Differing approaches taken by US and European regulators over the proposed GE/Honeywell merger highlight a need for common guidelines
If ever there was an illustration that the United States of America and the united states of Europe are separated by more than water, it is General Electric's efforts on both sides of the Atlantic to gain approval for its merger with Honeywell.
Late last week, after pessimistic statements from the chairmen of GE and Honeywell and the European Competition Commissioner, it looked likely the $42 billion merger would be abandoned. Submitting a final offer which he considered unlikely to be accepted, GE chairman Jack Welch complained that the European Commission's "extraordinary" demands went "far beyond" what the company could accept.
Europe's hard line contrasts with the easy ride through anti-trust approval that the merger enjoyed in the USA. US Department of Justice (DoJ) approval required GE only to divest Honeywell's helicopter engine business and give some engine maintenance work to a rival. If the decision is any guide to competition policy in the USA then it would appear to have lurched to the right under the Bush Administration.
The EC has been pushing GE to divest large parts of Honeywell's avionics business and either spin off leasing arm GE Capital Aviation Services (GECAS) or modify its competitive behaviour. Reports put the value of the divestitures sought by the EC at $6 billion, or a quarter of Honeywell's annual sales.
GE's final proposal included $2.2 billion in divestitures and an offer to set up GECAS so that it could only deal with Honeywell "at arms length". But GE, as expected, refused to give up ownership and control of GECAS.
The USA and EC have previously co-operated closely on merger policy and avoided damaging splits. It is to be hoped the GE/Honeywell merger has not highlighted a fissure in anti-trust thinking in the USA and Europe which would have major implications for companies contemplating domestic and transnational mergers.
The DoJ's anti-trust review process is concerned mainly with the impact of a merger on domestic US customers. The process can be very market-specific. The Department of Defense was concerned about competition on future helicopter engines, and GE's business was the biggest of the two, so Honeywell's had to go.
The EC's concerns are much broader, and deeper. For Europe, issues like the regional jet engine are an aside. The only way GE was likely to make the $6 billion cuts demanded by the EC was to do something radical with GECAS. At the heart of this debate is concern about the policy of the world's largest owner of civil aircraft only buying aircraft fitted with GE engines. Extend this to Honeywell and it is clear:
Europe's concern over the issue of bundling avionics, services and engines in a package backed by huge financial clout requires an answer from GE that is not addressed by the US giant's offer on GECAS.
While the USA rails at the EC, it is worth remembering the bundling issue is not dissimilar to the vertical integration argument put forward by the DoD when it rejected Lockheed Martin's merger with Northrop Grumman in the 1990s. The DoJ did not see this aspect of a combined GE/Honeywell as anti-competitive - despite the fact the merger would give GE more products to finance and service - because the USA views such market prowess as a benefit to customers, providing lower prices and better service.
But if the EC's concerns are based on the belief that GECAS already harms competition by only buying and leasing aircraft fitted with GE engines, or that GE's financial muscle already enables it to strike exclusive engine supply deals with Boeing, then the anti-trust process is currently the proper venue to address these issues.
Rather like the effect the Lockheed Martin/Northrop Grumman decision had on US defence industry mergers, maybe the EC has drawn a line in the sand on competition beyond which the global aerospace players cannot, for the time being, go. But, surely the proper way to ensure GE and GECAS are not anti-competitive is for EC and US regulators to renew their co-operation and agree common guidelines to regulating mergers in this industry which is clear and unambiguous to all parties.
Source: Flight International
