Case Study 2–8.

GE’s Aborted Attempt to Merge with Honeywell

Many observers anticipated significant regulatory review because of the size of the transaction
and the increase in concentration it would create in the markets served by the two
firms. Nonetheless, most believed that, after making some concessions to regulatory
authorities, the transaction would be approved, due to its widely perceived benefits.
Although the pundits were indeed correct in noting that it would receive close scrutiny,
they were completely caught off guard by divergent approaches taken by the U.S. and
EU antitrust authorities. U.S regulators ruled that the merger should be approved because
of its potential benefits to customers. In marked contrast, EU regulators ruled against the
transaction based on its perceived negative impact on competitors.
Background
Honeywell’s avionics and engines unit would add significant strength to GE’s jet-engine
business. The deal would add about 10 cents to GE’s 2001 earnings and could eventually
result in $1.5 billion in annual cost savings. The purchase also would enable GE to
continue its shift away from manufacturing and into services, which already constituted
70 percent of its revenues in 2000 (Business Week, 2000b). The best fit is clearly in the
combination of the two firms’ aerospace businesses. Revenues from these two businesses
alone would total $22 billion, combining Honeywell’s strength in jet engines and cockpit
avionics with GE’s substantial business in larger jet engines. As the largest supplier in the
aerospace industry, GE could offer airplane manufacturers “one-stop shopping” for
everything from engines to complex software systems by cross-selling each other’s
products to their biggest customers.
Honeywell had been on the block for a number of months before the deal was consummated
with GE. Its merger with Allied Signal had not been going well and contributed
to deteriorating earnings and a much lower stock price. Honeywell’s shares had
declined in price by more than 40 percent since its acquisition of Allied Signal. While
the euphoria surrounding the deal in late 2000 lingered into the early months of 2001,
rumblings from the European regulators began to create an uneasy feeling among GE’s
and Honeywell’s management.
Regulatory Hurdles Slow the Process
MarioMonti, the European competition commissioner at that time, expressed concern about
possible “conglomerate effects” or the total influence a combined GE and Honeywell would
wield in the aircraft industry. He was referring to GE’s perceived ability to expand its influence
in the aerospace industry through service initiatives. GE’s service offerings help differentiate
it from others at a timewhen the prices of many industrial parts are under pressure from
increased competition, including low-cost manufacturers overseas. In a world in which
manufactured
products are becoming increasingly commoditylike, the truewinners are those able
to differentiate their product offering. GE and Honeywell’s European competitors complained
to the EU regulatory commission that GE’s extensive service offering would give it
entre´e into many more points of contact among airplane manufacturers, from communications
systems to the expanded line of spare parts GE would be able to supply. This so-called
range effect or portfolio power is a relatively new legal doctrine that has not been tested in
transactions the size of this one (Murray, 2001).
U.S. Regulators Approve the Deal
On May 3, 2001, the U.S. Department of Justice approved the buyout after the companies
agreed to sell Honeywell’s helicopter engine unit and take other steps to protect competition.
The U.S. regulatory authorities believed that the combined companies could sell
more products to more customers and therefore could realize improved efficiencies,
although it would not hold a dominant market share in any particular market. Thus, customers
would benefit from GE’s greater range of products and possibly lower prices, but
they still could shop elsewhere if they chose. The U.S. regulators expressed little concern
that bundling of products and services could hurt customers, since buyers can choose
from among a relative handful of viable suppliers.
Understanding the EU Position
To understand the European position, it is necessary to comprehend the nature of competition
in the European Union. France, Germany, and Spain spent billions subsidizing their
aerospace industry over the years. The GE–Honeywell deal has been attacked by their
European rivals from Rolls-Royce and Lufthansa to French avionics manufacturer
Thales. Although the European Union imported much of its antitrust law from the United
States, the antitrust law doctrine evolved in fundamentally different ways. In Europe, the
main goal of antitrust law is to guarantee that all companies be able to compete on an
equal playing field. The implication is that the European Union is just as concerned about
how a transaction affects rivals as it is consumers. Complaints from competitors are
taken more seriously in Europe, whereas in the United States it is the impact on consumers
that constitutes the litmus test. Europeans accepted the legal concept of “portfolio
power,” which argues that a firm may achieve an unfair advantage over its competitors
by bundling goods and services. Also, in Europe, the European Commission’s Merger
Task Force can prevent a merger without taking a company to court. By removing this
judicial remedy, the European Union makes it possible for the regulators, who are political
appointees, to be biased.
GE Walks away from the Deal
The EUauthorities continued to balk at approving the transaction withoutmajor concessions
from the participants, concessions that GE believed would render the deal unattractive. On
June 15, 2001, GE submitted its final offer to the EU regulators in a last-ditch attempt to
breathe life into the moribund deal. GE knew that, if it walked away, it could continue as it
had before the dealwas struck, secure in the knowledge that its current portfolio of businesses
offered substantial revenue growth or profit potential. Honeywell clearly would fuel such
growth, but it made sense to GE’s management and shareholders only if it would be allowed
to realize potential synergies between the GE and Honeywell businesses.
GE said it was willing to divest Honeywell units with annual revenue of $2.2 billion,
including regional jet engines, air-turbine starters, and other aerospace products.
Anything more would jeopardize the rationale for the deal. Specifically, GE was unwilling
to agree not to bundle (i.e., sell a package of components and services at a single
price) its products and services when selling to customers. Another stumbling block
was the GE Capital Aviation Services unit, the airplane-financing arm of GE Capital.
The EU Competition Commission argued that that this unit would use its influence as
one of the world’s largest purchasers of airplanes to pressure airplane manufacturers into
using GE products. The commission seemed to ignore that GE had only an 8 percent
share of the global airplane leasing market and would therefore seemingly lack the market
power the commission believed it could exert.
On July 4, 2001, the European Union vetoed the GE purchase of Honeywell, marking
it the first time a proposed merger between two U.S. companies has been blocked
solely by European regulators. Having received U.S. regulatory approval, GE could
ignore the EU decision and proceed with the merger as long as it would be willing to
forego sales in Europe. GE decided not to appeal the decision to the EU Court of First
Instance (the second highest court in the European Union), knowing that it could take
years to resolve the decision, and withdrew its offer to merge with Honeywell.
The GE–Honeywell Legacy
On December 15, 2005, a European court upheld the European regulator’s decision
to block the transaction, although the ruling partly vindicated GE’s position. The
European Court of First Instance said regulators were in error in assuming without sufficient
evidence that a combined GE–Honeywell could crush competition in several
markets. However, the court demonstrated that regulators would have to provide data
to support either their approval or rejection of mergers by ruling on July 18, 2006, that
regulators erred in approving the combination of Sony BMG in 2004. In this instance,
regulators failed to provide sufficient data to document their decision. These decisions
affirm that the European Union needs strong economic justification to overrule crossborder
deals. GE and Honeywell, in filing the suit, said that their appeal had been made
to clarify European rules with an eye toward future deals, as they had no desire to
resurrect the deal.
Discussion Questions
1. What are the important philosophical differences between U.S. and EU antitrust
regulators? Explain the logic underlying these differences. To what extent are
these differences influenced by political rather than economic considerations?
Explain your answer.
2. This is the first time that a foreign regulatory body prevented a deal involving
only U.S. firms from occurring. What are the long-term implications, if any, of
this precedent?
3. What were the major stumbling blocks between GE and the EU regulators? Why
do you think these were stumbling blocks? Do you think the EU regulators were
justified in their position?
4. Do you think that competitors are using antitrust to their advantage? Explain
your answer.
5. Do you think the EU regulators would have taken a different position if the deal
had involved a less visible firm than General Electric? Explain your answer.