End of a Merger: General Electric and Honeywell
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RAY SUAREZ: General Electric’s offer last fall to pay $41 billion in stock for the Honeywell corporation would have created one of the world’s largest industrial giants.
JACK WELCH: This is the most exciting day in the 118-year history of GE, and we are going to take this company to levels that’s never been seen before.
RAY SUAREZ: But the deal was squelched today by European regulators, who feared the new company would have an unfair advantage in the airline industry.
MARIO MONTI: The European Commission has decided today unanimously to prohibit the proposed acquisition by General Electric of Honeywell. This follows an in-depth investigation in the markets for aero engines, avionics, and other components and systems. In adopting this decision, the commission concluded that the merger would create or strengthen dominant positions on several markets, and that the remedies proposed by GE were insufficient to resolve the competition concerns resulting from the proposed acquisition of Honeywell. This merger, as it was notified, would have severely reduced competition in the aerospace industry, and result ultimately in higher prices for customers, particularly airlines.
RAY SUAREZ: General Electric dominates the market for aircraft engines and servicing. GE is one of the world’s largest and most profitable companies, with annual revenues last year of $130 billion. It’s based in Fairfield, Connecticut, but has plants in more than 100 countries, employing 313,000 people. It also manufactures appliances and power plants parts, and owns the NBC Television network. Honeywell is the chief supplier for aircraft electronics for commercial jets.
Headquartered in Morristown, New Jersey, it has 125,000 employees. It also makes equipment for power generators, transportation systems and factories, and produces chemicals, plastics, and other industrial materials. It’s the first time a merger of two U.S. companies has been blocked solely by the E.U.. Last year the Europeans barred a proposed deal between telecom giants WorldCom and Sprint, but U.S. regulators also blocked that merger the next day. GE’s chairman Jack Welch had promised to postpone his retirement until the end of this year to oversee the merger. According to the “Wall Street Journal,” now that the deal has fallen through, Honeywell is ready to fire its chairman, Michael Bonsignore.
RAY SUAREZ: For more on why the merger did not succeed, we’re joined by Einer Elheuge, professor of antitrust law at Harvard Law School; Mario Calvo-Platero, U.S. Editor for “Ilsole 24 Ore,” Italy’s leading financial daily newspaper; and Janet Lowe, a financial writer and author of “Welch, an American Icon,” about GE’s chairman. Mario Calvo Platero, how did it happen that appointed European officials in Brussels, Belgium got the power to tell companies in Morristown, New Jersey and Fairfield, Connecticut that they couldn’t merge with each other?
MARIO CALVO-PLATERO: Well, I would say that the problem here is that those companies are operating in Europe and they have quite a large market in Europe so the European antitrust regulators intervene only if there is such a situation, meaning if an American company is very much of a presence in the European economy. So this is the first point. It was allowed in the same way that they did it with MCI, Sprint, WorldCom before. And they have a set of rules and regulations that sometimes are different technically and often in spirit from the American approach, and I would say everybody was hoping that in the end there might have been a solution, a friendly solution, to this deal. I think that everybody’s rather surprised, probably even Mario Monti that in the end a compromise was not possible to be found.
RAY SUAREZ: Einer Elheuge, put simply, what was the European objection to this merger going through in.
EINER ELHEUGE: Well I think there were two main differences between the European approach to this and the U.S. approach that were evident on the face of the decision. One was that they’re much more concerned about bundling than we are in the United States. Their concern is that jet engines are going to be bundled with avionics and create the kind of tie that helps both of them have a dominant position and create unfair advantages vis-à-vis their competitors. That’s interesting because that may have implications for what happens with Microsoft even if there’s a settlement in that litigation and what happens with Windows XP.
The other difference is that the Europeans are much more concerned about post-merger conduct than the U.S. counterparts are. So in this case, quite clearly in the decision they said, we don’t want to allow this merger because we’re afraid that after the merger, GE-Honeywell will say we’re not going to give you our avionics unless you take our jet engines. In the United States if you raise that kind of objection, the officials would respond, well, if that’s going to be a problem, you can always sue after the merger. Differences in Europe enforcement authority to go after conduct like that is much more limited than the United States. They don’t have this extensive regime of private enforcement. So you can’t make that answer in the United States. They often see the merger has really the last clear chance to cut these things off before the company is big enough to be able to do it.
RAY SUAREZ: And, Janet Lowe, we heard Jack Welch just a few moments ago making a very high- level commitment to the future of these two companies as one, calling it one of the most exciting days in GE’s history. How come the two companies couldn’t do what was necessary to squeeze this through the narrower portal that European regulators had provided for them?
JANET LOWE: Well I think there are two reasons. One of the reasons is that this was a last-minute decision to get into this business deal. It was very quick. It probably wasn’t as thought out. Jack Welch saw an opportunity when he was on the floor of the New York Stock Exchange doing something else. And he rushed and gathered his forces and went forward with the merger without a really good background, without a really good background check on what he was doing.
I think that he did that because he saw it as a huge opportunity. But the second reason that I this is a problem is it reflects the global nature of business today, the enormously global nature of business, and particularly the global nature of General Electric’s business. And I’d like to point out that there were two U.S. Companies, United Technologies and Rockwell International, that went to Europe to object to this merger in Europe. So there is an interesting dynamic, an interesting mix of opinions and interaction between companies all over the globe. So when any company, such as GE, which is a major player globally, takes on a big project, you know, a $41 billion project like this, they have to deal with other nations. We are not standing alone as one nation in the business world.
RAY SUAREZ: Well, toward the end when they started to get the negative reaction from the European Competition Commission, was one of the companies perhaps Honeywell more than GE or the other way around, willing to go further to make this thing work at the end?
JANET LOWE: You’re asking me, Janet?
RAY SUAREZ: Yes.
JANET LOWE: It sounded like Honeywell was really willing to go the extra step, but I do think that, you know, this is a business deal. And when you strip away the assets that GE was going to get for the price that they were going to get, there comes a point where the deal is no longer attractive to General Electric. I think it came to that point. It was a couple of weeks ago actually that the chairman-elect of GE or the new chairman of GE started saying that he thought that the deal had come to that point. So, you don’t do the deal just for the deal’s sake. There has to be economic advantages.
RAY SUAREZ: Well, Einer Elheuge, maybe we could go back to when the engagement was announced and you can help us understand why these two companies wanted to merge in the first place. What meshed about their two businesses both here in the United States and overseas?
EINER ELHEUGE: Well from their companies’ perspective there’s a wonderful synergy. There wasn’t that much overlap in the same markets. Honeywell did avionics. GE did jet engines for big planes. Honeywell actually did engines for small planes and did engine starters, so they were involved in all various important parts of making a plane but none of them the same. So there was this hope of being able to integrate them all into one package and achieve lots of efficiencies and synergies from doing so.
One interesting side light to this opinion is even though they have a different decision, reached a different decision from the United States’ authorities, they made it very clear in the E.U. decision that it wasn’t because they were protecting competitors at the expense of competition. Along… It was long interpreted that E.U. law wasn’t as focused on consumer welfare as it was on protecting competitors themselves. And the opinion basically vehemently denies it and says we’re not concerned about protecting competitors. We just see that in the long run this kind of bundling that the Jack Welch as a synergy creates a big anti-competitive threat.
RAY SUAREZ: So when you say protecting competitors you mean Europe’s so-called national champions, the well known multi-nationals, Phillips, Thompson and so on, Renault?
EINER ELHEUGE: Yes, any European firm that might make avionics or jet engines. So if, for example, you combine jet engines and avionics and you’re able to sell it more cheaply and nobody else can compete with you, under U.S. Law that’s not a problem because we don’t care if the firm is begin as long as in the end consumers get lower prices. It had been understood that the Europeans might care about such a dominant position even if it resulted in lower prices for consumers. But this decision suggests that they’re moving away from that so even though we have this stark conflict and results, underlying it is a certain amount of convergence on methodology.
RAY SUAREZ: Mario Calvo Platero, Treasury Secretary Paul O’Neill referred to it as “off the wall,” the possibility that European regulators might reject this merger. There’s talk that now there may be enhanced scrutiny on this side of the Atlantic of proposed European mergers. Does this set a dangerous precedent in this kind of law?
MARIO CALVO-PLATERO: I would say that there is definitely that risk. And I think it’s a risk that should be avoided. Just a few minutes ago I’ve learned that the senior official at the Treasury has said that he is planning to discuss the issue in the forth coming G-7 meeting that will be first in Rome and in Genoa in a couple of weeks. So the whole issue may be brought to the political level but I think if a political discussion should happen, it should be to try to understand where the differences are and to start to work towards modernization of the system rather than to start fighting on protection and counter protection measures.
Let’s not forget that the U.S. has taken very often very aggressive steps with several protectionist measures. Let’s just remember the Helms-Burton, for example, which applies unilaterally extraterritorial protection measures that was taken just for internal political reason to take care of the votes in Florida. There are many other instances — just recently the walls of steel industry protection measure. If their response will be harsh just to say they are wrong, we are right I think is not going to be constructive.
I think it’s more important that they discuss and maybe start to address a debate on how to solve this problem, for example, within the World Trade Organization there has been a debate to do that and there has been several proposals, Mario Monti himself has suggested that there is a need for a global competition forum and that countries and governments should start discussing that possibility. So if the discussion is to avoid the difference and move towards modernization, I think that’s a good step. If it is to take countermeasures, I think it’s a negative step.
RAY SUAREZ: Janet Lowe as a Jack Welch biographer, is this a tough note for him to end his celebrated career upon?
JANET LOWE: I’m sure that he wished it had turned out otherwise. It would have been a great coup to have a fireworks ending on the Fourth of July and that didn’t happen. On the other hand,, you know, Jack Welch is an enormously strong personality. At 65 he has high energy, lots of drive. I’m sure it is going to be difficult for him to leave GE, a company that is very involved with his ego. But he’s also a pretty balanced guy. I think that he knows that this is, you know, this is time to go. But I’d like to add one thing.
RAY SUAREZ: Quickly.
JANET LOWE: Over years he’s told his managers to take a swing and if you miss you won’t be penalized. We just want you to try. If something comes up, try it. So that’s what he’s done. He’s done what he’s told his people to do.
RAY SUAREZ: Janet Lowe, Mario Calvo Platero and Einer Elheuge, thank you all.