Mario Monti, the European Union's Competition Commissioner, is making Jack Welch look bad. Last October, Welch tried to cap one of the great management careers of the Industrial Age by announcing General Electric (GE, info) was acquiring Honeywell (HON, info) for over $50 billion. He extended his stay as CEO and confidently predicted a closing in the first quarter of 2001.
In late February, Monti put the EU's merger approval on a slow track, commencing a four-month investigation and hearing process. Welch and CEO-in-waiting Jeffrey Immelt responded by threatening to walk away from the deal, an impotent gesture unless Monti owns a lot of Honeywell stock.
Last week, the U.S. Department of Justice preliminarily approved the merger, with only minor modifications--divesting Honeywell's helicopter engine business and authorizing new third-party maintenance and repair service for some of its aircraft engines. Now all eyes are on the EU's approval, says Honeywell's CEO, Michael Bonsignore.
How did Mario Monti, a Yale-educated former professor from Italy, become the most important player in U.S. mega-deals?
In less than two years as Competition Commissioner, Monti has made his mark on several historic mergers. He flat-out rejected the WorldCom (WCOM, info)-Sprint (FON, info) combination, and required a variety of conduct remedies and divestitures from Vivendi Universal (V, info), AOL Time Warner (AOL, info), and Microsoft (MSFT, info), among many others.
Monti's mandate comes from Articles 81 and 82 of the Treaty of Amsterdam. In broad strokes, the articles prohibit the same conduct as equally vague U.S. antitrust laws: price-fixing, sharing markets, vertical tying arrangements, and limiting or controlling production, markets, technical developments, or investment.
EU merger regulations give the Competition Commission jurisdiction over all mergers (including those between U.S. companies) where the companies' worldwide annual revenues are greater than 5 billion Euros ($4.5 billion U.S. dollars) and European annual revenues are greater than 250 million Euros.($225 million U.S. dollars.)
The commission began flexing its muscles in the Boeing (BA, info)-McDonnell Douglas merger in 1997. The U.S. Justice Department waved the merger through, but the Commission prepared to prohibit it. Behind closed doors, the U.S. government made its views known to the commission and Boeing agreed to some restrictions. Ironically, the run-in has emboldened the commission. The Justice Department started working closely with the commission, coordinating objections and generally reaching similar conclusions.The EU's activist bent meshed well with the Clinton Administration's antitrust policy.
Since Boeing, the EU has blocked three deals, including the WorldCom-Sprint merger, which marked the first time the commission formally pulled the plug on an all-U.S. deal. More significant, EU threats have forced changes in scores of deals. In 1997, the commission forced changes in 13 deals. The amount increased to 21 in 1998, 29 in 1999, and more than 40 in 2000.
If none of this sounds good for GE or Jack Welch, brace yourself, because it gets worse.
The Competition Commission is considered much more dangerous to U.S. businesses than the U.S. Justice Department. It has no political base, so lobbyists and campaign contributions have no effect on the outcome. Mario Monti's pet theory is "collective dominance," in which vertical mergers, even in very competitive markets, are objectionable because a vertically integrated competitor might be in a position to dictate prices based on the breadth of its product line. (Doesn't that sound like GE-Honeywell to you?)
Procedurally, the EU process is a nightmare. The FTC has to get an injunction if it wants to challenge a merger; the Competition Commission plays prosecutor and judge, with the power unilaterally to void a merger. Don't like that, American fat cats? Try taking an appeal to the European Court of Justice. You'll get a result ... in two or three years.
In this environment, how could Jack Welch have been so confident in predicting that his vertical merger with Honeywell would close in February? (He also had past experience: Honeywell's merger with Allied Signal in 1999 incurred the four-month review, and Honeywell had to make concessions to obtain EU approval.)
To Eleanor Fox, an antitrust expert and professor at New York University Law School, it is unexplainable. "This is incomprehensible to anyone who is knowledgeable about the EU," she says. Herbert Hovenkamp, author of a 16-volume treatise on antitrust and professor at the University of Iowa School of Law, believes, under the circumstances, GE "should have anticipated a fairly thorough review."
Because it's unlikely that GE will walk or that the merger will be approved without concessions, that leaves three outcomes: rejection of the merger, imposition of conditions like divestitures and conduct rules, or U.S. regulators interfering on behalf of GE and pressuring the EU to relent.
Professor Fox thinks the EU might menace GE behind closed doors with the implication of a rejection, but that it would not go that far. "The more likely thing is that the EU imposes conditions, and the question is whether the U.S. is going to say 'that's anticompetitive.'"
The wild card is the new Bush Administration. Its antitrust enforcement is not yet in place, so Monti has not had a chance to establish a dialogue. The most obvious conclusion is that a Bush antitrust division will not go down the path of the EU or the Clinton antitrust division.
Still, don't expect the Bush Administration to turn its back entirely on the EU merger policy. Convergence between the U.S. and Europe will continue, albeit, according to professor Hovenkamp, at a slower pace. Perhaps Bush's antitrust division will let the EU take the lead on activism. However, keeping U.S. antitrust enforcers close to Monti is too important for U.S. companies for the Bush Administration to undo the cooperation (with its activist leanings) started by Clinton's Antitrust Division after the Boeing case.
The Department of Justice's approval of the GE-Honeywell merger last week telegraphs an accommodating position toward the EU, but with limits. Justice approved the merger, but not outright, indicating that it is not averse to tinkering. By making only minor changes, it has sent a message to the EU that its flexibility and commitment to convergence goes only so far. After taking a small step toward EU-type activism, it is signaling that Monti now must take a step toward a more hands-off policy, if it wants to operate in concert with this administration.
The EU needs that trend of cooperation to continue. U.S. support has allowed the commission to take bold positions in some giant mergers of U.S. companies. Monti will not grandstand publicly with the risk of getting into an early fight with the mysterious, unknown, potentially divergent Bush Antitrust Division.
The most likely result? Monti threatens GE. GE gets the Bush Administration to threaten the commission. GE agrees to some conditions tailored to particular products and markets. The deal closes in July. As professor Fox says, "I think it's just like Boeing; that's what happened there."