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A ghost of the European Commission’s past will appear this week when a European Union appeals court issues its long-awaited verdict on its 2001 veto of General Electric Co.’s aborted $45 billion takeover of Honeywell International Inc. There’s almost no chance of the merger being resurrected, and it may seem like ancient history. The prohibition was made under then-EU competition chief Mario Monti, long before the former Italian economics professor introduced a major overhaul of the EU’s merger-vetting system including greater internal checks and balances and more sound economic analysis. But as much as reigning competition Commissioner Neelie Kroes would like a ruling in the antitrust arm’s favor, competition experts and regulators alike will look to the Luxembourg-based Court of First Instance to provide guidance on how the commission scrutinizes so-called conglomerate mergers between companies that are not necessarily active in the same markets. “It is a case from a previous era, but the court may nevertheless have some interesting things to say on the substantive analysis and the burden of proof on the Commission in similar cases going forward,” says Simon Holmes, competition and trade partner with London-based law firm SJ Berwin, who was not involved in the case. The ruling is expected on Wednesday. Regardless of which side wins on appeal, Holmes expects the commission to face criticism for insufficiently proving the legal theory used to justify its decision: that GE could leverage its dominance in one market to lock in business for a related one and foreclose rivals. Specifically, regulators were concerned that GE could leverage its financing unit to squeeze out other avionics makers. The dominance, regulators alleged, would have resulted from some horizontal overlaps as well as the vertical integration of GE’s engine-making abilities with Honeywell’s avionics and nonavionics products. The commission rejected the merger even after GE offered to dispose of Honeywell aerospace products with $2.2 billion in revenues, and to sell a minority of GE’s leasing and financing unit to a private investor. The so-called collective dominance theory prevailed in the U.S. in the late 1960s, but regulators there abandoned it in the 1980s, when they determined that economic evidence failed to support it. The theory has more support in the EU and gained additional credence in 2002, when the Court of First Instance overturned the commission’s veto of Tetra Laval International SA’s attempted takeover of French equipment maker Sidel SA on grounds of insufficient evidence but without questioning the legal theory that was used by regulators. In February, the EU’s highest court upheld the Tetra Laval ruling, saying that EU courts have every right to question the regulator’s interpretation of economic information, thereby further increasing the burden of proof on the commission in reviewing conglomerate mergers. While these types of cases are not that common, a few high-profile ones have occurred in recent years, such as GE’s $2.3 billion bid for Finland’s Instrumentarium Corp. and, more recently, Procter & Gamble Co.’s $57 billion takeover of Gillette Co. Both deals were approved after the companies involved agreed to make concessions to allay competition concerns. GE and Honeywell weren’t as lucky in getting their concessions past regulators. Should the commission prevail in court, some lawyers predict it may become more aggressive in scrutinizing conglomerate mergers. “If there’s a win for the Commission, it will certainly help its morale and might encourage them to be a bit more aggressive and a little less defensive and conservative in reviewing mergers,” says Trevor Soames, a Brussels-based partner with Howrey who argued in support of the commission’s veto of GE-Honeywell on behalf of Cedar Rapids, Iowa-based avionics maker Rockwell Collins Inc., which opposed the deal as a third-party complainant. The commission will also look to the ruling as it drafts a general set of guidelines for handling conglomerate-merger reviews. If the commission loses, it can argue that the original decision was under a former competition chief, was made prior to the court ruling in Tetra Laval and preceded far-reaching merger reforms. In addition, the commission can point out that new merger rules now allow companies to offer concessions at a much later stage of a merger review. While the prohibition was only the 15th since the commission began scrutinizing mergers in 1990, it prompted critics in the U.S. to portray Monti as a sinister deal killer. In a press conference on the day of the decision, Monti said the EU had been “distinctively unimpressed” by political pressure to approve the deal both within and outside the EU. He also insisted that GE-Honeywell was a “rare case” where trans-Atlantic competition authorities had disagreed. In retrospect, Howrey’s Soames says that instead of stifling EU-U.S. cooperation in the antitrust arena as many feared, GE-Honeywell may have done just the opposite: “If the U.S. and EU fall out to that extent again in a merger review and if there is a divergent outcome, it would be most unlikely that we would see that level of vitriol again.” The veto came months after U.S. antitrust authorities blessed the deal when GE agreed to divest its helicopter business. It also came to symbolize differences between the U.S. and EU on regulatory matters, and the decision continued to reverberate through the halls of the commission’s competition department on Rue Joseph II in Brussels long afterward. It also came after heavy lobbying on the part of GE’s then-chief executive, Jack Welch, who had delayed retirement in order to see the deal done. In separate appeals that have been joined, GE and Honeywell argue that the decision should be annulled and the commission pay their fees. Honeywell’s appeal is much narrower, taking issue only with the so-called bundling theory used to justify the veto. For GE, a win would mean vindication for a long, drawn-out battle. But perhaps more important, GE would like to remove the “dominant company” stigma regulators attached to it in the decision, which could affect other deals Brussels reviews. Wednesday’s ruling may not be the end of the story, since both sides have the right to appeal to the EU’s highest court — but only if they can appeal on the grounds that the lower court committed a serious error. Copyright �2005 TDD, LLC. All rights reserved.

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