The European Competition Commission (ECC), through its Merger Task Force (MTF), is charged to review the merger of companies whose combined worldwide and European revenues exceed the established threshold revenues. This threshold is $4. 2 billion. The mandate for the commission is to protect free competition and to prevent massive concentration of market power on one company, which may in the long run affect consumer interest in the European Union. The MTF will assess the competitive effects of such mergers by: 1.
Determining whether such combination will create a company that will be so powerful as to impede or stifle effective competition. 2. Determine the combined market share of the merging companies in relation to the immediate competitors (horizontal effect). 3. Evaluate the combined effects of the merging companies on the consumer, especially if they have the same consumer base (conglomerate effect). 4. Analyze the merging companies’ position as the supplier and/or customer of their immediate competitors (vertical effect). Why the deal was rejected by ECC:
General Electric (GE) held a dominant position (about 60%) in the manufacture of large jet aircraft engines. Meanwhile Honeywell held a leading position in the manufacture of avionics and non-avionics aerospace components. According to European Union Merger Regulation, mergers or acquisitions, that creates or strengthens a dominant position as a result of which effective competition will be impeded, will be prohibited. Based on this regulation, the merger as it is, unless some concessions are made, will be rejected as it impedes effective competition.
These are the findings: 1. The combined position of the two companies will create exclusionary practices that will have the effect of shutting out single line competitors. Examples are Rolls Royce in aircraft engines and Rockwell Collins in aerospace components. This may eventually lead to the exit of these disadvantaged companies. It also means new entrants will be highly unlikely as the economies of scale will be so high. 2. GE will further increase their dominance with the use of GE Capital Aviation Services (GECAS).
Currently, GE buys back aircraft from manufacturers, which it leases out to airlines. This is great, as it reduces the financial burden on these aircraft manufacturers. The problem though is that GE has a “GE only engine” policy. There is fear that this policy will also extend to the aerospace components of Honeywell if this merger goes through. This occurring will further stifle the competition and technological innovation since the aircraft manufacturers will be forced to use GE engines and Honeywell aerospace components in other to sell their finished products to GECAS. 3.
Horizontal and vertical effects of the merger will further strengthen the dominance of the merged company at the detriment of the competitors. Honeywell sold large regional jet engines, in addition to GE’s dominance in other jet engines categories. The vertical issue observed is that Honeywell is the sole manufacturer and supplier of engine starters to Rolls Royce, a major competitor of GE. What GE and Honeywell have to do for ECC to approve the merger: The pressure to approve the merger is even greater since the Department of Justice of the USA has already given it her blessing.
The goal is to protect the EU consumer, by discouraging practices that impede competition, and at same time avoid views that are divergent from that of the US regulatory counterparts. As such, the merger will be approved if GE and Honeywell will give in to some concessions: 1. Eliminate the product overlap by having Honeywell sell off the regional jet engine division. 2. Honeywell should divest its Maintenance, Repair, and Overhaul (MRO) division. 3.
GE should sell a portion of GECAS to any of the competition to reduce the overpowering effect of GE on aircraft manufacturers, which will be even be greater by merging with Honeywell. Doing this will give the aircraft manufacturers the leeway on picking the right components for their aircraft without fearing if they will be able to sell their finished product. This will also encourage innovation as the potential discrimination of GECAS buying GE and Honeywell based aircrafts will be diminished.