Court of First Instance Upholds Prohibition of GE/Honeywell Merger
In a long-awaited judgment, the Court of First Instance of the European Communities (“CFI”) partially upheld on December 14, 2005, the European Commission’s decision of July 3, 2001 to block the proposed acquisition of Honeywell International Inc. (“Honeywell”) by General Electric Company (“GE”). In its decision, the Commission had considered that the merger should be blocked for three sets of reasons. First, GE’s existing dominant position in the market for large commercial jet aircraft engines would be strengthened and, furthermore, the merged entity would become a monopolist in the market for large regional jet aircraft engines. Second, the proposed merger would give the merged entity a dominant position in the markets for corporate jet aircraft engines and for small marine gas turbines. Finally, the Commission was of the view that the merger would create conglomerate effects leading to the creation of dominant positions for the merged entity in the markets for avionics products and nonavionics products. The CFI acknowledged that the Commission had been right in considering that the merger would create a dominant position in the markets for large regional aircraft jet engines, corporate jet aircraft engines and small marine gas turbines, which constituted sufficient justification for the prohibition decision. The CFI noted, however, that certain aspects of the Commission’s decision did not stand scrutiny and could, therefore, not be upheld. It considered, first, that the Commission’s finding that the Parties would be able to vertically integrate their respective engine and engine starter businesses, which would result in the strengthening of GE’s existing dominant position in the large commercial aircraft jet engine market, was not sufficiently substantiated. In the CFI’s view, in assessing whether future anti-competitive conduct of the merged entity is likely, the Commission should not only consider the incentives to such conduct but also the disincentives thereto. In accordance with such general principle, the CFI ruled that, although there would indeed be incentives for GE to disrupt or delay supplies of engine starters to its competitors in order to foreclose the market, it was nonetheless true that such conduct would fall under the scope of Article 82 EC, which would have the effect of deterring GE from adopting it. By having failed to take this disincentive into account, the Commission had come to erroneous conclusions on the effects of the merger in this regard. Secondly, the CFI took the view that the Commission had not provided a sufficient demonstration that the merger would create conglomerate effects in the avionics and non-avionics markets. In its decision, the Commission had concluded that after the merger GE would have been able to use the financial strength of GE Capital and the commercial leverage of GE Capital Aviation Services to increase Honeywell’s strength in the avionics and non-avionics markets. The CFI took the view that, although the Commission had demonstrated to sufficient standard that the merged entity would have had the ability to exert market power in the avionics and non-avionics markets, it had failed to establish that (i) it was likely that the merged entity would indeed adopt such course of action and that, (ii) as a result of such behavior, a dominant position would have been created in such markets in a relatively near future. Regarding the alleged creation of conglomerate effects as a result of the bundling of GE’s engine products with Honeywell’s avionics products, the CFI noted that were practical barriers to bundling since the end buyers of the two products were generally different and purchased the products at different stages of the manufacturing process. The Commission’s findings were therefore flawed. In short, the CFI, in line with its own judgment and that of the ECJ in the Tetra Laval case, confirmed the validity of the conglomerate effects theory of harm, but made clear that the evidentiary burden which the Commission will be called upon to discharge when applying such theory will be high. The Commission’s interpretation of this aspect of the judgment will likely be reflected in the upcoming guidelines on non-horizontal mergers, which are now even more eagerly awaited.