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As the European Union’s regulatory review of General Electric Co.’s $42 billion purchase of Honeywell International Inc. proceeds, company representatives will present in person their defense in closed hearings this week in Brussels, Belgium. Starting today, GE will lay out its arguments to the European Commission, the EU’s merger clearinghouse, which is reviewing the deal in a detailed antitrust investigation. GE’s arguments will largely address a document known as a statement of objections, drafted by the Commission and sent to the companies in early May. The statement formally outlines the EU’s arguments against the merger, and if GE wants to save the deal from regulatory peril, the Fairfield, Conn.-based company will have to attack the points contained within the document. Some of the EU’s concerns have been established from the start of the Commission’s detailed investigation in March. One clear concern the deal raises is the overlap of the companies’ businesses in the regional jet-engine market. According to sources familiar with the EU’s review, the statement of objections argues that combining the two companies’ activities in regional jet-engine production would give the enlarged group a dominant position in this market. Another less publicized overlap area is the merged company’s market strength in small, marine gas-turbines. As in the regional jet-engine market, because both companies have a considerable presence, the combination of the two would create a significant market share that may have worrying anti-competitive effects. One key area the EU is examining is the merged company possibly bundling, or tying, its products. European Competition Commissioner Mario Monti, the agency’s top antitrust official, elaborated on this concern at a press briefing in Brussels on the day the statement was sent to the companies. The commission is examining whether the tying of products could allow the new entity to extend its dominant position, Monti said. In bringing together GE’s jet-engine production and Honeywell’s avionics and non-avionics products, the new company’s product range would cover nearly all the parts used in building an airplane. Logically, the companies would bundle all their products together, creating an attractive one-stop shop for customers. In the Commission’s thinking, the companies would be compelled to do this out of sound business logic, in order to take advantage of the potential synergies. In a related, but slightly different argument, the commission is also objecting to the deal based on the resulting so-called vertical integration. GE has several complementary activities, notably its GE Capital Aviation Services, or GECAS, which leases aircraft to airline companies, and its GE Capital financing arm. In the EU’s statement of objections, the Commission argues at length that GECAS’ policy of acquiring aircraft fitted only with GE engines could be carried over to all the products of the enlarged company. Such a practice, the EU fears, could further strengthen GE-Honeywell’s power over the span of their product range. In addition, GE Capital could conceivably influence potential aircraft buyers seeking financing to opt for planes fitted with GE-Honeywell products. One possible counter-argument expected from GE is efficiencies resulting from the merger. But according to a source familiar with the Commission’s analysis, the EU is unlikely to accept this argument. According to the source, such a defense would reinforce, rather than weaken, the commission’s own argument because any synergies or efficiencies from the deal would allow the merged company to lower its prices. Since GE-Honeywell would already be dominant, lowering prices would further disadvantage its competitors. Another potential defense the companies are expected to present is that behavioral remedies, or a commitment to act a certain way, would sufficiently address the Commission’s concerns. In areas of clear market overlap, divestments are a necessary evil. But in gray areas, such as the EU’s concerns about product bundling or vertical integration, it is still unclear how convincingly the companies can argue that behavioral remedies, such as a pledge not to bundle products or to create a firewall between GE’s related businesses, are enough. If the Commission bases its analysis on structural grounds, then the only remedies possible are structural, said one source, implying clear-cut asset selloffs. If the results of the investigation show that no matter what behavior the merged company follows — even if it is willing to protect competition by its behavior — the structure of the market could nevertheless indicate that the merger will harm competition. One analysis the Commission is pursuing indicates that the EU is developing an argument on structural grounds. Thus, any possible remedies must be structural. While it is unclear whether the analysis was included in the statement of objections, the Commission believes the merger would be detrimental because of the combined group’s unrivaled power. The enlarged company could only be equaled in a similar merger among five or six different companies active in all the markets in which GE-Honeywell are present: avionics, non-avionics, engines, leasing and financing. Even in that unlikely occurrence, the Commission says a duopoly would arise. Or it would be a situation as dangerous as a monopoly because of the threat of collusive behavior such as price fixing. If behavioral remedies are not enough to assuage the EU’s concerns, then divestments will be necessary. The question then will be what formula of divestments would satisfy the Commission, whether it would simply entail different products or delve further into GE’s related activities. At a recent aerospace conference, David Calhoun, chief executive of GE’s aircraft engines division, said the company was willing to negotiate limited disposals with the EU, but GE has made clear in past comments that it won’t proceed with the deal were the Commission’s review to force concessions that would undermine the deal’s business logic. In attendance at next week’s hearings, aside from the companies and the Commission, will be representatives of EU member states who will be consulted once the Commission drafts a ruling, and several competitors. Competitors expected to be present include engine-makers Pratt & Whitney and Rolls Royce PLC, avionics producers Thales Group and Rockwell Collins (a division of Rockwell International Corp.), non-avionics maker Hamilton Sundstrand Corp. and United Technologies Corp., or UTC. UTC is the parent company of Pratt & Whitney and Hamilton Sundstrand, whose bid for Honeywell in October was trumped by GE. Following the hearings, events will probably move quickly. The Commission will consider the arguments and remain in contact with GE-Honeywell until June 12. By then, the companies must present their final offer of concessions before the Commission formally rules by July 12. The companies have already been given approval by the U.S. Department of Justice and Canadian regulators. Copyright (c)2001 TDD, LLC. All rights reserved.

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