The Ge-honeywell Merger in the Eu

The European Commission (EC) declared in July 2001 the merger between General Electric (GE) and Honeywell “incompatible with the common market”. The EC argument supposed that dominant position created or strengthened by horizontal overlaps and vertical and conglomerate integration, as a result of which effective competition would be significantly impeded, would end in the monopolization of some markets (like engines for large regional jet aircraft), vertical foreclosure in engine starters, and foreclosure and eventual exit of rivals of the merger entity. The decision was appealed by GE and Honeywell to the Court of First Instance (CFI), which in December 2005 (with the merger long “dead”) decided to uphold it, but only supporting the parts of the reasoning behind the decision related to horizontal overlap. Arguments of vertical effects and, most notably, conglomerate effects were instead found to be “vitiated by manifest errors”. The decision of the EC spurred a lively debate in economic and policy circles, not least because the merger had previously passed the scrutiny of the US Department of Justice (DOJ), only subject to the divestiture of the military helicopter engine business and other minor requirement. This paper is organized as follows: Section 2 describes the markets involved in the merger, and Sections 3 to 5 present the lines of arguments by the EC, along with the CFI responses, on the alleged dominance of GE and horizontal overlaps with Honeywell, vertical effects, and conglomerate effects. Section 6 presents the US position. In Section 7 we assess the pillars of the decision. Section 8 concludes.