On European Mergers, Acquisitions and the European Commission
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Executive Summary
As the European Union (“EU”) grows to prominence, the European Commission (“EC”) confronts several issues; of the most important is the role of how it handles business within and without the EU’s respective boarders. One of the main areas of the EC direct oversight of business is Mergers and Acquisitions; and how the EC applies that oversight is a source of direct and constant scrutiny. But what is the European competition policy with respect to Mergers and Acquisitions? And how does the European Commission apply these policies?
Section I – Principles Gleamed from History.
With respect to Mergers and Acquisitions, the European competition policy can be seen an outgrowth of Europe’s long history of warfare and constant struggle. Unlike in America, where the individual company is paramount, driven by the will of the Independent “everyman must make his own way”, mentality, Europe has developed a social structure to protect its citizens, and to bind countries together so there is less devastating conflicts; a system to avoid its long history of Internal war. Almost all it’s conflicts has had to do with the suffering or subjection of it’s diverse people, so in protecting the Masses the EU sees competition as good for and the people and subsequently the economy at the same time.
In the EU, the European Commission is the sole body, and has exclusive rights to investigate and prevent, merger within the community dimension. When the turnover of companies involved in M&A passes a set world wide threshold, or a EU threshold, the EC is the single body that reviews these cases. Otherwise, the member states have their own legislation for investigation. This regional legislation has been adopted to also be able to investigate and halt mergers and acquisition of local companies.
In the highly capitalistic markets of the West, the words of Milton Freedman ring constantly:
The sole purpose of a corporation is to generate profit for it’s shareholders and those companies who adopt “responsible” attitudes would be faced with binding constraints that would leave them less competitive.
Europe instead has adopted a somewhat Neo-Keynesian model, mixed with Social Democracy, with a strong emphasis of Corporate social responsibility, (even if forced on the company). For the Europeans, a Merger or Acquisition cannot merely be good for the company and the economy, but must also remain competitive. There is strong evidence that competition benefits the consumer, and drives innovation and production onward.
The Countries of the EU do not believe in a version of “trickle down economics”, as many do in the West. For them a bigger company does not automatically contribute more to the economy and general welfare by producing better jobs, (even if it loses jobs in the short terms) gains more revenue, expanding wages and expanding partner industries, which completes the loop and therefore creates more jobs. The EU believes instead, a merger or acquisition has a positive effect on the market, create a companies that will hopefully reduce logistic and distribution cost, and consolidate with restructuring methods that will result in more efficient operations. These changes leads to a leaner company, that grows and innovates rapidly, expanding outwards into the world market, while protecting its workers with social programs and consumers with products efficiently developed under an economy of scale. Beyond efficient operations, many firms in the EU are also combining to counter competition from more developed nations and companies, and gain entry into new markets opened by the EMU. This process improves company and consumer, not just the company at the expense of the consumer.
Section II – Decisions, Decisions
The EU competition policy prohibits a merger that strengthens or creates a dominate position in the market, for fear the dominate mover will abuse their power, or block out new entrants into their market. In practice, While the EC has been rather firm in dealing with Mergers and Acquisitions they believe violate these rules, and have taken a strong stance towards vigorously promoting competition, they have, as all political institutions, been forced to give way to some member state interests -particularly French and Germany’s meddling in M&A, and desire to create National/Industrial Champions- if only to keep these larger members happy and promote stability across the Euro region. The EC have have blocked Mergers they believe would result in unfair competition even if approved by the West while allowing various Liberalization of Local Industries. Inshort, they have taken a decided European view in the matter of M&A.
Industrial Champions, a company that exist as the preeminent company of it’s type in a region or country, goes against the competition policy in principle. National Champions are themselves not without merit, if they existed across countries yet independent of government controls, but when the countries band together to create them, then it’s a “Legal Monopoly.” Which is often time not as regulated as a Municipality Monopoly would be. Furthermore, because its generally been created to counter outside FDI, internally in the EU it sometimes maintains a restrictive practices, blocking out competitors.
Germany and France have taken an active role in creating Industrial Champions, often going on record as to what they would like to happen in a certain industry. France has enjoyed more success in creating such powerhouse companies; Sanofi-Synthelabo and Avenis merged after France discouraged the Swiss from bidding. Air France merged with KLM Royal Dutch to create a Flag Carrier for France and the Dutch. Germany has been more unsuccessful, with several of its proposals turning actively against the government, such as Deutsche Bank not accepting a bid by Post Bank, despite government encouragement.
The EC, at the present, has only so much power over local companies, instead relying on the host Government to handle the matter, unless the threshold is crossed. When the threshold has been crossed, the EC has been encouraged to define the Market world wide (aka, vs others) so as to let the mergers go thru.
Such strong European views can be seen in the case of the GE/Honeywell Merger. The US had allowed the merger to pass muster with very little changes, however, the Merger would have created a huge powerhouse of a company in Europe, with dynamic horizontal and Vertical Acquisitions. The EC felt a lot more would have to be done to bring that merger under control.
The EC favors divestment of major shareholdings to Competitors in many of these cases to ensure competition. It did this with INA’s acquisition of Generali; both insurance companies, and with Totalfina and Elf in petroleum sector.
When it comes to Liberalization created by Mergers and Acquisitions or just Liberalization in general the State Governments have the right to invest certain amount of power in these monopolies. But to get approval or avoid scrutiny by the EC, they must “serve the general economic interest.” Even so, the EC also encourages competition in these areas. Even if the Service itself cannot competitive, it’s use maybe, such as allowing all competitors to use the same power lines to distribute energy. In a known case, The Spanish government had another telephone company paying for a right to operate in the Spanish market, while its own local Company didn’t have to pay. This payment was reversed by the EC, for two reasons. It amounted to a service tariff and second, because of the fee, the New company (Airtel Movil) could not compete as effectively against the Spanish indigenous company which didn’t have that fee.
Conclusion
In the end, the Competition Policy of the EU is very strong and applied stringently, but at its core it is still European biased when it comes to multinational companies. In 2004 it was revised to make legal proceedings easier, yet move towards a more uniform system. New rules allow for member states to take a more active roll in direct enforcement of rules and penalties that result from harm to companies or consumers because of unfair competition. The EU’s merger rules are being revised so a Company may be able to reorganize or merge horizontally with more mitigating factors and allow for the rapid pace of the modern economics. They however make a distinction where the reorganization then disturbed the competitive landscape. The EC will therefore always keep pushing the rights of the consumer and competition ahead of company rights, especially when dealing with M&A.
OceansOfThought @ June 25, 2008