US and EU clash on competition

The widely anticipated collapse of one of the largest transatlantic merger attempts in history has made it clear that the European Commission's anti-monopoly officials think differently from their US counterparts. And as BBC News Online's Jorn Madslien finds out, not everyone is happy about it.

The European Commission's anti-monopoly watchdog has until 12 July to decide whether it will block or permit a proposed $42bn (£30bn) merger between the world's largest company, GE, and the giant US manufacturer Honeywell, both of which have massive operations in the EU.

Mr Pagrotsky: "We both have strong legal frameworks to protect competition, but they work a bit differently"

But as far as both GE president Jeffrey Immelt and US President George W. Bush are concerned, it is a foregone conclusion.

"The indications we have from the European Commission lead us to think the offer won't be accepted," Mr Immelt said early this week, soon after Mr Bush had said he was "concerned that the Europeans have rejected it".

Merger control authorities

A major transatlantic tiff is looming, rallying diplomatic efforts by the traditionally peaceful Scandinavians.

"We both have strong legal frameworks to protect competition, but they work a bit differently," said Leif Pagrotsky, the trade minister of Sweden which holds the current European Union presidency.

But Mr Pagrotsky's insistence that such complicated competition matters should be considered on higher plains is likely to fall on deaf ears.

Certainly, the EU would like competition issues to be discussed at the next round of the World Trade Organisation.

But with the European Commission President Mario Monti explicitly rejecting global competition rules that would require changes in national laws, progress could well prove slow.

The US stance is even tougher, with Washington having so far resisted taking competition issues to the WTO.

Merger mania

And yet, the problem is not likely to go away.

Large cross-border mergers have become ever more frequent in the last decade.

Mr Sipling: "With increasing globalisation, more and more mergers need approval from both the US and the EC authorities"

The number of mergers notified to the European Commission has risen from about 60 per year during the early 1990s to between 200 and 300 per year less than a decade later.

The next merger wave is expected to be between US and EU companies.

"With increasing globalisation, more and more mergers need approval from both the US and the EC authorities", according to a competition expert and partner at the City law firm Berwin Leighton Paisner, John Sipling.

As a consequence, similar clashes will occur again unless the two anti-monopoly watchdogs bang their heads together pretty soon.

Similarities and differences

The starting point may appear promising: Two regulators which both aim for the same thing, namely preventing market dominance, aim to cooperate.

But as with many transatlantic conflicts, the focus is likely to be on the differences rather than on their similarities between the competition authorities.

For starters, the European Commission and the US Department of Justice operate with different rules about when a merger should be formally considered in the first place, explained Mr Sipling.

In the US, they make judgements about all mergers where one party has sales or assets of at least $100m and the other has sales or assets of $10m.

In the European Union, a deal must be almost 25 times larger than that, at 2.5bn euros ($2.1bn, £1.5bn), before the EC will look twice at it.

It may therefore appear to be easier to get a deal past the regulators in Europe.

But this is not always the case.

In fact, getting acceptance for smaller deals can be extremely cumbersome because these mergers must be cleared by the competition authorities in each EU member state that is affected, Mr Sipling said.

Definitions

Another problem facing the competition watchdogs is how to define the market that will be affected by a merger.

Mr Monti: Opposes changes to national laws

After all, without such definitions they cannot decide whether a merger will lead to market dominance.

In a recent case involving Coca Cola, the European Commission defined its market as the one for colas rather than opting for one that included a wider variety of soft drinks.

Consequently, it was decided that competition from Coca Cola would not constitute competition for, say, lemonade, mineral water, or tea and coffee.

Mr Sipling pointed out that when such narrow definitions are adopted, there are no guarantees that they will be agreed universally.

Market power

The US and the EC competition watchdogs also differ in their philosophical approach to different forms of market power - leading to some misunderstandings.

President Bush: Concerned about Europe's rejection

In one area, when it comes to what lawyers term 'portfolio power', the EU rules are tougher than those in the US.

That is when two companies combine their portfolios of products and this gives them greater market power.

This would not be the case where a brewer merges with a maker of sewing machines since the products are sold to very different markets.

But if vodka maker merges with a gin maker, there could be massive cross-selling of their products to existing clients, and this could be deemed damaging to competition.

Both the US and the EU would block mergers that would create a single market leader with a dominant market share of, say, 40%.

But take a market with, say, nine companies operating, where the number one had a 20% market share, the rest had a 10% share each.

A merger between two of the smaller companies would create a market dominated by two companies, each with a 20% market share.

The EU would be more likely to block such a situation where a merger leads to two companies dominating the market, said Mr Sipling.

Some US companies find it tricky to figure out how the EU's competition authority operates, but Mr Sipling insisted that this is "not because the EU is difficult to deal with", but rather a reflection of how these companies are familiar with US competition law.

Both are legalistic, both are prepared to negotiate with companies to find solutions, he said.