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ArchiveFebruary 2 2001

Is Monti spoiling the M&A party?

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Investment bankers in Europe are complaining that the European Commission’s competition taskforce, under the leadership of Mario Monti, is shifting its remit to policy making instead of just policing mergers and acquisitions, says Peter Shearlock.

He is the investment bankers’ bogeyman.

In little more than a year since he took over the post of European commissioner for competition policy, Mario Monti has incurred the wrath of mergers and acquisitions (M&A) professionals for blocking at least three multi-billion dollar deals, demanding major concessions in nearly 30 more and appearing to raise the hurdle height for deal approvals generally.

Not only that, but he is accused of turning the mergers taskforce into an instrument of industrial policy rather than a review body for bids and deals.

“With the increase in business concentration in Europe, there has been a hardening of attitudes, of that I have no doubt,” says Vittorio Pignatti, head of European M&A at Lehman Brothers.

“Not only that, but the role of the anti-trust authorities in Europe has become more than that of an approvals body. They are now concerned with policy making. But if they are policy makers, they need new instruments with which to make that policy and they should review the approvals procedure and obtain more resources to avoid becoming a bottleneck.”

Peter Sutherland, chairman and managing director of Goldman Sachs International, professes himself to be a big fan of Mr Monti, his predecessors and the European Commission’s (EC) mergers taskforce.

But, he says, the role of the EC is to find ways to make mergers work rather than stop them. “For that we need to have dialogue. I have sympathy for the commission because they are having to handle an ever-increasing workload with a very small number of people.

That makes dialogue difficult. “The mergers taskforce is highly respected by industry and by the banks as people of integrity and efficiency. Overall, I think they are doing a good job with limited resources. But clarification on some issues – such as collective dominance – is needed, and I am somewhat dubious about extending the theory,” he says.

Norbert Reis, co-head of M&A in Europe for Credit Suisse First Boston, says: “The list of criteria for approval appears to have been widened and their relative weight is less clear than it used to be.”

Another tracks the change directly to Mr Monti. “Karel Van Meert, his predecessor, was tough but fair. Now, one can’t help but feel that the criteria are not being spelled out. You don’t know which way the commission will turn.”

The EC is not the only anti-trust body in the bankers’ sights. There is barely disguised exasperation among a number of practitioners at the UK Competition Commission’s recommendation (accepted by the UK trade and industry secretary Stephen Byers) to force Belgian brewer Interbrew to sell off Bass Brewers, for which it paid $3.35bn last June.

And there is similar disgust that the Italian authorities are now insisting on reviewing Enel’s proposed $10.5bn acquisition of Infostrada from Vodafone even though the EC has approved it. In the case of Interbrew/Bass, the UK authorities used the investigation as the platform for a review of policy towards the brewing industry and said they wanted to see three strong competitors, one of which was preferably not a multinational.

In other words, say critics, they allowed their judgement of the deal to be clouded by their goals for the industry, even though the market was hardly about to reshape itself to suit. In the case of the Italian investigation, the authorities appear similarly intent on rejecting the deal because their preference is for a new entrant to the fixed-line telecoms market to take on Telecom Italia.

But, as it stands, it is hard to see how the proposed Enel/Infostrada combination changes the competitive position since the resulting company will have barely 2.5% of the fixed-line market. “It is getting to the stage where you cannot establish whether you are going to have a problem with a deal or not,” says one M&A professional.

“You cannot submit deals to the commission until you’ve signed or announced. In areas like the internet and telecoms they appear to be getting ever tougher and in others they are being unrealistic about the number of competitors they want to see in a given sector.”

That uncertainty is potentially crippling for divestors, particularly in the highly geared telecoms sector. “In the current market, sales are done out of need rather than fun,” says one banker. Bankers were shocked a year ago when the EC blocked the Volvo/Scania deal on the grounds that it would have created a local monopoly (in parts of Scandinavia).

“For a deal to be ruled out on the basis of market share in one region – which was administered not by a local anti-trust authority but by the commission – set quite a precedent,” says one of those involved.

But the biggest deal that the EC scuppered last year was in the internet sector: MCI WorldCom’s intended $115bn takeover of Sprint. The commission decided the deal would have resulted in the creation of a dominant position in the market for top-level universal internet connectivity.

Speaking at a conference to mark the tenth anniversary of EC merger control, Mr Monti said: “The combination of WorldCom and Sprint’s extensive internet networks and large customer base would have led to the creation of a company of such absolute and relative size compared to its competitors that it would have been in a position to dictate terms and conditions.”

But what rankled with advisers was the commission’s rejection of the proposed remedy (put forward on the final day for the submission of undertakings, according to the strict European Union merger review timetable).

The parties offered to divest Sprint’s internet business. But the commission decided it could not be sure that would result in effective competition. MCI WorldCom is appealing against the decision in the courts. “There is certainly increasing rigour being applied in the analysis of proposed remedies,” says David Harrison of law firm Allen & Overy’s Brussels office.

“There is more attention being paid to the identity and viability of the purchaser in a proposed divestment. But it represents more an evolution than a sea-change in commission thinking.”

Mr Harrison also says recent deals have often taken the EC into unfamiliar territory where there is a lack of previous case law. He cites the issue of internet access as one example.

“There are areas where things are constantly developing. That creates a degree of unpredictability. It is not as simple as saying the commission is getting tougher.” In his September speech, Mr Monti drew attention to a study by the US Federal Trade Commission on undertakings given by merging companies.

“[It] cautions us to be careful in choosing a purchaser who just has the pocketbook to pay for the divested assets. The study identifies the very great importance of choosing a purchaser who demonstrates the necessary incentives and interests to compete in the relevant markets where the competition concerns arise,” he said. Conscious of the growing importance of this issue, the EC published a paper on its current position on remedies just before Christmas.

Amelia Torres, a commission spokesperson for competition policy, denies it represents any hardening of policy. “It just builds on the commission’s existing practice,” she says.

The statistics do, however, support the contention that the commission has become progressively tougher in the past couple of years. In 2000, it reviewed 344 merger notifications compared with 292 the year before.

Some 17 of those went to the second phase of investigation (the full-blown, four-month enquiry stage) compared with just nine in each of the previous two years. But perhaps the most telling statistic is the number of deals that were cleared at the phase 1 stage – the preliminary one-month investigation, which can be extended to six weeks – but only after the merging parties had given undertakings to make disposals or other concessions.

In 1998, there were just 12 deals involving such “remedies”. In 1999 there were 19. Last year there were 27. The EC refutes any suggestion that it has changed its criteria for reviewing mergers or is applying them with more vigour than in the past.

“The merger regulation adopted in 1979 has not changed since,” says Ms Torres. “It is being applied with the same determination; nobody is getting tougher.”

A rise in the number of deals done to get mergers approved at the phase 1 stage is not of itself surprising. The original Merger Regulation of 1989 empowered the EC’s mergers taskforce to accept remedies offered only in the course of a phase 2 investigation.

Although the commission did occasionally accept undertakings at the phase 1 stage, it did not have formal powers to do so until March 1998. Given the manpower problems it faces after a doubling of merger notifications in the past three years – a point that Goldman’s Peter Sutherland repeatedly stresses – the EC is probably extra keen to avoid expensive and time-consuming phase 2 investigations.

“There are resource issues within the commission that are no secret,” says one seasoned adviser. “A lot hangs on who you’re dealing with in the merger taskforce and how busy they are.”

Another suggests that most of the undertakings given by companies at the phase 1 stage were anticipated by the protagonists, who knew they would have to have something up their sleeves to give away. In other words, there is a new game being played, rather like forfeits. The most identifiable shift in EC thinking in recent years is in the area of what constitutes market dominance.

Speaking at a conference in September last year, Mr Monti conceded “our assessment of dominance has developed significantly over the last 10 years”.

From concentrating on single dominance issues, the commission has progressively shifted its sights to collective dominance – in the form of duopolies and oligopolies. In 1998, the European Court of Justice gave a judgment on the Kali & Salz affair (which would have resulted in a European duopoly in potash) which confirmed that the concept of dominance contained in the Merger Regulation covered collective dominance.

“Success in the courts gave the mergers taskforce more confidence to tackle the issue of joint dominance,” says Mr Harrison. “Now they are extending the principle to oligopolies.”

The issues involved were taken out and dusted off in the proposed First Choice/Airtours merger that was blocked more than a year ago because the EC ruled it would have reduced the UK packaged holiday industry to just three dominant players.

Its decision is now being tested in the courts. The commission appeared to stretch its definition of what constituted a threatening oligopoly still further in the Time Warner/EMI case. This time it was concerned that four firms (Time Warner/EMI, Universal Music, Bertelsmann and Sony) would control 80% of the recorded music market in Europe.

The proposed merger was withdrawn after it became apparent that the EC would not sanction it. Mr Monti has also made it plain that he is concerned at the emergence of oligopolies in mobile telephony. “Competition in mobile markets has been limited mainly to the national retail market, even if recently new pan-European operators started to operate.

Problems remain regarding network access, call termination and roaming charges,” he said. Ms Torres says: “Commissioner Monti understands this issue is creating some nervousness in the business and legal industries. They are saying: ‘First you told us the existence of two dominant players was worrying, now it is three’.”

Mr Monti has promised a notice clarifying the position but Ms Torres says it has been postponed until after the Court of First Instance has delivered its judgment on Airtours, which is expected some time this year. Mr Monti promises to go on “refining” the commission’s analysis in this area on a case-by-case basis.

“We will continue discussing these issues with other competition authorities in order to converge on our criteria for assessing these cases,” he says. Mr Harrison says it is wrong to suggest that it is Mr Monti who has stretched the dominance criteria.

“The Airtours decision was written under Mr Monti’s predecessor, Karel van Meert,” he says. “In some other sectors, for example aspects of the oil sector, Mr Van Meert suggested that the acceptable limits of concentration might have been reached.”

That view is echoed by Ms Torres, speaking for the commission. She says: “The reason why we have more prohibitions now is simple. The merger wave is into its fourth or fifth year. Industry is already consolidated. An increase in the number of remedies sought in the phase 1 stage does not mean the rules are getting tougher. We have already reached a level of concentration in many sectors that is the maximum that regulators around the world deem acceptable.”

If that is so, argue bankers, the EC and other anti-trust authorities around Europe must establish a common set of principles and a clear strategy for reviewing mergers that is transparent. And the EC staff probably needs beefing up. There are still “too many rubber stampers” there, is one comment.

Ideally, investment bankers would like to deal with an organisation that resembles a mirror image of themselves rather than a directorate of civil servants. But they will have to wait a while for that.

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