Outlook: European Commission gets the full Monti on merger rulings

Marconi travails

Time was when corporate advisers would rub their hands with glee at the realisation that the deal they had been working on would fall to be vetted by Brussels rather than the relevant national competition regulator. Compared with national regulators, who had a habit of being bolshie, difficult and obstructive, the European Commission seemed all sweetness and light. Forty per cent market share? Fine by us, Brussels seemed to say every time a commercial consolidation of such magnitude occurred.

Today the reverse appears to be true. Alright, so most mergers sail through Brussels without any kind of a problem, but on anything remotely contentious, it invariably seems to be an uphill struggle. Among corporate advisers and business leaders, the European mergers taskforce is seen as an arbitrary and oppressive authority that will do all it can to road block any merger of size. The bar, many say, has been set absurdly high and, in so doing, the competition directorate has begun to do the reverse of what it is supposed to, which is to safeguard competition, not obstruct the proper functioning of the free market.

Yesterday, the European Commission was given another bloody nose by the European Court of First Instance, which for the second time in a year ruled that the directorate's reasoning in blocking a big merger was flawed. Some competition lawyers expect a similarly humiliating judgment on Friday, when the court is due to rule on Tetra's acquisition of the French bottle maker, Sidel. The detail of both cases, which involve Continental companies of little direct interest to the UK market, need not concern us here, suffice it to say that in yesterday's ruling the Commission was found to have been guilty of "several obvious errors, omissions and contradictions in ... economic reasoning".

Mario Monti, the European Competition Commissioner, has always seemed to me one of the more intelligent and fair minded regulators on the Brussels circuit. A quietly spoken Italian law professor, the reality of the man seems strangely at odds with his apparent reputation as an arbitrary and unaccountable bureaucrat, all puffed up with his own sense of self importance and power. He's as aware of and sensitive to international trends in competition policy as any and although he wants Brussels to be at the cutting edge of thinking on these issues, he's also keen to ensure that policy is coordinated internationally in a way which is seen by all to be fair.

Even so, there must be something wrong at the heart of the Competition Directorate for its decisions to be reversed with such frequency. All competition regulators get it wrong from time to time. The reprimand the directorate received last summer for its decision on Airtours' bid for First Choice, the first of its kind at the time, may have been forgivable. Mr Monti wasn't in any case responsible for that one, which largely happened under his predecessor. But to be accused of misreading the evidence, bad economics and failing to justify conclusions not just once but twice is strongly indicative of generalised bad practice. If, as expected, it happens again on Friday the case against Mr Monti starts to look unanswerable.

It was only an eleventh hour change of mind that prevented something similar happening with Carnival's bid for P&O this summer. All the indications were that the European Commission was squaring up for a fight with Carnival, then inexplicably Mr Monti changed his mind and waived the takeover through without so much as a single objection. Wiser counsel plainly prevailed.

Others can only look on with frustration. Jack Welch at General Electric and Eric Nicoli at EMI are only two of those who believe their merger proposals were unfairly handled by Brussels. Mr Welch is still pursuing Mr Monti through the courts to prove the point, but it's too late to save his deal.

The problem with the mergers taskforce lies not so much with Mr Monti, who seems sometimes too detached for his own good, as further back in the hinterland of the competition directorate, where an unduly officious, even faintly anti-business culture often seems to rule the thinking and analysis.

Mr Monti is responding to the strictures with the appointment of a full-time economist, together with a system of checks and balances to test the merger taskforce's thinking and judgement. Many think the reforms do not go far enough, and although Mr Monti's own position doesn't seem to be in any immediate danger, he's plainly got a big task ahead of him in rebuilding credibility.

Yesterday's judgment is a particularly embarrassing one for Mr Monti, since the Commission's objections to the Schneider/Legrand merger prompted a direct intervention from President Chirac of France to the effect that the Commission was behaving unreasonably. Mr Monti immediately leapt on his high horse to warn about the dangers of political intervention. The business world could be sure, he insisted, that he for one would be free of all such influence. Well, in this case at least, it was the politician who was ultimately proved right, while the unelected bureaucrat seems to have allowed his own vanity to get the better of his judgement.

Jack "Neutron" Welch hasn't got much to smile about these days, what with his divorce and the consequent disclosure to much public criticism of his gold-plated retirement package, but yesterday's judgment seems fully to vindicate the scorn he poured on Mr Monti and his mergers taskforce when they blocked the Honeywell merger a couple of years back. It is very much the modern way to place regulation in the hands of independent, unelected technocrats where it will remain free of the allegedly corrupting influence of politicians and business. Nobody stopped to think about the possibility of incompetent practice and unrealistic thinking by such people.

Marconi travails

Does Marconi have a future? To shareholders, whose interest in the company shrinks to just 0.5 per cent of the equity under the terms of the refinancing agreed with bankers and bondholders, it may not seem to matter any longer, but there is still a workforce, debtholders and other creditors to think about, and for them the refinancing seemed preferable to the alternative of liquidation.

Unfortunately for them, it might yet end that way. Yesterday's trading update made grim reading. In the three months to the end of September, there was a further sharp deterioration in trading, with revenues down 40 per cent on a year earlier. More worrying still, there was a 6 per cent fall quarter on quarter, even though the September quarter is seasonally meant to be a better one than the preceding three months. That's bad enough, but there's worse. Cash continues to disappear through the back door at an alarming rate, even though you would have thought that after more than a year of crisis the company would by now have been stabilised.

Only disposals, worth £295m, ensured that the company didn't suffer another massive cash outflow during the three month period. The group is continuing to spend more than it earns on a gigantic scale. The cash outflow on operations for the period from the end of June until the expected completion date for the refinancing in January is projected to be £408m. Even taking account of the fact that the refinancing will remove all interest rate costs, it is hard to believe that any organisation with such an appetite for cash can really be sustainable.

The company insists that the figures are in line with "sensitised" financial projections, whatever sensitised projections might be, so presumably bankers and bondholders haven't yet been disappointed by the numbers. None the less, doubts must be starting to creep in. There is a real danger of good money being poured after bad. In the City many are beginning to wonder whether the refinancing will stumble before it is finally signed off. Marconi's top three executives have already received half their £2m in shared bonuses for pulling off the debt for equity swap. It may be touch and go whether they will get the rest.

jeremy.warner@independent.co.uk