GE poised to scrap $42bn takeover of Honeywell

Does the failure of the world's biggest industrial merger foreshadow a tougher approach from Brussels?

General Electric and Honeywell were last night poised to call off their $42bn merger – the largest industrial tie-up ever seen – in the face of seemingly insurmountable objections from European Union competition authorities.

If the deal is not withdrawn by today then it is almost certain to be formally rejected by the EU's 15-strong college of commissioners when they meet this afternoon in Strasbourg.

Competition experts believe the two US companies will be reluctant to allow that because a formal veto would require the European Commission to publish its findings – thereby setting a precedent, which could be used against GE and Honeywell in future.

The merger was approved several months ago by US competition authorities. But it has stumbled on this side of the Atlantic because of fears on the part of the EC Competition Commissioner, Mario Monti, that a combination of GE and Honeywell would have an unfair advantage in the aeroengines and avionics markets.

The remedy required by Mr Monti – the disposal of at least $2bn of assets and the sale of a 20 per cent stake in GE's aircraft leasing business, Gecas, to its two rivals, Rolls-Royce and Pratt and Whitney – has proved to be a demand too far for the legendary GE chairman Jack "Neutron" Welch.

In an 11th-hour bid to salvage the merger, his opposite number at Honeywell, Michael Bonsignore, last week offered to cut the takeover price by $1.7bn to compensate GE for the additional disposals it would have to make. But Mr Welch replied in characteristic form saying that the concessions demanded by Mr Monti would "cut the heart out of the strategic rationale of our deal, telling Mr Bonsignore that his proposal made "no sense for our shareholders for the same strategic reason".

Honeywell was expected to admit defeat and agree to call off the merger at a board meeting taking place last night. "As far as I am aware, Lazarus only rose from the tomb once," said one observer.

The failure of GE and Honeywell to get their way has provoked a host of conspiracy theories. That this is Europe's revenge on the "Toxic Texan" George W Bush for his refusal to sign up to the Kyoto agreement on global warning. That this is retaliation for the blocking by US antitrust authorities of the BOC-Air Products-Air Liquide merger after it had been approved by Brussels.

Few competition lawyers subscribe to the conspiracy theories. As one says: "I have dealt with the Commission a lot and it seems to me that this decision is about law and economics, not politics."

What the GE-Honeywell case does highlight, however, are the subtle differences in approach towards big industrial mergers taken by the US and EU competition authorities. In the EU, the test is whether a merger "creates or strengthens a dominant market position". In the US it is whether it results in "a substantial lessening in competition". In the US, the Federal Trade Commission and the Justice Department are primarily concerned about the impact on consumers. In the EU, much more weight is given to the complaints of competitors.

They also differ in the way those tests are applied. At the heart of Mr Monti's objection, was the concern that GE would "bundle" together its engines with Honeywell's avionics to gain an unfair advantage over rival engine manufacturers. In addition, he was worried that Gecas, which accounts for 10 per cent of world airliner deliveries and almost exclusively buys GE engines, would henceforth only buy Honeywell avionics.

Mr Monti's concerns presuppose two things: first that "bundling" exists at all; and second that GE and Honeywell could indeed bully customers with a huge amounts of purchasing power such as Boeing, Airbus and the big flag-carrying airlines, into buying engines and avionics from the same company.

The US and the EU have powers to tackle the market abuse of bundling – through the Sherman Act and the Treaty of Rome respectively. But as Nigel Parr, a competition lawyer with Ashurst Morris and Crisp, says: "The US authorities took the view that there were laws in place to tackle this behaviour if it happened. The approach in the EU was to prevent it being able to happen in the first place."

As to whether the GE-Honeywell affair presages a move towards much tougher policing of mergers in Europe and a more laissez-faire approach in the US under President Bush, the jury is still out. It is certainly the case that the new assistant attorney general at the Justice Department, Charles James, will have his work cut out to emulate his predecessor, the doyen of the world's trust-busters Joel Klein.

But Mr Parr doubts whether President Bush, for all his pro-business credentials, will usher in a free-for-all. "When it comes to control of cartels and judging the impact of mergers I am sure the US competition authorities will be as rigorous under Bush as they were when Clinton was president."

Where he thinks the Bush administration will be more relaxed is in its approach to companies that have built up a dominant position such as Microsoft, which, incidentally, is also under investigation by Mr Monti. "Where there is choice between breaking up these businesses or applying different remedies, I think we will see the Bush administration exercising more restraint."

As for Europe, there is one school of thought that believes the Competition Commissioner, having used up so much of his political capital in getting the GE-Honeywell deal blocked, will not be in a hurry for another titanic clash. "If I was a big company contemplating a mega-merger and I had the balls, I might just be tempted to chance it," says one seasoned Brussels observer. And risk the full Monti?