SmartMoney | By Roben Farzad
GENERAL ELECTRIC's (GE) $41 billion acquisition of fellow Dow component Honeywell International (HON) was supposed to be the coup de grace of GE Chief Executive Jack Welch's legendary career, delivering Honeywell's coveted avionics business to the giant conglomerate at an attractive price. So natural a fit was the deal, in fact, that the two stocks have traded in arbitrage-free lockstep since it was announced last October.
Well, don't pick out a wedding present just yet. European regulators have stormed the marriage ceremony, refusing to forever hold their peace. Though the deal was approved last month by American regulators with only a couple of provisions, the European Commission, and its notoriously technocratic competition commissioner, Mario Monti, have made their blessing conditional on sweeping Honeywell aerospace divestitures. Following marathon negotiations between Welch and Monti on Wednesday, GE emerged this morning willing to shed only $2.2 billion of assets; the other side is reportedly demanding as much as three times that figure. If no deal is struck by midnight Thursday Brussels time, GE might have to shelve its largest-ever takeout bid.
The market took the news -- and its apparent implications for resurgent protectionism -- hard. The Dow Jones Industrial Average plunged 181.49 points, or nearly 2%; the Nasdaq fell 77.59 points, or nearly 4%; and the Standard & Poor's 500 index lost 21.73, or 2%.
This sort of intercontinental roadblock isn't without precedent. Just last year, the Competition Directorate-General of the European Commission single-handedly scuttled WorldCom's (WCOM) acquisition of rival telecom giant Sprint (FON). European regulators also insisted on numerous concessions in exchange for their signature on the historic AOL Time Warner (AOL) merger.
Like those actions, this latest holdup underscores the message that the European Union -- whose overall economy has underperformed expectations in recent years -- will not shy away from protecting its corporate constituency when it believes it is necessary. And that protectionist bent could increase if the Continental economy should slip into a recession.
Indeed, the Welch-Monti impasse comes at a tenuous time for Europe. The euro has drifted back down to 86 cents against the dollar, nearly 10% lower for the year and less than four cents from its all-time low of 82.28 cents. Theoretically, the euro's weakness against the dollar should make European goods more attractive to American consumers. In practice, however, the pronounced slowdown in the U.S. is instead bringing down all boats.
Europe's equity indexes, meanwhile, have priced in rough waters: The Dow Jones Global Europe Index is down more than 15% year-to-date and is 30% off its 2001 high. Many had hoped that last year's surprisingly robust 3.4% rate of growth in Euroland would follow through into 2001. Instead, European Central Bank President Wim Duisenberg, who has been widely criticized for being too trigger-shy on monetary easing, now concedes that the Continent's economy will likely not break out of its vexing historical 2.5% growth ceiling this year. And that's paired with a surprisingly high inflation rate of 2.5% or greater and unemployment of around at 8%.
In recent years, Europe has made significant strides in what Duisenberg calls "structural improvements" -- that is, less restrictive trade policies and commercial regulations and more fluid and interchangeable economies. But Morgan Stanley European economist Vincenzo Guzzo cautions that, while there has been some political momentum in the last couple of years to ease protectionist policies, a nasty downturn could quickly produce a backlash against this trend. "If prices run higher than wages and workers perceive a loss of purchasing power, you can certainly see pressure against deregulation from labor unions [which carry great clout in Euroland politics]," says Guzzo. As the GE/Honeywell situation suggests, a resurgence of protectionism on the Continent could pose all sorts of obstacles for U.S. businesses.
In this instance, European regulators are concerned with the prospect of GE -- itself a big player in the aerospace capital-equipment sector -- winning an anticompetitive share of the aviation-machinery market with an acquisition of Honeywell's regional jet engine, air turbine and avionics manufacturing businesses. France's Airbus, for example, could be hurt by a lack of competition in airplane-parts pricing. And more expensive planes could then affect the likes of Lufthansa and Air France.
Concerns like these compelled Monti and the Commission to demand divestitures that would go far beyond the mere sale of a military helicopter engine unit ordered by the U.S. Justice Department. It should be remembered that the U.S. and Europe are two different animals when it comes to corporate-political culture -- a reality that has always impacted cross-Atlantic regulatory issues. "In the U.S., we're much more pliable," argues Scott Brown, an economist at Raymond James. "Here, it's a lot easier to lay people off or move cross-country for new work. There, [organized] labor is a lot stronger in voicing layoff concerns related to mergers, and the Central Bank is more focused on fighting inflation than producing growth."
At the very least, with breakout growth not materializing and inflation still worrisome, Europe is far more likely to attend to its own economic interests than to those of foreign corporations. This is hardly new - nor uniquely European - in the history of political economy. The United States, you'll recall, imposed the draconian Smoot-Hawley Tariff Act in 1930, as the Great Depression was gathering momentum. More recently, during the recession of the early 1990s, Big Labor's concern over possible job losses clashed with the Fortune 500's desire for cheaper production costs during the debate over the North American Free Trade Agreement.
Those episodes demonstrated how easily economic malaise can morph into political obstruction. That's all the more reason for investors banking on big mergers to keep an eye on the tentative European economy and the even more tentative mood of Mario Monti.
SmartMoney.com c 2001SmartMoney:
