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Europe gets tough on antitrust
EU competition commissioner Mario Monti's strict stance on what constitutes monopoly power can throw CEOs for a loop.
EU competition commissioner Mario Monti's strict stance on what constitutes monopoly power can throw CEOs for a loop.
By Tim Jones
Institutional Investor Magazine
EU competition commissioner Mario Monti's strict stance on what constitutes monopoly power can throw CEOs for a loop. One surprised merger supplicant: GE's Jack Welch.
In building MCI WorldCom into a telecommunications powerhouse, Bernie Ebbers had done 60 acquisitions in less than a decade. Now the 6-foot-4 Mississippian was on the brink of the deal that was to be his crowning achievement: a $129 billion merger with Sprint Corp.
But there was one little hitch. A European Union bureaucrat based in Brussels had concluded that the merger of MCI WorldCom and Sprint, both U.S.-based companies, might have a negative impact on telecom competition in Europe. So Mario Monti, who had been EU commissioner for competition policy for just nine months, blocked the takeover.
Ebbers hastily offered to sell off Sprint's Internet and long-distance assets, but Monti was adamant that he dispose of MCI WorldCom's UUNet. As Ebbers saw it, the loss of this core Internet service provider would have destroyed the logic of the deal. So, in June 2000, he abandoned his dream merger, and MCI WorldCom is now itself considered a takeover candidate.
American, as well as European, CEOs are getting to know Europe's new antitrust czar - a silver-haired, 58-year-old Yale University-educated Italian economist - all too well. Of just 14 mergers blocked outright in the commission's roughly ten-year regulatory history, four of the thumbs-down have occurred during Monti's short watch. Along with MCI WorldCom and Sprint, disappointed would-be partners include Airtours-First Choice Holidays (both British, September 1999); Volvo-Scania (both Swedish, March 2000); and Mets? Tissue-SCA (Finnish-Swedish, January 2001).
But that hardly tells the whole antitrust tale. To avoid having to choose between a Monti veto and conditions that the companies' CEOs deemed too onerous, Norway's Aker Maritime pulled its takeover of Anglo-Norwegian shipbuilder Kvaerner in December 2000, and EMI Group and Time Warner abandoned the $20 billion melding of their music businesses in October 2000.
The latest U.S. CEO to cross paths with Monti is General Electric Co.'s Jack Welch. The soon-to-retire Welch assured GE shareholders that the company's impending $45 billion takeover of Honeywell International would be completed quickly. But during a courtesy visit to Monti in March, he was politely but firmly informed by the competition commissioner that, although the merger was ostensibly an all-American affair, it threatened to curb competition and hike prices in the worldwide jet-engine market.
Welch has had to abandon any hope of obtaining the commission's approval by February - as he'd once planned. He'll be lucky if Monti's blessing is forthcoming by early July. Moreover, the commissioner could well try to scuttle the deal as he did MCI WorldCom-Sprint, setting off the biggest dispute yet between U.S. officials and the EU's increasingly assertive antitrust authority.
It wouldn't be the first such imbroglio. When Monti allowed Time Warner's $111 billion combination with America Online to proceed only after forcing Time Warner to forsake its planned EMI alliance, he went too far, in the opinion of some U.S. politicians. Senators Mike DeWine and Herb Kohl, who lead the Senate Judiciary Committee's antitrust panel, wrote Monti saying that they were "troubled by the possibility that your analysis and outcomes have been influenced in part by pan-European protectionism rather than by sound competition policy."
Monti dismisses this charge out of hand during a long interview in his Brussels office. "The track record of the ten years of EU merger control shows that the commission reviews all mergers and acquisitions based on their merits and makes no distinction as to the origin of the merging companies or complainants," he insists. "The test we apply is whether or not a merger creates or strengthens a dominant position, which would leave consumers with less choice and potentially higher prices." He pointedly notes that after he had stated precisely this in his reply to the senators, they made no further specific accusations. Monti was due to expand on his views in a meeting with DeWine and Kohl during a visit to Washington in late March.
As it happens, the senators' allegations don't really bear close scrutiny, at least from a historical perspective. Of the more than 350 mergers involving one or more U.S. companies submitted to the commission over the past decade, only the MCI WorldCom-Sprint deal was blocked outright; even that ruling was not exactly a bolt from the blue. Two years earlier WorldCom lawyers had had to engage in long and difficult negotiations with the commission to secure approval for the company's merger with MCI Communications Corp. The then-competition commissioner, Karel Van Miert, prevailed upon WorldCom to go beyond limited asset sales and divest all of MCI's Internet interests so that the eventual buyer would, in effect, be able to supplant MCI in the Internet "backbone" market (the telecommunications networks and routing equipment used to deliver data traffic to and from Internet service providers).
Monti is in the Van Miert activist tradition, but he is even more zealous in seeking to derail mergers that might result in monopoly powers. Indeed, he has proved to be by far the toughest of the three competition commissioners who have successively shaped inchoate EU antitrust policy since 1990. That was the year the commission gained the right to vet mergers of companies, including U.S. and other foreign enterprises, with significant EU sales. Says Van Miert, now president of Dutch business school Nyenrode, "[Once the] commission [finally] became aware that it had to act as an indepedent competition authority, it became tougher and tougher over the years."
Monti, a former economics professor, takes what he calls a "more economic approach" to analyzing combinations than did his predecessors. In particular, he regularly invokes a controversial doctrine known as "collective dominance," under which mergers can be blocked even if powerful rivals would remain to provide competition in a given market. For Monti the key is whether or not eliminating even one significant competitor might conceivably induce the remaining companies in a concentrated sector to "tacitly collude" in raising prices and reducing quality and choice.
Such a putative oligopoly is very much in the eye of the beholder, contend Monti's critics. They single out as an especially egregious case of regulatory excess one of Monti's first acts: blocking British package-tour operator Airtours from acquiring a British rival, First Choice Holidays, on the basis that the takeover would have run afoul of the collective-dominance concept. The commission's reasoning puzzled M&A attorneys. The U.K. market for package holidays appears to be fiercely competitive, even cutthroat. Niche products abound, consumers can shop around, and prices for trips to southern Europe and North Africa have actually stabilized or fallen.
Yet the commission concluded that the market was highly concentrated in just four players - Airtours, First Choice, Thomas Cook Holdings and Thomson Travel Group - all "vertically integrated" companies that engage in everything from operating tours to chartering airlines to brokering plane seats. Together they control some 80 percent of the Britain-to-Europe short-haul market, the commission contended. The remainder of the market is fragmented among a plethora of small firms, none fully integrated and most with a market share of less than 1 percent, according to the commission.
"In the Airtours case, you have a highly competitive market for short-haul flights [and] tourist packages, a lot of players and loads of price competition," observes a lawyer who regularly negotiates mergers with the commission and thus did not wish his name to be used. "Historically, collective dominance can occur in a commodity market with low transparency and stable market shares. Ninety percent of all competition lawyers would never have predicted the way that case went. Now we're all being very, very careful."
Monti held that the disappearance of First Choice as a separate entity would shrink the package-tour market and also remove an alternative supplier of charter-airline seats and travel-agency services to niche operators. The last time the collective-dominance doctrine had been invoked by the commission to challenge a merger, the deal had involved a standardized product: platinum. Considerably extending the commodity concept, the commission's economists concluded that the tour operators were all high-volume, low-margin producers of a commoditylike product called "capacity," or vacation days.
"There was no predicting they'd do that," says another veteran merger lawyer, based in Brussels, who also prefers to remain anonymous. "The commission did some interesting things in that case that were highly questionable. There was no knowing which market they would identify for finding collusive effects." Airtours has appealed the decision to the European Court of Justice's fast-track court, the Court of First Instance, but no judgment is expected until next year at the earliest.
Although Monti's predecessor Van Miert used collective dominance to block the combination of the two platinum producers (Lonrho and Gencor) in 1996, he was generally reluctant to wield so blunt an instrument, even in areas where he identified the potential for oligopoly: oil production and refining, auditing and accounting services for multinationals and jet-engine manufacturing, to name a few. Monti, by contrast, has deployed the doctrine not only to check Airtours, but also to thwart the EMI-Time Warner deal on the grounds that the combined companies would have created "a collectively dominant position in national European markets for recording music." He invoked the doctrine again in March 2000 when he prohibited automaker Volvo from acquiring Swedish rival Scania, a specialist in trucks, buses and engines.
"Collective dominance is an additional complication," says the Brussels lawyer. "The problem with the theory is that it's based on economic analysis, which is not a precise science and is therefore often ill defined."
Monti's power is greater than that of earlier competition commissioners in part simply because the merger scene has gotten so much busier. As tax and border controls between EU countries have fallen and a single currency has emerged, a merger wave has swept Europe, engulfing such traditional industries as coal, oil, paper and steel. Formerly unthinkable deals, such as Vodafone AirTouch's hostile takeover of Germany's Mannesmann and Olivetti's acquisition of state-owned Telecom Italia, have helped to foment a merger-friendly culture. Announced M&A deals soared from $280 billion in 1996 to $1.1 trillion in 1999 and reached $892 billion in a comparatively sluggish 2000.
As the EU's antitrust czar, Monti is responsible for directing the work of a 400-strong Competition Directorate-General - known in Brussels-speak as "DG Competition" - and its specialist merger task force. He and his staff set policy goals and oversee negotiations with companies seeking regulatory clearance for deals. The commission has the right to investigate mergers of companies based within a single EU state, provided the deal meets the usual thresholds and would have a "significant impact" on a number of EU countries (hence the review of Volvo-Scania). However, the commission does have the flexibility to pass an inquiry back to a national merger authority at the latter's request.
This last happened in August 2000, when U.K. Trade & Industry Secretary Stephen Byers requested that the commission relinquish authority over Belgian-Canadian beer maker Interbrew's proposed takeover of Britain's Bass Brewers, because Byers believed the deal raised special competition concerns in "distinct markets within the U.K." Monti agreed to hand over the investigation, and the U.K. ended up blocking the $3.5 billion acquisition in March in a decision that has infuriated Interbrew and the Belgian government.
DG Competition is currently reviewing four pending mergers in detail: General Electric-Honeywell; a joint bid by Hutchison Ports Netherlands and Rotterdamse Container Participatie Maatschappij for Europe Combined Terminals; German truck and engineering group MAN's proposed takeover of fellow German bus producer Gottlob Auwaerter; and the acquisition by Canada's Bombardier of DaimlerChrysler Rail Systems. Monti will make the final recommendation for approval or rejection to a committee of antitrust experts from EU member states and to the 20-member central executive committee of the commission. Although Monti can in theory be outvoted by his fellow commissioners on the executive committee, such a thing would be almost unheard of, for policy as well as for political reasons. As Van Miert notes, the other commissioners on the committee have come to accept that merger decisions should be independent.
Unlike U.S. antitrust officials, Monti, whose five-year term is renewable, doesn't ordinarily have to go to court to defend his decisions. An appeal to the European Court of Justice's first recourse, the Court of First Instance, takes at least two years, so companies rarely bother to file one.
Monti regards his mission as nothing less than preserving the gains achieved by Europe's eight-year-old economic union. Fittingly, he helped to draft the European Commission's Competition Act in the late 1980s and was a member of the Working Party that prepared Italy for the single market. An economics professor at Italy's prestigious Bocconi University for some ten years, he later served as its rector and then as president. He has been a member of the commission since 1995.
Monti retains a deep-seated belief in fostering market forces as the best way to douse inflation, in hacking back government subsidies to promote competition and in championing the spread of consumer choice. Calm and deliberative - unlike the more flamboyant Van Miert - Monti trusts in well-marshaled arguments to carry the day. His patrician style is formal. After five years at the commission - first as the commissioner responsible for policing the EU's huge internal market, then as the antitrust chief - he still addresses staff members by their surnames and academic titles.
Monti's approach tends to be painstaking, and once embarked upon a course, he's not easily deterred. His stubborn streak was on display in his handling of the deadline for abolishing the tax-free sale of alcohol and tobacco among EU states. Although the measure had been agreed to by all 15 EU members eight years earlier, the Big Three prime ministers - Germany's Gerhard Schr?der, the U.K.'s Tony Blair and France's Lionel Jospin - applied intense pressure on Monti to preserve the popular tax break. What's more, a lobbying crusade unprecedented in the EU's history sought a reprieve for retailers that stood to be hurt by imposition of the sales tax. But Monti was convinced that this traditional form of tax relief for travelers distorted market forces, as well as amounted to a subsidy of business travelers by nontravelers. He refused to bend: Tax-free tobacco and alcohol sales were abolished in 1999.
Politically, Monti can be surprisingly tone-deaf. Before he became the commissioner responsible for overseeing fair trade among EU member states in 1995, the occasional commission lawsuit against a member government for failing to implement or enforce open-market rules was either ignored or settled away from the glare of publicity before it reached the European Court of Justice. Monti, however, not only stepped up the number of such suits but publicized them as well - much to the embarrassment of several governments and often over the objections of then-commission president Jacques Santer.
Controversy over commission antitrust policy predates Monti, of course. Rows between Van Miert and former research commissioner Edith Cresson, the ex-French prime minister, were constant and notorious. She argued that Van Miert's stringent antitrust policies were preventing the creation of "European champions" - companies large and strong enough to take on the Microsofts, Sonys and Time Warners. For his part, Van Miert countered that mergers could be evaluated only according to their probable market impact in a regional, rather than a pan-European, context, despite the fact that Europe has been a common market since 1993. Argues Van Miert today, as adamant as ever: "Cresson ignored the fact that Europe is still very much about regional and national markets. That's just a fact of life. People all too often indulge in wishful thinking and pretend a market is European or global when in fact it's still regional and national."
Monti has taken this same line. In January he blocked the takeover of Finnish toilet-paper maker Mets? Tissue by Swedish rival SCA on the grounds that it would have "created or strengthened" dominant market positions of tissue producers in Denmark, Finland, Norway and Sweden and "severely limited consumer choice for tissue products, such as kitchen towels and toilet paper, and would have enabled manufacturers to raise customer prices." The impact on the entire EU tissue market would have been modest. Anxious to deflect criticism that the commission was singling out Scandinavia for special scrutiny, Monti took pains to note that the "overwhelming majority" of Nordic mergers had sailed through the commission. But the decision as to which geographic market should stand as the relevant benchmark for evaluating mergers remains a sensitive issue, and one that has not yet been fully resolved.
Instead, Monti would counsel European or American CEOs contemplating mergers that they can avoid protracted negotiations with the commission - and, ultimately, prohibitions - if, when they first put deals together, they bring in legal teams and prepare potential remedies for what are likely to be the commission's major concerns. The commission's merger task force has barely a month to examine proposed takeovers for evidence that they may lead to dominance of sectoral or geographical markets. Finding such evidence kicks off a four-month period of negotiations to address the task force's concerns.
Monti sent a clear message to CEOs and their lawyers in March 2000 when he cleared Shell Petroleum and BASF to combine their polypropylene and polyethylene interests in a joint venture after just four weeks of investigation and negotiation. To gain Monti's approval, the two companies had agreed at the outset to a complex package of concessions, from divesting a plant and a new technology business to licensing patent rights to competitors.
"Without such cooperation, it is highly unlikely that the commission's concerns about the operation could have been eliminated at this stage," declared the commission in its approval statement. Shell Chemicals CEO Evert Henkes agrees. "Perhaps the principal reason we were able to achieve this result," he says, "was because of the effort put in by both the [commission's] merger task force team and our own in-house team in identifying the competition issues in advance."
The BASF-Shell experiment gave Monti the idea of making merger reviews more predictable by issuing formal guidelines that set forth the kinds of remedies he would find acceptable for most concentration problems. Rebuffed on Time Warner, EMI took Monti's words to heart at the beginning of the year when seeking to combine with Bertelsmann's BMG Music. Months before announcing an alliance, the companies' representatives locked themselves away in negotiations with the merger task force. "Companies are always welcome to consult the commission even before publishing their wedding banns to try to avoid bad surprises," says Monti. Commission officials are available, he says, to discuss "any potential competition problems" before a deal is formally submitted to the commission.
But CEOs must recognize that the commission is loath to accept mere promises of corrective action before allowing a merger to proceed. "When a competition problem is identified," explains Monti, "we prefer structural remedies. These usually consist of asset sell-offs to remove or reduce product [or] geographical overlaps that otherwise would have created or strengthened a dominant position in Europe." But he adds that "when justified, other remedies or commitments can also be accepted, such as termination of exclusive distribution or supply arrangements, access to infrastructure or technology, or licensing arrangements."
Nevertheless, the commission staff dislikes settlements based on licensing and monitoring agreements because they're time-consuming and hard to enforce. DG Competition has been stung before by being too trusting, as staffers see it. For instance, when it cleared the WorldCom and MCI merger in 1998, the commission demanded that the companies - MCI in particular - shed their Internet businesses. MCI proceeded to sell its Internet operation to Cable & Wireless in July 1998. But within a month, the British buyer was suing MCI WorldCom, claiming that it had received 65 percent fewer leased lines than it had originally been promised. In February 1999 MCI WorldCom settled with Cable & Wireless for $200 million in exchange for C&W's dropping all litigation and regulatory complaints.
Monti told the European Parliament that "important lessons are to be drawn from this dispute in the resolution of the MCI WorldCom-Sprint deal." He was emphatic that all deals involving the disposal of assets - exactly what was to be sold and to whom - had to be settled by the time a merger received clearance by the commission.
The sort of deal that Van Miert struck with Boeing Co. three years ago to permit it to take over McDonnell Douglas Corp. is not likely to be repeated in the Monti era. The unhappy aircraft maker agreed under duress to keep McDonnell's commercial aircraft division, Douglas Aircraft Co., a separate legal entity for ten years, to avoid exclusive deals until 2007 and to concede to competitors nonexclusive licenses for patents arising from publicly financed research. Van Miert had pressed Boeing to divest itself completely of Douglas Aircraft, but he came under immense pressure from the Clinton administration and its political allies in Europe not to force Boeing to sell.
Increasingly, the competition commissioner is looking for so-called up-front remedies, under which companies come forward with ready buyers for assets they must divest. When KLM Royal Dutch Airlines and British Airways were negotiating a merger - aborted in summer 2000 - the commission didn't bother with the usual bean-counting approach of determining how many takeoff and landing slots, say, each would need to shed at London Heathrow Airport or Amsterdam Airport Schiphol. Far easier and also cleaner was simply to demand of BA and KLM that they dispose - premerger - of their low-cost carriers Go and Buzz. (Other issues, such as KLM's objection to BA's valuation of the Dutch carrier, were chiefly responsible for scuttling the deal.) The up-front approach was actually put into practice this past December when the commission authorized auto-parts maker Robert Bosch to buy Mannesmann subsidiary Rexroth - but only after Bosch had arranged to sell its radial piston pumps to a U.S. competitor, Moog.
Merger lawyers point to an obvious pitfall of this preemptive approach. "We don't know yet whether this has an effect on the price [of the asset being divested], but it does put considerable pressure on the seller and looks like a fire sale," says one. "We have been worried about the commission latching onto this for a long time." Commission staffers defend the approach as one more easily monitored and enforced than complicated traditional settlements.
Critics of the commission say that it exercises too much sway over mergers. A respected committee of Britain's House of Lords recently concluded that the balance of power in merger inquiries has tipped too far toward the commissioner and away from supplicant companies. The committee went so far as to suggest that existing merger probes could violate the European Convention on Human Rights. Article Six states that "everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law," with rights to prompt and clear explanation of accusations and adequate time to prepare a defense and to examine witnesses. If Monti shrugs this off entirely, he runs the risk of being brought before the Strasbourg-based European Court of Human Rights by an aggrieved merger party.
Fears that merger-minded companies might not be receiving a fair hearing were heightened last September when John Temple Lang resigned as the commission's chief hearing officer just four months after Monti had appointed him. The commission's three hearing officers, as senior commission officials, play a pivotal but vaguely defined role in vetting mergers. Officially, they review the formal "statement of objections" to a merger prepared by the merger task force and arrange a hearing if the parties to a merger request one. Hearing officers then draft short reports summarizing the issues and giving their own conclusions. They can present their views on all matters of substance - crucially, on whether the commission erred in defining the market affected by a merger and thereby exaggerated the anticompetitive threat.
But as of now, hearing officers' findings are strictly confidential. The reports go only to Monti - who isn't bound by their conclusions - and, if the parties appeal the final decision, to the European Court of Justice. Says ex-hearing officer Lang, who now works for a U.S. law firm: "The job of hearing officer is ineffective and unsatisfactory, because the companies don't know what the hearing officer thinks. There is no reform yet, nine months after [I resigned]."
Monti says he's begun looking into beefing up the role of hearing officers. But the House of Lords committee's recommendation that the hearing officer's report be sent to all parties concerned is unlikely ever to be adopted. More radical proposals, such as making hearing officers employees of the European Court of Justice rather than the commission, have also been struck from the near-term agenda. Jean-Fran¨ois Pons, the commission's deputy head of competition policy, informed the Lords' panel that although this was a "possibility" for the future, it would hobble hearing officers in gaining access to documents and obtaining updates on case developments.
Monti staunchly defends the fairness of the commission's current procedures. He points out once again that "the commission's door is always open" to discuss potential merger objections before a deal is even submitted. What's more, he says, "companies have the opportunity to reply to objections in writing as well as at an oral hearing before the commission takes a final view." Asserts Monti, "I believe there are enough checks on the commission's competition department, which conducts those reviews and investigations, to ensure that these rights are systematically respected and that the parties' views are duly taken into account." He adds that, as a safeguard, the commission's legal department exercises oversight of merger inquiries and that the final decision in merger cases lies with all 20 commissioners.
For Monti's predecessor Van Miert, the problem is not the commission at all - it's CEOs who don't do their homework. "There have been several operations that derailed because the CEOs concerned have not really been thinking about the competition issues," he says. "I'm still astonished that CEOs seem to be so naive." Maybe, but they tend to be fast learners where billion-dollar mergers - or nonmergers - are concerned.