Honeywell match looked seriously endangered. According to Bright, the true picture emerged on 13 June, the last day for putting in undertakings, at a head-to-head meeting between Welch and Competition Commissioner Mario Monti. There had already been lots of discussions between the lawyers, but according to Bright it took a top-level meeting to clarify that positions were entrenched and the deadlock was not just a result of posturing.
Negotiations continued right up until 3 July, when the commission released its decision, but the issue of Gecas proved to be the major sticking point. The best that GE could offer was a 19.9 per cent divestment on Gecas plus an array of other minor divestments. There is disagreement over whether this had to be by way of public sale of the shares. GE's lawyers insist that public sale was the deal on the table, while Drautz maintains: “We never said you have to sell it to competitors, we only said you have to find a way to guarantee independence, and that was translated by some people as meaning you have to sell to competitors.”
The deal was pronounced officially dead by the commission on 3 July, but the final days were marked by desperate horsetrading from Honeywell. On 29 June, Honeywell CEO Michael Bonsignore sent a letter to Welch, reminding him of his obligations to use his “best effort” to secure regulatory approval, a phrase mirroring the contractual requirement that both parties use best efforts to make the merger happen. Welch volleyed straight back with the reply: “What the commission is seeking cuts the heart out of the strategic rationale of our deal.” Baxter believes that everyone was surprised by Honeywell's decision to “leave the arena of private negotiations and go public with a request”.
The decision to throw caution to the wind may have just been a reflection of the importance of the deal to Honeywell. The Brussels rumour mill, however, has thrown up other explanations. Various sources close to the merger investigation have suggested that Honeywell was no longer the bride GE thought it was, and that GE was looking for an out. Certainly, Honeywell was worth less in real terms in July's economic climate than it was last October when the deal was clinched. This is clearly the explanation for conspiracy theorists; an alternative proffered was that GE simply played the brinkmanship game too hard and ended up overplaying its hand. Whatever GE's rationale, Monti believed the deal was doable, telling the press: “There were ways of eliminating these concerns and allowing the merger to proceed.”
Both these theories are, of course, hotly denied by the GE legal team, and nobody else proved willing to talk about them on the record. Honeywell's law firm, Skadden Arps Slate Meagher & Flom, would not talk about the case at all. Left adrift, Honeywell has seen its CEO Bonsignore resign, and rumours have circulated that it is considering an action against GE in the US, coordinated by antitrust star David Boies of New York firm Boies Schiller & Flexner.
GE, meanwhile, is considering its own options for appealing the commission's decision. Both Baxter and Bright have controversial opinions on the decision. Bright calls it “audacious” and “a bid for the history books”, while Baxter calls it “a surprising divergence from the US and Canadian decisions”. Bright is concerned about the philosophy behind the commission's stance, which he sums up by saying: “The EU view is that big is bad.” He also contends that the decision seems to have been made on a primarily intuitive level, which will only create uncertainty in the long term. Baxter, too, believes that the EU's regulatory environment under Monti has become tough and less predictable, with a number of zig-zags in enforcement. Whether it is a blip or trend, it will not be far from the mind of any other multinational considering a European acquisition. Andrew Renshaw of Freshfields, which represented Rolls Royce, called it a “salutary reminder of having a properly-thought-out antitrust strategy”. Fortunately for M&A lawyers, nobody has suggested that it will lead to a reduction in European mergers, and certainly, the EU's farcical failure to pass the Takeover Directive is far more worrying.
The attempts to get merger clearance involved an unprecedented amount of political influence and lobbying. GE has been criticised for overly aggressive lobbying, but this is flatly denied by both of its lawyers, who claim that the company did nothing unusual. While it is easy to fall back on the stereotype of aggressive Americans misreading European culture, there does not seem to be much evidence for this view. Drautz said that he was not concerned by lobbying and actually got on well with Fipra, GE's lobbyists. Political intervention, in the form of a word in top European ears from President Bush and threatening letters from the US Senate, is another matter. Monti has publicly deplored such attempts to influence the EU, and even GE admits that they backfired. Baxter concedes: “You don't influence Monti through transatlantic megaphone diplomacy, or at least not the way you'd want to anyway.”
The silver lining to the European Commission's decision is that we may well see better cooperation between the EU and the US over competition policy. Bright warns: “Americans used to think the EU was weak; now they think it's wacky,” and that the assumption that the two jurisdictions were singing from the same hymn sheet has been shattered. The upside of that, however, is that Monti has made it publicly clear that he desires improved cooperation. Drautz backed this up saying it was a good opportunity to openly discuss all the issues afresh and that serious talks between the old and the new world are clearly needed. That way, the next big merger will have a decent chance of being cleared for takeoff rather than being grounded on European soil.
Helen Power is a research analyst at World Markets Regulatory Analysis, part of World Markets Online
|The key players|
| The General Electric Company
The General Electric Company (GE) was represented in the European Union (EU) by Chris Bright, a Shearman & Sterling partner at the London office, and Simon Baxter, partner and head of European competition at Clifford Chance's Brussels office.
Bright has been at Shearmans since May this year, prior to which he was at Clifford Chance's London office. He qualified with Linklaters & Paines (now Linklaters & Alliance) in 1985, becoming a partner in 1992, and stayed with that firm until 1999, before being recruited by Clifford Chance as the firm's head of competition. He has also worked for the UK Government as an adviser in the competition policy department at the Department of Trade and Industry. He previously worked on the Pfizer-Warner-Lambert, Air Products-BOC and Nedcor-Stanbic deals at EU level.
Baxter was a made a partner at Clifford Chance in 1998. He qualified in 1987, having graduated in law from the University of Sussex. He advises at both EU and national level on joint ventures, mergers, distribution systems and licensing.
The European Commission
TThe competitors United Technologies Corporation was represented by Nick Levy and Mark Leddy of Cleary Gottlieb Steen & Hamilton. Rolls Royce was represented by Andrew Renshaw of Freshfields Bruckhaus Deringer. Rockwell Collins was represented by Jim Davies and Alan Ryan of Freshfields. Thales was represented by Dominique Voillemot of Gide Loyrette Nouel.