Timothy Wood
American notes
It is common cause that swashbuckling corporations are gaining power at the expense of governments. But the reverse is true as shown by General Electric’s (GE) stuttering merger with Honeywell. Worse still, it is unaccountable bureaucrats who are gaining ascendancy.
GE, the United States’s fifth-largest company with sales of $130-billion, won approval from its government to acquire fellow multinational Honeywell in a $44-billion deal. But because the companies do business abroad, the European Commission must also give its imprimatur.
That should have given GE boss Jack Welch shivers right from the start. The commission has had a field day obstructing US companies from pursuing deals they believe will reward shareholders and benefit customers.
Last year embattled telecom firm WorldCom was denied permission to acquire Sprint, with the commission even beating US anti-trust officials to the punch in delivering their verdict. The Europeans also forced AOL Time Warner to swerve off acquiring EMI Music for fear of having the original merger denied.
But Welch’s army of lawyers did their homework and were confident that because GE and Honeywell have complementary rather than overlapping businesses there would be no official objection. Unfortunately they forgot that the relatively modern European Commission has no trouble delving into murky history for its ideas.
In this case, GE-Honeywell has been told that a 163-year-old economic idea proves that a merger would be anti-competitive. In 1838 French economist Antoine-Augustin Cournot suggested that when merged companies “bundle” complementary products, they become “too” efficient and undercut their competitors.
That sounds like consumer heaven. Apparently not though and this confusion goes to the heart of growing outrage with anti-competition decisions.
Competition authorities the ultimate oxymoron supposedly make their rulings in the interests of consumers. However, recent competition rulings have more to do with protecting competitors than benefiting consumers.
In the case of GE-Honeywell, the commission uses the bundling argument to claim the merged firms would be too powerful in the aerospace industry. By powerful the commission means it has a good chance of winning business away from other companies. That can be harmful if GE-Honeywell deliberately under-prices its bundled products to drive competitors out of business and, once achieved, uses its dominance to establish an artificial market on its terms.
The commission could not give any substantive evidence that this is what GE-Honeywell intended, or that either of the firms has acted this way in the past. Also there have been numerous studies showing that the bundling theory is inapplicable to the aerospace business.
Instead, it weighed its decision almost entirely based on the evidence of GE’s European competitors, principally Rolls Royce. The British jet-engine maker argued that GE would bundle its engines with Honeywell’s avionics so tilting what is supposedly a level playing field irretrievably in its favour.
The commission may actually be harming consumers if it does refuse the merger without substantial divestitures that will be unacceptable to both boards. Bundling has a history of innovation, a rather important consideration when it comes to flying planes safely through busy skies.
While the debate between the US and European competition authorities is often dismissed as academic duelling, that ignores the real impact on consumers. There is a tragic irony in appointed bureaucrats having the power to halt mergers that investors approve of when there is no equivalent procedure in public life.
Where is the consumer hotline to government when things go wrong? How do you arrange refunds and exchanges for defective and dangerous products? Where is the redress in court when politicians break contracts? There is never any recourse and yet governments insist they have consumer interests at heart when making competition decisions.
European competition policy is rank hypocrisy given the Union’s use of an elaborate web of subsidies and tariffs to keep pet industries from being put out of business by more efficient foreign competitors. The European Commission would serve a more noble cause by investigating why South Africa, for one, is prevented from exporting whatever it chooses into the Union.