-Caveat Lector- ----- Original Message ----- From: "Ray Heizer" <[EMAIL PROTECTED]> Sent: Thursday, June 14, 2001 11:05 PM Subject: WSJ: As Honeywell Deal Goes Awry For GE, Fallout May Be Global > If their deal dies, it would mark the first time that European regulators have > killed a merger between two American companies that U.S. officials had > approved. That would almost certainly chill merger activity among other U.S. > multinationals intent on expanding their global reach. > > What's more, it could exacerbate political tensions between the U.S. and a > more outspoken Europe at a time when the two sides, for all their ties, seem > to be headed on diverging paths on some cultural and economic issues. The > troubled negotiations underscored obvious and critical differences in how the > two trading partners view mergers. While the U.S., for example, focuses more > on whether a proposed merger lowers or raises prices for consumers, the EU > looks more closely at whether the deal undercuts corporate competitors. <http://interactive.wsj.com> June 15, 2001 Page One Feature As Honeywell Deal Goes Awry For GE, Fallout May Be Global By MATT MURRAY, PHILIP SHISHKIN, BOB DAVIS and ANITA RAGHAVAN Staff Reporters THE WALL STREET JOURNAL When John F. Welch Jr. snatched Honeywell International Inc. from the arms of United Technologies Corp. at the last minute last fall, it was the crowning coup of his 40-year career. "This is the most exciting day in the 118-year history of GE," the longtime head of General Electric Co. exulted at an October news conference. It seemed as though nothing could damp his buoyant mood, not even the prospect of antitrust problems. "This is the cleanest deal you'll ever see," said Mr. Welch, who postponed his retirement to see the acquisition through. With a current value of $41 billion, it also was GE's largest ever, negotiated over a three-day weekend, too fast for the company to even consult its outside antitrust counsel or notify regulators. "Every single activity, there is no product overlap," Mr. Welch said at the time. "Everything is complementary. That's not a speech for the antitrust people, that's fact." Thursday, a humbled Mr. Welch and GE all but walked away from that deal, after weeks of battling European antitrust regulators who kept insisting that, au contraire, Europe had many reservations about the proposed merger between the two U.S. companies. Clearly, Mr. Welch had miscalculated. Facing a deadline, GE, as required, submitted a final offer of concessions to the European Commission, the European Union's executive arm. But both GE and European regulators said they remained far apart. Privately, the negotiators were even more pessimistic about the deal's chances. Read a statement from GE and Honeywell regarding their merger proposal before the European Commission. "This shows," the 65-year-old Mr. Welch said in a statement, that "you are never too old to get surprised." As Mr. Welch and his executives hopped the GE corporate jet to fly out of Brussels, where they had spent much of the last week engaged in talks, it was clear that more than the immediate future of their long-planned merger was up in the air. If their deal dies, it would mark the first time that European regulators have killed a merger between two American companies that U.S. officials had approved. That would almost certainly chill merger activity among other U.S. multinationals intent on expanding their global reach. What's more, it could exacerbate political tensions between the U.S. and a more outspoken Europe at a time when the two sides, for all their ties, seem to be headed on diverging paths on some cultural and economic issues. The troubled negotiations underscored obvious and critical differences in how the two trading partners view mergers. While the U.S., for example, focuses more on whether a proposed merger lowers or raises prices for consumers, the EU looks more closely at whether the deal undercuts corporate competitors. While there's still a small chance that the two sides could attempt to broker a last-minute compromise, both GE and the European Commission dismiss this as almost unattainable. GE's negotiators have made it abundantly clear that they've put their best offer on the table and aren't going to raise it anymore. And the commission is also sticking to its guns and saying that GE's proposals fall far short of what's necessary to secure approval. A senior commission official said Thursday night that the Merger Task Force charged with leading the investigation wasn't even planning to start an official consultation process on GE's latest offer -- a sign that the deal is headed for collapse unless the commission suddenly changes its mind. In one of the possible scenarios, GE and Honeywell could withdraw their application, in which case the commission won't have to issue a formal decision on the deal. Theoretically, it could open the door for the two companies to resubmit their deal for approval at a later stage. But because any new merger plan must be substantially different from the one withdrawn, it is highly unlikely that GE and Honeywell will pursue this option. For GE, the failure of the deal would be more of an embarrassment than a business blow. The company still expects robust growth this year and for the foreseeable future, despite the recent economic slowdown, thanks in good part to its huge GE Capital Corp. financial arm and its power-systems business, which is booming as energy demand climbs. Some shareholders even see a silver lining: Jeffrey R. Immelt, Mr. Welch's successor, who will take over as GE's chairman and chief executive later this year, wouldn't immediately be confronted with the huge challenge of integrating the two companies. Honeywell, however, is in a much different position. Having spurned one suitor for a second one, and lived through a merger process that already has dragged on longer than anyone expected, it now faces the prospect of having to right itself or find another buyer. While sitting in merger limbo, the company has seen its net income drop due to the slowdown and the rise in oil prices. Thursday, Honeywell declined to comment. Honeywell shares plummeted Thursday in 4 p.m. composite trading on the New York Stock Exchange, losing as much as 15% of their value in early trading before recovering slightly to close the day down $5.16, or 12%, at $37.10. GE shares, however, rose $1.01 to $48.86. >From the start, the negotiating process, though usually cordial, reflected divergent views that only got wider as the two sides talked. For all the thousands of hours they spent together, GE's negotiators and the commission's merger task force never bridged a fundamental disagreement about the antitrust implications of a deal that could have reshaped the global aerospace industry, let alone what remedies were called for. One gulf: The Europeans sought to apply the economic theory of "bundling" -- that the combined company's range of products would give it undo power -- an argument GE rejected. >From GE's perspective, dealing with the members of the task force increasingly seemed like a through-the-looking-glass tumble into an unfamiliar world where process-oriented technocrats, answerable to no one, made law and changed the rules as they saw fit. Mr. Welch may have expressed the bewilderment GE came to feel best in a Wednesday meeting with European Competition Commissioner Mario Monti, where he said the regulators' case for blocking the merger "doesn't work on the theory and doesn't work on the fact," according to people familiar with the situation. To the Europeans, meanwhile, Mr. Welch and GE embodied the stereotype of a scheming and arrogant American multinational, throwing its considerable global weight around and unwilling to consider any objections that might stand in the way of its getting even bigger. Europe's regulators -- who review mergers of even non-European companies if they surpass a certain size and do substantial business in Europe -- insist that they were the ones talking common sense from the start, while a grasping and disingenuous GE refused to listen to reason. By the time GE submitted its final offer Thursday, it said it was willing to sell off Honeywell units with about $2.2 billion in annual revenue, including regional-jet engines, air-turbine starters and other aerospace products. To GE, those were major concessions; anything further would have undermined the rationale for the deal. But the commission was asking for divestitures that would have cut out more than $3 billion more in revenue, according to people close to GE. (Lawyers for the task force say they never put dollar numbers on the divestitures they were seeking.) While GE was insisting the EU was going right for the guts of Honeywell's aerospace business, which was the whole reason it did the deal, the commission argued it was still only going for a quarter of Honeywell's revenue. Moreover, it complained that in many cases GE was offering to sell only parts of Honeywell's businesses that wouldn't be viable without the rest of the business. Another stumbling block was GE Capital Aviation Services, the powerful airplane-financing arm of GE Capital. The commission targeted that business early on, arguing that Gecas, as it is known, uses its clout as one of the world's largest purchasers of airplanes to pressure airplane manufacturers into using GE products, such as jet engines. GE shot back that Gecas had only 8% of the global leasing market, hardly a dominating market share. When the EU raised the prospect of spinning off or even selling Gecas, GE said that was a deal-breaker. It did say it would put the unit at arm's length, with separate management and outsideauditors, but that was well short of what the EU sought. At the beginning, GE, whose integration effort was led by Vice Chairman Dennis D. Dammerman, believed its deal with Honeywell would sail through regulators by the end of February. In its eyes, the two companies had no major product or service overlaps. To be sure, the combined company could sell more products to more customers, especially in the aerospace industry and could realize better efficiencies, but it wouldn't hold a dominant market share in any particular market segment. Customers would benefit from GE's greater range of products but would be free to shop elsewhere. This was a view that U.S. regulators ultimately backed, approving the deal in May with only one small condition attached: the sale of Honeywell's military helicopter-engines business. Antitrust officials in Canada also signed on. But GE failed to anticipate the kinds of questions it would be asked in Europe. At his October news conference, Mr. Welch even dismissed specific questions about the 58-year-old Mr. Monti, whom he later conceded he had underestimated. >From the start, the task force's staffers, especially Enrique Gonzalez-Diaz, the 39-year-old lawyer overseeing the GE case, argued that by buying Honeywell, GE could parlay its powerful position in the large jet-engine market into possible dominance of a related industry, avionics, which produces crucial flight equipment. Honeywell is one of the strongest players in this market. GE conceded Thursday that the Honeywell deal came together too quickly for it to consult its European merger lawyers, Chris Bright of Shearman & Sterling and Simon Baxter of Clifford Chance. But the company's top lawyer says both later signed off on the proposed transaction. Moreover, Honeywell, which had just been through a harrowing negotiation with the same EU lawyers in an earlier merger with AlliedSignal Corp., also told GE it anticipated no particular troubles. In any case, GE wasn't prepared at first for a European merger-review process that gives more voice to competitors' feelings than does the U.S. process. The first inkling GE had that any of these issues might be on the table came in December, by which time Mr. Gonzalez-Diaz was already getting an earful from GE's two largest rivals in aircraft engines, Rolls Royce PLC and spurned Honeywell suitor United Technologies, owner of Pratt & Whitney. Other vocal critics included Thales SA of France and Rockwell International Corp.'s Rockwell-Collins division. They complained that GE was an elephant willing to use its size to crush the competition. Even worse, from GE's view, the task force early on embraced the economic theory of bundling, arguing that a combined GE and Honeywell would be able to club rivals with discounts because of the range of its products and services. Although it is often applied in the computer industry, the bundling theory isn't widely accepted in aerospace. GE, initially thrown for a loop by an argument it viewed as illogical and irrelevant, recruited an array of heavyweights to shoot it down. Among them was Barry Nalebuff, a professor at the Yale University School of Management, whom GE asked to assess the theory's relevance to the case. Mr. Nalebuff, who has done some pioneering work in the field, argued before the commission that the theory simply didn't hold water in the aerospace market, where sophisticated buyers, not consumers, choose among a relativehandful of players. Opposing him was Jay Pil Choi, another American professor hired by GE's fierce rival Rolls Royce. GE felt Mr. Nalebuff forcefully refuted Mr. Choi. But as the investigation progressed, GE felt that the commission already had made up its mind that the combined company would bundle products and gain unfair advantages in the market. GE's aggravation is echoed by commission critics who point out that unlike in the U.S., where antitrust enforcers have to go to court to block a merger, their European counterparts don't have a similar system of checks and balances in place. Some say this system raises the possibility of a bias on the side of prosecution and leaves merging companies with fewer opportunities to defend themselves. "There's a limit on how interventionist U.S. antitrust authorities can be. Anything they do, they know they have to convince a judge," says John Kallaugher, an antitrust lawyer at Wilmer Cutler & Pickering in London. "In Europe, there's no judicial control, and the college of commissioners is unlikely to overrule Commissioner Monti." The commission says its merger-review process is fair and balanced. Lawyers for the task force say companies unhappy with its decisions can always appeal to the European Court of Justice in Luxembourg. But such appeals are possible only after the fact and can take more than a year to get a hearing. By then, critics say, the rationale for most mergers is moot. As talks intensified this spring, with a July 12 deadline for a final decision nearing, Gecas also heated up as an issue. The commission went out of its way to argue that the unit gave GE an unfair edge over Rolls Royce and Pratt & Whitney. In its summary of the investigation, the merger task force alleged that Gecas placed large orders for regional aircraft shortly after their manufacturers decide to install GE's engines on them. A similar strategy, the task force argued, could be used to promote Honeywell's avionics. But GE's team successfully undermined some of the commission's evidence. The commission, for instance, held up a sworn affidavit from a former senior executive at Fairchild Dornier, one of the four companies making regional jets. He testified that Fairchild Dornier chose GE engines because it knew that Gecas would subsequently place a large order for these aircraft. Furthermore, the executive testified that there was a contract explaining the arrangement between GE and Fairchild. After GE disputed the existence of the contract, however, the executive withdrew the part of the affidavit pertaining to the written agreement, say people close to the situation. GE argued that the engines were purchased long before Gecas had even decided to enter the regional-jet market and backed its case up with documents. The executive stuck to his original assertion that the Gecas order was a consideration in choosing GE's engines, even if there was no written agreement, a senior commission staffer says. But the commission's indictment of Gecas clearly suffered a credibility blow. In recent weeks, GE tapped a wide array of antitrust officials from the U.S. to similarly try to undermine the commission's case, including officials of the Clinton administration, who had shared close relations with their European counterparts. GE also turned to the Bush administration. Attorney General John Ashcroft last week dispatched a senior political appointee, Deborah Herman, to meet with EU officials to explain why the Justice Department concluded last month that the transaction was legal and could be approved with limited conditions. Mr. Welch also asked White House chief of staff Andrew Card for help. During the presidential campaign, GE had contributed $306,000 to Republican Party committees -- three times the amount it contributed to Democrats. But a senior administration official said that neither President Bush nor U.S. Trade Representative Robert Zoellick specifically raised the GE-Honeywell merger during meetings with their European counterparts this week. By the time Mr. Welch sat down to meet with Mr. Monti at commission headquarters Wednesday morning, GE was resigned to the potential collapse of the merger. That's when Mr. Welch told Mr. Monti that, in GE's view, the facts didn't fit the theory that the competition was pushing to block the deal, according to people familiar with the talks. Mr. Welch also noted that U.S. and Canadian antitrust authorities hadn't found any credence in the theory the commission was espousing, and told Mr. Monti he should look hard at the consequences of intervening in a deal on the back of speculative theory and distorted fact. Mr. Monti simply read back his list of demands. (Through a spokeswoman, Mr. Welch Thursday said he would not comment on the talks with Mr. Monti.) When the meeting broke up, word from the EU camp was that progress was being made. But on the GE side it was becoming increasingly clear that the deal was doomed. At Mr. Monti's request, Mr. Welch returned for a brief meeting later that day. Mr. Monti told him he had looked at the case and felt it was well-founded, and reiterated that GE couldn't proceed with its merger with Honeywell unless it came up with more divestitures. Mr. Welch told him the deal didn't work at the price he was asking. The two spoke again on the phone early Thursday, but were no closer. That was when GE decided to issue its strongly worded statement, in which it said it was "not optimistic" its final package would be approved. In the statement, Mr. Welch said he and Mr. Immelt "wanted to complete the transaction but we have always said there is a point at which we wouldn't do the deal. The commission's extraordinary demands are far beyond that point." He admitted those terms "exceeded anything I or our European advisers imagined," adding that they "differed sharply from antitrust counterparts in the U.S. and Canada." Mr. Monti later issued a statement of his own. Noting that its dealings with GE were "always constructive and cordial," he said the commission had explored alternatives that would have required no further divestments in Honeywell's business but instead would have entailed "structural commitment to modify the commercial behavior of Gecas." "We regret that this avenue has not been pursued," he said. ### Write to Matt Murray at [EMAIL PROTECTED], Philip Shishkin at [EMAIL PROTECTED], Bob Davis at [EMAIL PROTECTED] and Anita Raghavan at [EMAIL PROTECTED] ======================================================= Kadosh, Kadosh, Kadosh, YHVH, TZEVAOT FROM THE DESK OF: *Michael Spitzer* <[EMAIL PROTECTED]> The Best Way To Destroy Enemies Is To Change Them To Friends ======================================================= <A HREF="http://www.ctrl.org/";>www.ctrl.org</A> DECLARATION & DISCLAIMER ========== CTRL is a discussion & informational exchange list. Proselytizing propagandic screeds are unwelcomed. Substance�not soap-boxing�please! These are sordid matters and 'conspiracy theory'�with its many half-truths, mis- directions and outright frauds�is used politically by different groups with major and minor effects spread throughout the spectrum of time and thought. 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