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U.S./EU: Analysis -- What Killed The GE-Honeywell Merger?

  • Mark Baker

When the European Commission last week decided to deny General Electric's proposed takeover of Honeywell, it not only scuttled the biggest industrial merger in history. It also underscored deep differences between the U.S. and the European Union on how competition law is interpreted and applied. The $42 billion merger of the two U.S. companies had already received regulatory approval in the United States but needed the support of the EU. RFE/RL correspondent Mark Baker spoke with a competition expert on the differences between EU and U.S. regulators, and asks how officials on one continent can stop an approved merger between two companies on another.

Prague, 10 July 2001 (RFE/RL) -- The story has it that the chairman of U.S. industrial giant General Electric, or GE, was so eager to acquire another large U.S. company, Honeywell, before he retired that he neglected to ask his lawyers whether the deal would violate antitrust laws.

Jack Welch, GE's chairman, was hoping the $42 billion deal to buy Honeywell would cap a highly successful career that saw General Electric -- which makes products ranging from household appliances to jet engines -- grow to be the world's largest company. The takeover of Honeywell would have been the biggest industrial merger in history.

But last week the European Commission threw cold water on that dream when it rejected the takeover on the grounds the merger would have reduced competition in the European Union's single market.

EU Competition Commissioner Mario Monti made the announcement last Tuesday (3 July) in Strasbourg:

"The European Commission has decided today unanimously to prohibit the proposed acquisition by General Electric of Honeywell." Monti justified the action on grounds the takeover would have reduced competition in Western Europe's aerospace industry. GE is a major supplier of aircraft engines, while Honeywell manufactures advanced avionics -- electronic communications and navigation equipment.

"This merger, as it was notified, would have severely reduced competition in the aerospace industry and resulted, ultimately, in higher prices for customers, particularly airlines."

GE disputed the commission's findings: "We strongly disagree with the commission's conclusions about the competitive effects of GE's acquisition of Honeywell." The statement continued: "We believe this acquisition would have clearly benefited consumers in terms of quality, service and prices."

The commission's decision was even more controversial because it was the first time the European Commission had rejected a merger between two U.S. companies that had already been approved by the U.S. government. Two months ago, the U.S. Justice Department approved the takeover, ruling that GE's and Honeywell's product ranges were mostly complementary -- that is, the two companies did not make the same things and hence were not competitors.

While GE and Honeywell could have fused without the European Commission's approval, the newly merged company would have been prohibited from selling its goods in the EU -- one of the world's biggest aerospace markets. Once the commission had rendered its decision, GE had no real choice but to submit.

George Priest, a professor of law and economics at Yale University Law School in the United States, has studied the proposed takeover. He says the commission's ruling underscores a major difference between the U.S. and the EU in interpreting and applying competition laws.

"The principal standard in the United States for determining whether some practice or some agreement is competitive or anti-competitive is whether it can be shown to benefit consumers or harm consumers. [Defining] the standard in terms of consumers is the broadest social welfare criterion possible. Quite differently, in Europe the effect on consumers is not given the same attention as in the United States."

Priest says that in the EU, on the other hand, competition law is based on the notion of "dominance" -- in other words, on the size of a firm and the scope of its activities. He says this idea was fashionable in the United States in antitrust circles 50 years ago or so. But he says "dominance" has been abandoned in the U.S. in favor of looking at the effect of a merger on consumers. He explains:

"We've recognized in the United States that the size of a firm and the seeming dominance as measured by size or scope of activities is not a good measure of how competitive an industry is and what constraints there are on the firm in terms of setting price or providing quality products to consumers. So in the United States the concern about size or scope of operations -- what in Europe is called dominance -- has been abandoned in favor, as I mentioned before, of what the effect will be on consumers."

Priest says the commission's Merger Task Force concluded that given GE's strength in aircraft engines and Honeywell's expertise in avionics, the new joint company could bundle these products and thus "dominate" the European aerospace industry. The task force therefore insisted that GE sell off Honeywell's avionics business or detach its own subsidiary, GE Capital Aviation Services, which finances aerospace purchases. GE offered some concessions but not enough for the EU.

With the GE-Honeywell merger now dead, the commission's decision raises the specter that regulators on both sides of the Atlantic will disagree in the future -- to the possible detriment of the world economy. Priest says that such disagreements between regulators are part of the growing globalization of the world economy:

"This conflict among governments or administrative agencies is a new feature of the globalization process that will have to be dealt with in some way if we're going to achieve the gains from globalization that are possible for all of the citizens of the world."

He says a possible disagreement now is looming over the future of Microsoft, which the U.S. government has determined is a monopoly. The U.S. software maker has won an appeal that ensures the company will not be split in two, but European antitrust officials are still pondering their course of action.

The British-based "Financial Times," in a recent editorial, identified several possible solutions for avoiding antitrust disagreements, including creating a global competition authority or harmonizing standards for evaluating mergers. But the paper concludes that the best way to avoid future disagreements is to improve dialogue. It notes, however, that not even extensive consultations at the highest levels managed to save the GE-Honeywell proposal.