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Antitrust review of trans-Atlantic mergers has been transformed from an esoteric exercise to the stuff of front page news and op-ed sections thanks to one defining moment in July, when the European Commission shot down General Electric’s $42 billion acquisition of Honeywell. In the aftermath, Americans are asking how a foreign authority could scuttle a deal that involved only U.S. companies and that the Justice Department and about a dozen other competition authorities had approved with modest concessions. From a competition policy perspective, however, that the EC prohibited GE/Honeywell may ultimately prove less important than why it did. U.S. and EC regulators reached conflicting outcomes in GE/Honeywell based not on different market conditions (the affected markets were global) or even, to a large extent, different judgment calls on common principles, but because of a parting of ways on fundamental doctrine. The EC relied substantially on the “range effects” doctrine (also referred to as the “portfolio power” doctrine), which has been gaining some momentum in EC cases but had never before been applied to prohibit any merger outright, much less one affecting global markets. This range effects doctrine, as applied in GE/Honeywell, is antithetical to modern U.S. antitrust policy. The doctrine prohibits mergers that the United States views as pro-competitive for the very same reason that the EC opposes them: because they will generate lower prices for consumers and require competitors to work harder to keep up. In so doing, the doctrine clashes with time-tested, core principles that had guided merger regulation on both sides of the ocean. Unfortunately, the harm to consumers and competition itself from the misconceived range effects theory will extend far beyond the European Union. As GE/ Honeywell showed, with multinational merger review, a single jurisdiction is able to impose its views on the rest of the world. Continued reliance on range effects threatens to undermine the cooperation and harmony that has made merger review a model for trans-Atlantic regulation — to the detriment of consumers, businesses, and competition worldwide. PARADOX OF EFFICIENCIES Under the range effects theory, the EC may prohibit a merger because it will produce a company with a stronger range — or portfolio — of complementary products, thereby creating a more efficient competitor able to offer lower prices, better products, or convenient one-stop shopping. In GE/Honeywell, the EC was concerned that the combination of a manufacturer of jet aircraft engines with a supplier of avionics (aircraft electronic systems) would be able to offer a bundle of products at lower prices than those charged when the products were sold separately. The new and improved GE might then gain market share from, or even drive from the market, rivals offering only engines or avionics that were unable to match GE’s prices or quality. In some cases, but less so in GE/Honeywell, the range effects theory is also grounded in concern that a merged company might someday engage in illegal tying by refusing to sell a product in which it has monopoly power to customers that decline to buy the newly acquired complementary product. The perverse implications of range effects theory can easily be seen using a hypothetical merger between makers of, say, televisions and DVD players. One can imagine many potential efficiencies here. The merger might promote: (a) product integration, such as common input/output alignments, remote control devices, and cabinet designs; (b) economies of scale and scope, by allowing one plant and common machinery to produce, and engineers to apply their skills to, both products; (c) distribution efficiencies, by dedicating a single sales force and delivery fleet to promote and deliver both products; (d) one-stop shopping, which would allow wholesalers and retailers to save transaction costs by sourcing TVs and DVD players from a single supplier; and (e) discounting, by, say, suppliers that formerly sold only TVs but now have incentives to offer discounts on TVs to customers who also buy DVD players. These and other possible efficiencies create a win-win proposition for the company and customers alike: The company can offer more desirable and cheaper TVs and DVD players; customers get better products more cheaply and will also get better offerings from other competitors striving to keep up. The only losers are sellers of DVD players and TVs that do not match such improvements and therefore lose market share. But under range effects theory, this deal and all its benefits can be sacrificed in the name of mere speculation that those inferior competitors could become marginalized or leave the market. MOVING CLOSER TOGETHER Ironically, range effects doctrine harks back to theories that were briefly popular in the United States in the 1960s, under which the Justice Department and the Federal Trade Commission challenged mergers of complementary product-makers that would supposedly create an unduly effective competitor and mergers that would create a structure possibly conducive to future exclusionary conduct. With experience, these theories were discarded in the United States, and, until quite recently, they played little role in EC merger enforcement. Indeed, despite very different legal, economic, and political traditions, the two jurisdictions have shared principles of sound competition policy and made extraordinary progress toward substantive convergence. Although their doctrines differ somewhat at the margins, both jurisdictions focus on two ultimate concerns: � By combining horizontal competitors, would the transaction allow the company to restrict output and raise prices above or reduce quality below competitive levels, either unilaterally or in coordination with other suppliers? � By combining companies in a vertical relationship, would the merger impede competition at the upstream or downstream level, and thereby leave the new company free to exercise market power? Even in Boeing/McDonnell Douglas, the most acrimonious U.S.-EC merger conflict before GE/Honeywell, the differences in judgment (or, more cynically, in politics) were confined to horizontal and vertical issues. Similarly, when the FTC blocked the Air Liquide/BOC Group merger last year after the EC had approved the deal, it did so based not on doctrinal differences but because market conditions in the United States and the European Union differed. The most significant remaining substantive difference has concerned the treatment of efficiencies, but even this cannot explain the divergence over range effects. U.S. antitrust agencies will approve a merger that may create market power if it simultaneously promises to lower production costs so substantially that it will not lead to increased prices or reduced quality. The EC does not recognize such an efficiencies defense. But a merger of companies offering complementary products (like GE/Honeywell) does not call for any balancing of market power against productive efficiencies. Because the parties neither compete nor have a vertical relationship, there is no potential for output restriction-indeed, the efficiencies from the deal are likely to increase output. Thus, the EC’s rejection of an efficiencies defense to an otherwise anti-competitive merger cannot explain its embrace of range effects theory, which condemns mergers because they create efficiencies. CONFLICT AT THE CORE Range effects theory can be justified, if at all, only on the ground that merger policy needs to protect competitors from market forces to ensure that they are not marginalized or forced out of business. If competitors are marginalized or leave the market, the story goes, the merged company will be free to increase prices or reduce quality. But this rationale confounds fundamental principles that have served both the United States and the European Commission well up to now. First, the theory turns competition policy on its head by transforming it from an instrument for removing barriers to competition to a means of protecting competitors from competition itself. Competition works because it makes each supplier respond to its rivals’ lower prices or better quality with improvements of its own; this continuous cycle of improvement and response drives prices down and quality up. Prohibiting mergers based on range effects stops the process in its tracks by discouraging efficiency-creating deals that would spur on competitors. The message is corrosive: Competitors may be better served by seeking protection from regulators rather than bettering their own offerings. Second, range effects theory denies customers certain and immediate lower prices and better products based on speculative, long-range concerns that competitors might someday leave the market if they cannot match the merged company’s offerings, and that the merged company might then exercise market power if actual or threatened entry did not constrain it. For good reason, both EC and U.S. merger reviews have traditionally focused on likely short- or medium-term effects rather than distant possibilities. It is, for example, no answer to antitrust concerns to argue that entry in five or 10 years will restore competition; consumers will suffer in the meantime and entry far down the road may prove a mirage. Similarly, it makes no sense to deny consumers immediate benefits from an efficiency-creating deal based on long-range concerns about competitor marginalization or exit that may never happen. Furthermore, insofar as potential tying is the concern, the theory makes even less sense. Any tying can be addressed if and when it occurs under laws specifically aimed at tying arrangements. Third, the EC’s theory undermines the salutary predictability that stems from focusing on horizontal and vertical issues. Businesses considering mergers involving complementary products will now have to ask whether the deal promises so many efficiencies and consumer benefits that it may be prohibited. Indeed, the premise behind range effects is so unbounded by basic competition theory and economics that it seemingly could be applied to any merger that creates a superior competitor through efficiencies. Why, for example, shouldn’t the same thinking apply to bar a merger that joins a superior manufacturer with a technology leader? BRINGING ORDER TO DISAGREEMENT Nonetheless, if the EC’s reliance on range effects theory affected only the European Union, it would be of limited practical consequence to the United States. As GE/Honeywell demonstrates, however, in a deal involving global markets, one jurisdiction applying overly restrictive theories can impose its policy choices on the rest of the world. The veto power that EC and U.S. regulators have over deals that affect consumers globally makes convergence on basic principles especially important. But we should still recognize that there may be occasions when we agree to disagree. What we need is a decision rule that will minimize the extent to which any jurisdiction imposes its values on others and that will provide a neutral principle to determine who should defer. Perhaps we can borrow from conflict-of-law principles to determine whose law should apply to a global merger. Under this approach, if a merger affects consumers the same way worldwide, the law of the jurisdiction with the most connections to the merger will apply. In GE/Honeywell, this would have been the United States: Both companies were American; the complaining competitors were fairly evenly divided between the United States and Europe; and Europe accounted for less than a quarter of the sales of the products at issue. In another case, EU contacts may predominate, and the United States would defer. Such a decision rule would ensure that the jurisdiction with the most restrictive law does not prevail simply because it can. Such a rule would lend balance and order to multi-jurisdictional review. In the aftermath of GE/Honeywell, and absent either complete substantive convergence or more willingness to take international comity into account, there is too great a danger that trans-Atlantic merger review will cease being a facilitator of efficient globalization and become an impediment. U.S. and EC regulators might conclude that they were no longer working toward common goals and stop cooperating; political pressure to retaliate could build; and merger review might degenerate into a game of tit-for-tat in which each jurisdiction protests that the other is killing deals for political, rather than policy, reasons. One need only observe the tension in trans-Atlantic trade relations — with all the accusations of protectionism and retaliatory tariffs — to see where that could lead. Fortunately, there are signs that the EC recognizes the importance of not allowing this disagreement to lead to a long-term rift. Mario Monti, the EC commissioner for competition policy, has already invited bilateral discussions on novel theories (like range effects) in the interest of promoting greater convergence. However it is done, it is crucial that the United States and the European Commission avoid future divergences in approach of the kind that occurred in GE/Honeywell. If the EC and U.S. antitrust agencies grow apart in their substantive standards, it will greatly increase the uncertainty that businesses face when contemplating transnational mergers. Companies will react by limiting the scope of mergers or by avoiding efficiency-creating deals altogether. The resulting distortion of competition and lost efficiencies are a price that consumers and businesses throughout the world cannot afford. William J. Kolasky is a partner and co-chair of the antitrust and competition practice group, and Leon B. Greenfield is counsel, in D.C.’s Wilmer, Cutler & Pickering. Kolasky and Greenfield counsel clients on mergers and acquisitions, antitrust investigations, and antitrust litigation. They have previously represented GE and Honeywell, and counseled the companies in the final stages of the European Commission’s investigation of GE’s proposed acquisition of Honeywell.

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