GE-Honeywell and the European Union Revised: September 17, 2001 In October 2000, General Electric Co. (GE) announced that it had agreed to acquire Honeywell International Inc. in a tax-free merger valued at US$41 to US$45 billion plus debt, the largest acquisition in GE’s corporate history. GE expected the acquisition to be completed in early 2001, and to lead to double-digit growth in company earnings per share in the first full year, excluding one-time charges. GE planned to use the “GE-Honeywell” brand name in some key product lines. This was expected to be a major move for GE, with CEO Jack Welch agreeing to stay on at the company until the merger was complete (he had originally planned to retire in April 2001). Honeywell New Jersey-based Honeywell is a diversified technology and manufacturing company with strengths in business areas from avionics and power systems to automated control systems and chemicals and materials. The company operates in 95 countries and employs 120,000 people. General Electric GE is a highly diversified industrial and financial company, whose major product lines include appliances, lighting products, aircraft engines, plastics, broadcasting, and a wide range of financial services. GE employs 340,000 people in more than 100 countries and has anticipated current year revenues of US$130 billion – about six times those of Honeywell. GE-Honeywell and the European Union When GE announced plans to acquire Honeywell International it looked like a marriage made in heaven. Both companies appeared to be on the way to a happy union when the antitrust division of the U.S. Justice Department gave its blessing to what would have been the largest industrial acquisition ever. However, the merger ran into difficulty when Mario Monti, the European Union’s competition commissioner, vetoed it. At the last minute, GE made concessions to the EU and the 20-member European Commission (EC), the EU’s executive arm, and Honeywell made concessions of its own to GE. Ultimately, they were not enough to salvage the deal. While little is new about the EC exercising oversight over US firms, there was talk that Monti was primarily acting, not on the merits of the case, but at the urging of GE’s European competitors, who were less than eager to see the merger approved. The case Firms and MarketsMini-CaseGE-Honeywell Page 2 even attracted the attention of politicians. US President Bush and two US senators expressed concern about the EC’s opposition to the merger. However, European companies themselves have said that they can’t believe how rigid Monti is in applying antitrust rules consistently in all cases. Unfortunately, Monti did not help his case by offering different reasons at different times for his opposition to the merger. The multiple explanations gave the appearance that EC officials were making up antitrust rules as they went along. At first, the EC said it didn’t like the fact that GE and Honeywell wanted to bundle GE’s aircraft engine business and Honeywell’s avionics business because bundling would harm GE’s competitors. GE countered by successfully criticizing the theory that bundling was anti-competitive. Then the EC changed its mind and said that it was concerned that GE’s aircraft-leasing business – GE Capital Aviation Services, or GECAS – would make things difficult for GE’s competitors. European authorities insisted that GE sell $4billion of its avionics business to its competitors. GE had initially wanted to sell only $1 billion of the avionics unit, but agreed to meet the EC halfway by agreeing to sell $2.2 billion. But the EC then changed its mind once again, saying it wanted GE to sell $7 billion worth of avionics so that its competitors would be in a stronger position to compete with GE. In addition, Monti announced that he wanted GE to sell 20% of GECAS in the open market. It seemed to GE that what the EC wanted has been a moving target. GE’s Welch initially balked at the EC’s demands, and it appeared that the merger’s prospects were bleak. However, GE unveiled an 11th-hour counter-proposal, offering to sell 19.9% of GECAS in a private placement to non-competitors. Monti rejected this proposal as not enough to address his concerns. On June 28, 2001, EC officials voted to endorse Monti’s recommendation that the merger be rejected. A day later, Honeywell CEO Michael Bonsignore wrote a letter to Welch offering to accept $1.8 billion less than previously agreed so that GE would be compensated for money it would lose by selling 199% of GECAS. Welch responded that the regulators would not be swayed by the offer, that the EC’s demands cut “the heart out of the strategic rationale for our deal,” and that Honeywell’s offer “makes no sense for our shareowners, for the same strategic reasons.” On July 3, 2001, EC members officially rejected the merger and vetoed GE’s bid for Honeywell. Conclusion In calling attention to the differences in the criteria used by US and European antitrust authorities to assess mergers and acquisitions, the GE-Honeywell case underscores the need for more serious discussion about how regulators around the world need to work more closely on antitrust cases to avoid confusion and chargers of protectionism. A variety of solutions, all with strengths and weaknesses, have been floated. Examples include creating rules for competition policy within the World Trade Organization or establishing a global body to oversee antitrust issues.GE-Honeywell Page 3 Questions for Analysis (a) Why is the European Commission worried about GE-Honeywell merger? (b) Why does the EC focus on the effects that a proposed merger would have on the competition, while U.S. antitrust officials concentrate on the effects it would have on consumers? (c) Who would the gainers/losers of the GE-Honeywell merger have been? (d) What are the pros and cons of establishing a global antitrust