The Anatomy of the GE-Honeywell Disaster

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General Electric Co. Chairman Jack Welch

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GE and its lawyers took their seats along one side of the room, the complainants faced them, representatives of the E.U. member states and the DOJ watched from the sidelines, and the Commission's task force sat on a raised dais at one end of the room. (Unlike the procedure in the American system, the Commission's staff both investigates a case and makes a judgment on its merits.) GE's advisers claim that they had been left with less than two weeks to examine the Commission's objections and complain that the Commission and the competitors had been working together for six months. "It's very much an ambush," says a lawyer, "but that's the way it often is. The process is deeply flawed."

Of the 15 airlines said to have commented on the deal, only one — Lufthansa, whose executives gave evidence in secret — showed up at the hearings. The Commission staff concluded that if the carriers were that frightened, then Welch's company really must be an overbearing bully. A Commission official said, incredulously, that one American airline didn't attend because it feared it would lose the fares of GE executives.

Still, GE didn't do so badly. Most observers consider that it destroyed the Commission's case on bundling. But for Monti's staff, the "vertical" merger of the aircraft leasing division with GE's engines and Honeywell's electronics threatened to diminish competition. As the price of approval in Washington, GE had already agreed to divest itself of a helicopter-engines division — the one area where GE and Honeywell had a product overlap. Monti wanted much, much more; Welch agreed to sell off businesses with revenues of $2.2 billion — not including the helicopter-engines division — and was prepared to "ringfence" GECAS to ensure that its activities would not be anticompetitive. It wasn't enough.

When Welch arrived at Monti's office on June 13, the Commissioner was flanked by seven aides. Monti stiffly read out his conditions. "It wasn't a negotiating session," said a GE lawyer who was present. GE, said Monti, had to sell 19.9% of the leasing arm in such a way that it "would assure nondiscrimination in the purchasing policies of GECAS."

Monti told TIME that the key point was that GE could not restrict those who would buy the shares. But to some GE advisers, this could mean only one thing — Monti wanted GE to sell part of GECAS to a competitor. That was never going to fly. "It would have been like asking [Ford CEO] Jacques Nasser to drive a Toyota for 20% of the day," says Yale economist Barry Nalebuff, who advised GE. Monti asked Welch to consider the terms and return that afternoon. Welch did, and rejected them. The next day, Welch called Card and flew back to the U.S. Jeff Immelt, his successor as CEO of GE, went to the Paris air show to pronounce the deal dead.

Which, in effect, it was. GE made a last-ditch effort, suggesting that it sell a part of GECAS in a private placing to a handpicked buyer. Monti didn't take that seriously. Honeywell's CEO Michael Bonsignore desperately offered to drop the purchase price of his company, but Welch wasn't interested. And so, on July 3, the full European Commission endorsed the decision that Monti had made. "We remain," said Monti, "distinctly unimpressed by any political pressure."

Welch says GE's lawyers are considering an appeal to the European Union's Court of First Instance in Luxembourg. That won't save the Honeywell deal — such a case might not be settled for two years. But it would give GE a chance to disprove the allegation that it had a "dominant position" that it was likely to abuse. If that stain remains on the record, GE is going to find it hard to make any significant acquisitions in Europe. Honeywell has a new CEO; when the deal went down, so did Bonsignore. His successor: Larry Bossidy, a longtime GE colleague (and golfing partner) of Welch's whose job, he says, is to fix Honeywell or sell it.

And did GE's competitors down a bottle or two of Belgium's cherry-flavored beer in celebration? Probably not. Some of the opponents wanted the deal weakened, not killed. "I feel like a golfer who's just overshot the green," said an executive on the "winning" side. Had the deal gone through, GE's opponents would have been able to pick up some of the Honeywell businesses Welch was ready to divest. Now they can't. At least some on the GE side of the case felt that the competitors' appetite for GE's spare parts would trump their fear of a merger. That didn't happen.

Those Washington Senators and Cabinet members who seem to think Monti was acting mainly to protect European companies are laughably off base. In Europe, everyone knows that GE's most determined opponent was United Technologies, Honeywell's jilted American suitor. Chris Bright, one of GE's lawyers in Brussels, says the Commission sent United Technologies away "to find the mud, and in the end, unfairly, the mud stuck." One more lesson: the slow confirmation process in Washington has a cost. Had James been confirmed as antitrust chief at the Justice Department by March, say, regulators on both sides of the Atlantic would have been able to discuss the merger at a high level — and maybe come to common conclusions. As it is, Treasury Secretary Paul O'Neill has described the Commission's action as "off the wall," while James said the European decision "reflects a significant point of divergence" with American practice.

The biggest lesson of all from the GE case is this one: soon, something like it will happen again. The Commission in Brussels is currently engaged in three investigations of Microsoft, one of them driven by an American competitor, Sun Microsystems. Monti's staff is looking at the behavior of chipmaker Intel, at the behest of one competitor from the U.S. and one from Taiwan. U.S. regulators will review Switzerland-based Nestle's purchase of Ralston Purina, which would consolidate more than 50% of the $3 billion U.S. cat-food market. For now, the only antitrust authorities that really matter are in Brussels and Washington. But as other nations develop their economies, that may not always be the case. Activists in South Africa, for example, have forced American and European pharmaceutical companies to reverse their policies on the patent protection of drugs.

Monti and his counterparts around the world aren't taking on these cases because they want to stick it to the ugly Americans. They are doing so because in a globalized world, the country where a company has headquarters matters much less than where it does business. If one person understands that truth, it's Jack Welch. Why, TIME asked Welch, should a European be able to shape a merger between two American companies? "That's the law," replied Welch. "That really is just the way the world works." We'd all better get used to it.

With Reporting by Frank Gibney and Eric Roston/New York, and James Graff and Joseph Kirwin/Brussels

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