Discussing the GE/Honeywell Merger in Light of the Antitrust Authorities in the US and EU

Introduction

Cross border antitrust enforcement has always been the subject of controversy, especially when comparing the economic and competitive philosophies of Europe and the United States. Since the Reagan administration in the USA, American economists have successfully managed to rationalise antitrust regulation via an array of conservative principles, derived from the Chicago School. However, despite rigorous efforts to propagate such a philosophy at an international level, the Chicago School economists failed in disconnecting the “liberal social overtones” that have been firmly established within the European Commission’s framework. On 3rd July 2001, the European Commission made a decisive move in rejecting the proposed $42 billion merger between General Electric (GE) and Honeywell. The significance of this decision lay in the fact that it was the first time that EC Competition regulators decided to block a merger between two US companies which had already been approved by the American Antitrust Regulators. Several academics have questioned that in an era of close convergence, how could the North American and European antitrust authorities have reached diametrically opposite conclusions in deciding the anti-competitive effects of what was to be the largest merger ever.

The purpose of this discussion will be to critically examine the positions adopted by the American Antitrust Authorities and the European Commission during the evaluation of the GE and Honeywell merger. The discussion has been divided into two parts, focusing on each jurisdiction to forward an understanding of the USA and EC Commission’s decision. Particular attention will be focused on the concerns that the Commission was faced with over the issue of ‘bundling’ and conglomerate merger analysis, so as to act in accordance with its governing statutes and regulations.

US decision

American merger review is founded upon the Clayton Act, prohibiting acquisitions which may possess effects “substantially to lessen competition, or to tend to create a monopoly.” Proposed mergers are reviewed by the Antitrust Division of the Department of Justice (DOJ) where attention has been diverted primarily towards horizontal mergers examining ‘points of overlap’ that might allow a firm to enjoy a dominant share in some markets. The DOJ seldom interferes with conglomerate mergers as US antitrust policy has abandoned any interests in the conglomerate effects of mergers for over thirty years. Instead, focus is placed on how a merger would impact customers, increase prices and decrease output.
This is a significant differential factor between the EU and the United States. The theory dates back to the traditional leverage theory of bundling. In the United States, conglomerate analysis has evolved to a much narrower scale. This was discussed extensively in a report where it was posited that the EU approach to the treatment of conglomerate mergers was synonymous to the US approach during the 1960s. In the 1960s, mergers were considered ‘bad if big’ and more so if they strengthened an already dominant firm. This wave receded during the 1980s and antitrust agencies revised their opinions where authorities would not interfere with any conglomerate mergers for three reasons:
a.It is difficult to ascertain conditions where a conglomerate merger would allow the merged firm the incentive to raise prices or restrict output.
b.Bundling services may actually benefit customers.
c.Significant efficiencies may be spawned, thereby satisfying the US objective of efficiency.

Consequently, the US abandoned conglomerate effects as a source for testing mergers in the 1982 US Merger Guidelines. Hence, the merger between GE and Honeywell was met with little scepticism by the Antitrust Authorities. The only ‘horizontal overlap’ that the authorities could find was in the production of US military helicopter engines. GE and Honeywell were the two premier manufacturers of US military helicopter engines. This particular market was narrowly defined in contrast to the market definition provided by the EU. In the US the market was defined according to the US military helicopter engines and maintenance, whereas in the EU, the Commission examined the markets on a broader level by including markets for aerospace and power systems, large commercial aircraft engines and avionics/non-avionics products. An agreement was confirmed with the DOJ whereby Honeywell would embark on a divestiture program of its military helicopter engine business along with providing a licence to allow a new competitor to maintain and repair a selected range of its engines. On May 2, 2001, the DOJ announced:
[We have] reached an agreement in principle … resolving the Department’s antitrust concerns with the companies’ proposed $42b merger…[The] Department is requiring the companies to divest Honeywell’s helicopter engine business and to authorize a new third-party MRO service provider for certain models of Honeywell aircraft engines and APUs.”

According to Charles James, the agency had conducted an exhaustive investigation and the merger, with its compromised ‘fix it first’ remedies would become beneficial to consumers as well as offer a better range and quality of products and services at lower prices than firms could have provided individually. However, the authenticity of this information is based on James’ assertions and press statements. According to Karacan, it has been argued that nothing had been made available to support the notion that the proposed merger would benefit consumers let alone any discussions of any cognizable efficiencies. Additionally due to the gap in communications, access to such information was often classified as per DOD standards and the United States refused to provide any explanation to this position.

Conclusively, this merger was perceived in the United States as one which offered improved products and better prices than either firm could have offered on a standalone basis. Briggs and Rosenblatt also suggest that this proposed merger would provide competitors with an additional incentive to improve their product offerings, thereby satisfying the essence of competition.

However, the ECO was not willing to accept the same compromise and as a result it became the first proposed merger that was stopped by an international authority after being approved by several others.

EU decision

The law of the European Community prohibits any “concentration which creates or strengthens a dominant position as a result of which effective competition would be significantly impeded in the common market or a substantial part of it.” Merger Regulation is administered and enforced by the Competitive Directorate of the European Commission. It is a mandatory requirement for companies to ‘pre-notify’ competition authorities for the agreement to merge. As a result, GE and Honeywell notified their merger agreement for regulatory clearance in Europe on 5th February 2001. Ensuing from this, on 1st March, the Commission embarked on an in-depth investigation which would later reveal GE’s already dominant position in the markets for jet engines for large commercial and large regional aircraft. According to Holland, the European merger review process is “arguably much more conducive than the American regulators,” whereby remedies may be negotiated for mergers that may affect competition in a detrimental manner. This suggests volumes about the discretionary freedom that the Commission enjoys where it may block a merger without proving it in an adjudicative setting. Furthermore, this provides the Commission with the ability to provide extraordinary remedies on a proposed merger additionally allowing them to explore highly speculative theories of anticompetitiveness.

In assessing the proposed merger, the Commission discovered “significant horizontal, vertical and conglomerate effects” that might have resulted from combining the assets of the two parties. On defining the market, a very wide approach was taken including aircraft engines, starters, avionics and non avionics systems. In contrast, the US approach to market definition was much narrower. Pursuant to the aforementioned standard procedure, the Commission concluded that GE’s existing position of dominance would be significantly strengthened if the merger were approved. The Commission further mentioned that no other competitor in the jet engine industry would be able to compete with the merged group in the long run and the level of dominance in the jet engine market would grow signifantly stronger in the future.

Of the various concerns of the Commission, one of the most crucial elements was the conglomerate effect of combining GE with Honeywell. By examining the former American perspective it is possible to identify certain points of divergence with respect to such an argument. Whilst US competition authorities have abandoned concerns for conglomerate mergers, the Commission believes that the “portfolio power” of mergers may be detrimental to competition. According to Mario Monti:
…[whilst] conglomerate mergers are normally not anticompetitive, under some circumstances they can lead to exclusionary effects and a worsening of competition conditions…[they] will raise concerns when they make possible that the merged entity leverages market power with the effect … [to] foreclose market one or several markets from effective competition.

The validation for such an approach is that producing such a range of additional products includes advantages beyond what might be indicated by the market share of the individual product. The merged entity’s catalogue of products would empower the group to offer attractive packages or “bundles” and an integration of systems. Also, the Commission found that such mergers are capable of employing well disguised predatory tactics against smaller competitors and even if refrained from doing so, the threat in itself could be construed as a disciplinary weapon. The parties argued that such ‘bundle’ pricing practices were uncommon in the aviation industry, insinuating that the Commission was making a baseless argument. US regulators clearly agreed with the parties, and have overtly expressed “alarm” at the Commission’s use of such anticompetitive theories. In response to this, the Commission provided evidence that in fact, such practices occur on a frequent scale. Additionally in its decision, the Commission also expressed knowledge of Honeywell’s previous bundling practices with avionics products since its Allied Signal merger in 1998. As a result, the Commission deduced that the current competitors in the market were in no way prepared to challenge the dominant position that GE and Honeywell would assume post merger.

The Commission also expressed arguable concern over a purchasing, financing and leasing subsidiary of GE: General Electric Capital Aviation Services (GECAS). According to the decision, ten percent of total aircraft purchases are made by GECAS, making it the largest aircraft customer in the world. Holland argues that GECAS would possess the ability to create economic incentives for airframe manufacturers to favour GE products. This incentive would be created from the compensation the manufacturer would receive from GECAS through the form of potentially large aircraft sales orders. GE’s competitors were not positioned to compete at this level, providing such strategies, giving GE yet another advantage in the market.

As mentioned earlier, despite finding these discrepancies, the Commission was able to offer remedies to the proposed merger in order to nullify these anticompetitive effects. Honeywell and GE promised not to include any bundling strategies and even offered GECAS as a separate legal entity. This was immediately rejected where the Commission remarked that such behavioural remedies were still unsuitable as “[t]heir effect would be that the parties would become dominant or strengthen their dominant position but promise not to abuse it.” Intolerant over the behavioural changes, the Commission demanded larger structural changes which eventually GE would not compromise on. It is important to note that the main concern for rejecting the merger based on the above information was not entirely based on the ‘bundling’ argument. The Commission was always open to settling the matter with a remedy that would have capped the divestures of Honeywell products to below GE’s initial proposal. This would be accompanied with a further revision over the structural undertaking of GECAS. GE however, was not willing to compromise on the structural changes and this was the Commission’s most intractable concern. This led to the final blow of rejection on 3rd July 2001.

Presumably, several criticisms have been made towards the outcome of this case. One criticism of the Commission’s decision has been that EU policy focuses primarily on the competitor whilst US policy aims to protect the consumer. Commissioner Monti aptly explains that the goal of competition policy ultimately is to protect the consumer by maintaining a proficient level of competition in the common market. European experience has revealed that the best way to enjoy consumer welfare is by preserving the large number of competitors. This concern stems from the Freiburg economic schools where it is believed that individuals should enjoy economic freedom in conjunction with their political freedom. This evolved scepticism trails down to the late 19th century where it is believed that entities with too much power can be detrimental to economic and individual freedom and must hence be controlled.

Additionally, several academics have forwarded persuasive critiques, where the Commission was immune to judicial review at the time. This is a diametrically opposite feature in US Antitrust Law, where such issues are heard against a judicial backdrop. In fact, the new EC Merger Regulations do support judicial review, although in 2002, the Court of First Instance reversed the Airtours-First Choice decision on the ground that the Commission’s had not shown that the particular merger in question would create a position of dominance. This counters the latter argument suggesting that the Commission is not immune to the control of higher legal authorities

Conclusion

The Commission’s theory in relation to its decision made on the GE/Honeywell case was not based on conventional merger analysis, but it was treated on an exclusive basis. It is also important to note the constant political dialogue exchanged over the course of this decision which subliminally reflected the regional influences of either side. 2001 was an important year for the global economy, particularly in Europe where the aviation industry was at its most intense, owing largely to the combined EU efforts for the production of the Airbus A380 ‘superjumbo’ aircraft. If the GE/Honeywell merger had been granted by the Commission, it may be speculated that such a merger could lead to undesirable effects on the EU’s Airbus project with the potential bid for engines and avionics being poached from Rolls Royce and AIM GmBH to combined GE/Honeywell ‘bundled’ packages. It is interesting to note that Honeywell is also a part of the EU Airbus project which clearly indicates the eager ‘foot in the door’ that Jack Welch had hoped for in order to cap his legendary career. The decision in GE/Honeywell clearly indicates the need for a unified Antitrust policy, especially in the wake of large mergers such as GE/Honeywell and Boeing/McDonnell Douglas. The current situation is clearly unsatisfactory, especially for multinational corporations. These problems may be solved by simple mechanisms such as bilateral agreements, improved international co-operation and overall transparency. Clearly this would entail a very slow, arduous process, however there is a pressing need for enhanced co-operation amongst antitrust authorities worldwide (currently there are over 100 antitrust authorities today), especially since the contribution of the GE/Honeywell case. It is important to bear in mind that whilst economic and antitrust philosophies may continue to exist dynamically, the fundamental principle of competition must not be forgotten – the end consumer.

Copyrights Reserved
Kayaan Unwalla
Use of this paper is for reading purposes only. For use of any other purpose, please contact me first. Footnotes and bibliography will only be provided on request. Also, this paper is not to be used for plagiarising any essays or discussion papers in the Competition Law modules.

: 31 Dec 2005 01:12 |  Tags: Antitrust |  Comments (3) |  Close comments |  Report a problem

Batman Begins

Title:

Batman Begins

Rating:

I don't know where to begin with this movie (no pun intended). There are a few movies which would make you watch over and over again (Godfather, Top Gun, Incognito, Lord of War, Spy Games, Great Expectations, Seven Years in Tibet … the list goes on), but Batman Begins surely ranks in my top 5 of all time.

Let's start off by saying that this movie made me feel like a kid all over again. I don't know about you folks, but Batman for me was an obsession as a kid. I even had the underwear. So when Tim Burton comes out with the first two, with Michael Keaton, you begin to hope that the subsequent editions will include the same Batman character. Unfortunately, Joel Schumacher decided to add a disco ball effect to the following two along with a cast which almost took pride in cracking very painful jokes in the films (I know… I sound obsessive). Arnold Schwarzennegger's weapons of choice were his usual half wit accented puns which to be very honest made my testicles retract with agonising pain.

Then, after the leather and spandex nippled hype, we have Chris Nolan almost intentionally keeping it on the 'DL' before coming out with the idea of wiping the slate clean and re-defining the Dark Knight and his becoming.
To do this we need a fantastically dark yet relatively unknown actor. Christian Bale, (American Psycho) who is accustomed to playing roles where his character is torn by dual personalities decides to take on the film. To add to the intensity we have the classic fillers Michael Caine (the Nanny), Liam Neeson (the fitness instructor), Morgan Freeman (Logistics and Ancillary Services), Gary Oldman (the Good Cop Gordon) and Tom Wilkinson (the Brit with the Chicagoian wiseguy accent). I haven't mentioned much about Katie Holmes simply because I prefer Kim Basinger and I don't think any one ever came close to her.

Now, on to the movie. The film is detailed to the core, down to how Wayne gets his arm blades, the discovery of the batcave, his spelunking uniform and of course (amongst others) the Batmobile. Seriously folks, Nolan wanted to leave no stone unturned with the detail about how Wayne came about, traumatised by the death of his parents to finding his way in the mountains, training with Neeson, and back in Gotham. The story line was long but fantastic. Almost half the film goes by before you see the Batsuit. Some people criticised the length, but then again, Nolan was making up for lost talent from the last two Batman films (note to self… let the last two films go…).

The cinematography was immaculate. The aim was to make the movie dark…. and so it was. It was filmed on an almost Sepian monochromatic tone and accompanied by a sountrack (Hans Zimmer and James Newton Howard) which makes you want to buy the CD, stick it in the car, blast the volume, wear a batmask or even a balaclava and drive real fast on the M40. For once, Hans Zimmer didn't sound like Hans Zimmer if you know what I mean unless you've heard the soundtrack to Crimson Tide which has familiar tones.

Bale's performance commands enough respect for an academy nomination although you could say he was trained for it from American Psycho, coincidently playing a character by the name of 'Bateman' (last name) who is also caught between two disturbed personalities. Liam Neeson as usual trains you how to use a sword. You can't really find fault with him simply because of his imposing onscreen personality which was ideal for the character he played.

Some folks criticised the fight scenes for being too hazy and too chaotic. I agree, but I think Nolan intentionally used that effect. Think about it, if you were attacked by bats, you aren't going to see some fancy Peregrine Falcon-like swoops and manoeuvres before your eyes get poked out. When bats come at you (and I speak from the experience of a school excursion in India), they don't even know where they want to get you. That's exactly what it felt like in the fight scenes when Bale had the batsuit on. It was chaotic, barely visible but very obvious that Wayne was on another one of his masked 'crazies'. I come across as if I'm taking the mick out of the film, but that's only because I'm beginning to find some humour in it after watching it about a dozen times.

Overall, it was spectacular. I give it 6 stars out of 5 and I hope Nolan sticks to his word about the sequel. We can only hope that the last part of the film with the joker card was not some tribute to Tim Burton but instead a teaser for Nolan's next anticipated masterpiece.

Oh and by the way, here's something nifty. The tracks in the score are named after species of bats (all in Latin…).

Watch the movie folks. Then, watch it again…. then watch it again and again until we see the next one come out.

: 30 Dec 2005 05:02 |  Tags: Batman |  Comments (1) |  Close comments |  Report a problem

King Kong

Now I don't want to take a leak over any of your well thought of 'critiques', but you have got to look at the movie in its entirety. The movie was originally written as the first major block buster of all time. It was. No doubt about it.

This was Peter Jackson's way of letting our generation in on what would now appear to be crappy special effects given the advanced green screens we use today. The movie was PURE entertainment. I agree with you on the Captain and that kid from Billy Elliot (yep .. it was him). That was a bit weird, almost veering towards the typical passive sailor-sailor relationship.

Nevertheless, I think it would be silly to look at Jack Black as if he were the King of Rock or compare him to any other character from his previous movies. The guy clearly contributed to the 'Oomph' factor in the film. He was serious, as yet managed to carry out his signature expressions which made it all the more entertaining.

Re: the cinematography, I think it was fantastic. Not many talked about it. It was brilliant, almost running close to that of Batman Begins where you actually feel like you're there. The soundtrack had much to be desired for, but then again, it's very common for Musical Composers to 'signature' their music. Hans Zimmer for instance wouldn't think twice about using Lisa Gerrard for the vocals. Similarly, you can tell that this movie had a very strong parallel with the LOTR trilogy just by listening to the soundtrack. Similarly, John Williams who is loved by Spielberg loves the clang and bang of the orchestra. The same applies for a Tim Burton film where its almost gothic/fantasy. Can't disagree with that one now can we? Or not at least in general terms.

The graphics were fantastic. Except for a few bits, which could afford to get away with it… for instance .. the pole vaulting tribal on his way to kidnapping Ms. Watts. That seemed a bit primitive if you ask me, but then again, T-Rexs caught in vines trying to grab a bite pretty much makes you forget about that. The CGI team has come a long way with originality and imagination. Also hats off to the actor who played Kong. He was also the same actor who played Gollum in LOTR.

I liked the film. At least there were more positives than negatives. It's definitely something you watch and say 'WOW'. You sure as hell don't walk out looking at your girlfriend/wife/boyfriend/husband with your hand wantonly reaching your chest saying 'It's Beautiful', but you definitely say 'Wow… did you see that scene where…. yatta yatta yatta….'

Harrison, I agree with you in some respects, but on others I don't. Not because you're wrong, but perhaps because you might have taken the movie a bit too seriously for what it was. Don't get me wrong in any way, but the movie was initially intended to pack in as much grandeuse, effect and style as it did in as much was contributed towards its very own nomenclature.

Aside from that, I think Jackson is definitely looking at a nomination this year for an Academy. I would be a bit surprised if it doesn't make it.

Now I don't mean to bore any of you so I'll wrap it up. Thanks for listening though, hope I haven't offended anyone and I hope I managed to identify with you on some level.

– Kayaan

(PS. This blog may have been addressed to others from a previous entry. Don't mind the unintended exclusions. Feel free to write in :) )

: 19 Dec 2005 21:05 |  Tags: Kong |  Comments (2) |  Close comments |  Report a problem

The Life of Pi

The Life of Pi was probably one of the few books that I've read without putting it down until I finished it. Related in a story-like fashion, allowing fiction to come dangerously close to reality (down to the point where the author makes us believe that the book is a compilation of interviews) the last page of the book leaves you in quite a predicament figuring out conclusions.

The underlying theme of the book constantly relates to survival, will power and the ability to use whatever little resources you have in the best possible way. Exciting and outlandish in ideas, the book keeps you gripped to it wondering what happens next simply because you can't help imagine yourself being stranded on a boat with a tiger in the middle of the ocean.

The book starts out really slowly before it can get to the exciting bits, but in retrospect I think it was worth the build up.

Definitely worth reading if you aren't a fiction reader and interested in venturing over to that part of town.

: 02 Apr 2005 06:30 |  Tags: Book Reviews |  Comments (4) |  Close comments |  Report a problem

The Alchemist

I recently finished reading Paul Coelho's "The Alchemist" and I have to say it was a really good read.

It's the kind of book you would take with you on a long train ride, but this time actually learn something from it. As I was reading this book, I couldn't help but think about why corporate organisations haven't made their employee's read this book instead of investing millions of dollars on internal motivation projects. Apart from motivation, at certain points it was almost as if the book was making a concious effort to relate to instances that the reader has faced in the past or is likely to face in the future. You realise quite a few things along the way and will probably try to remember certain parts of the book because you feel you may identify with it strongly. What I particularly liked about the book was its constant subliminal message to the reader that when one needs something to happen, the whole universe conspires to help you in your endeavours. A little too idealistic in the real world, but then again that's what being idealistic is all about.

The downside of this book is that it becomes a bit too 'preach-ish' towards the end, especially where the Alchemist and the young man journey the desert.

I liked the book very much and would recommend it to anyone interested in being plyed with motivation.

: 02 Apr 2005 06:13 |  Tags: Book Reviews |  Comments (5) |  Close comments |  Report a problem