When the executives of large multinational companies begin merger discussions, one of the first things many do is jump on a plane to Brussels to sound out the views of Mario Monti, the European Union's powerful competition commissioner.
Executives at Hewlett-Packard (HP) did precisely that in the days leading up to the official notification of the Compaq Computer deal. They were concerned that their planned €20 billion takeover of Compaq should not suffer the same fate as General Electric's €48 billion bid for Honeywell. It was scuttled by the European Commission (EC) in mid-2001, despite being blessed by US competition authorities.
The US administration is adopting an increasingly laissez faire attitude to industry consolidation, but that is not being replicated by the EC. Companies planning a merger are, therefore, now concentrating first and foremost on satisfying the authorities in Brussels, says Edward Bannerman, head of the business unit at the Centre for European Reform, an independent EU think-tank.
Why does Brussels have the authority to block a merger between companies based outside of Europe? The reasons are notoriously complex – even to legal experts. Peter Stone, a competition lawyer and partner at Berwin Leighton Paisner, says the rules dictating when a merger has to go before the EC for clearance are so complicated that he keeps them pinned to the wall of his London office.
The EC's powers are far-reaching. All mega-mergers must be approved, and this means satisfying the EC that the deal will not "create or strengthen a dominant position" in a particular sector.
The key measures are revenue-related. The most basic test is that merger parties operating in the EU – irrespective of whether they are headquartered in Europe – must notify the EC if their combined worldwide turnover is at least €5 billion and their respective EU turnovers are at least €250 million. Another common test is that if the parties' combined revenues reach €100 million in three member states. Parties that fail to notify Brussels risk heavy fines and having the deal declared void.
Through its military-sounding merger task force (MTF) unit, the EC is responsible for gathering and analysing the facts as well as making the final decision. Importantly, the MTF does not need to provide evidence to any outside authority – and few people ever get to see all the information being evaluated. It is this lack of transparency, combined with the EC's self-appointed role of investigator, prosecutor, judge and jury, which has led to calls for radical reform.
There are two obvious alternatives to the current regime, although neither is currently on the agenda, says Stone. One option would be to divide the EC's powers with another independent administrative body. MTF officials may even welcome such a move, given their workload. It is understood that only 40 officials investigate about 350 merger applications each year, some of which run to over a million pages of documentation.
A second option would be to follow the US example of requiring regulators to seek court approval before they can block a merger. But, says Stone: "I don't know how easy it would be for courts to deliver a swift decision," given the traditionally slower-moving legal system in Europe.
Admittedly, companies whose merger plans are blocked by the EC can still appeal to the European Court of Justice in Luxembourg. But, explains Bannerman, this is an expensive, uncertain and painfully slow process, with little benefit: "The planned merger cannot sit on ice for a couple of years while the cogs of justice turn." Given that, it is probably better to fly to Brussels and get Monti on side at the outset.