News item: the European Commission has vetoed as many transactions in 2000-2001 as from 1991 to 1999.

While only 10 mergers were vetoed from 1991 to 1999 by the European competition authorities, in 2000-2001 Mario Monti's office has blocked eight deals, five in 2001 (Tetra Laval/Sidel, CVC/Lenzing and Schneider/Legrand in October, GE/Honeywell in July, and SCA/Metsa Tissue in January) and three in 2000 (MCIWorldcom/Sprint in June, Volvo/Scania in March and AirTours/First Choice in September 1999). In addition to these outright vetoes, several planned deals were dropped after preliminary contacts with Brussels authorities did not augur well for Commission approval. These included Telia/Telenor, Alcan/Pechiney, and EMI/Time Warner.
The number of Commission vetoes (five in 2001) must be kept in perspective, given the number of notifications (296) it has received. Even so, Mario Monti's decisions have surprised the legal and financial world, as they seemed to break with a rather live-and-let-live tradition as regards major M&A deals. The change in the Commission's philosophy is based on a stricter approach to mergers, even if it is partly due to the concern of the current commissioner to consolidate the reputation of the European anti-trust authority as a credible and respected institution that does not back down to political pressures (for example, pressure from France and the US were of no avail in the Schneider and GE deals, respectively).

European competition rules
Rule 4064/89 of the Council of 21 December 1989 sets European anti-trust rules. This founding text stressed that the establishment of a European domestic market would lead to a major cross-border reorganisation and that it was important to establish equitable rules so that such transactions would not harm competition. In other words, the same obligations in terms of notification and the same legal procedures and standards apply to all link-ups having a significant cross-border impact.
This is why the rules give the Commission the exclusive right to rule on EU-scale link-ups. This one-stop-shop principle has two purposes: 1) in the spirit of subsidiarity, it is based on the fact that EU-wide antitrust review is justified given the inability of any one member-state to judge the full cross-border impact of this type of transaction; 2) it simplifies administrative procedures, something that allows both the competition authorities and companies to keep down the costs of merger reviews.

The Community dimension
The rules applies to all EU-scale link-ups, i.e. to all deals meeting the following criteria:
a) If total worldwide revenues for all the companies concerned is over €5bn; and
b) Total revenues generated individually in the EU by at least two of the companies involved amount to more than €250m, unless none of the companies generates more than two thirds of its total EU revenues within a single member-country.
After a number of deals slipped through the Commission's grasp because they fell under these revenue thresholds, the rules were supplemented in 1998 with an additional paragraph (the famous "Article 1, paragraph 3"):
A deal that does not reach the above-stated thresholds nonetheless has an EU dimension when:
a) Total worldwide revenues by all the companies involved is above €2.5bn;
b) total revenues of all the companies involved exceeds €100m in at least three member-countries;
c) in at least three of the member-states as defined in b), the total revenues of at least two of the companies concerned exceeds €25m; and
d) total EU revenues of at least two of the companies concerned exceeds €100m.
The Commission's objective is clear: to claim jurisdiction in deals affecting at least three member-countries. But in 2000, the Commission was notified of only 20 deals under this article, out of 75 multiple notifications involving at least three member-countries. The Commission is therefore considering modifying this article in order to avoid multiple notifications, the number of which is rising sharply (could companies merely wish to avoid Commission intransigence?)

A fast-track procedure
One of the hallmarks of the European procedure is its very tight timetable (by law, no more than four months). This is why the Commission must be officially notified no more than one week after the deal is announced. The Commission then publishes the notification and begins the preliminary phase of reviewing the deal, which lasts one month.
After this preliminary phase, the deal is either approved (if it is deemed not to be governed by the rules or deemed not to raise "serious doubts on its compatibility with the common market") or the procedure is started. A first, three-week phase (phase I) then begins. The companies involved have until the last day of phase I to offer any concessions that would keep the deal from being vetoed. If the concessions are deemed insufficient or if the Commission wishes to investigate further, it then begins a second phase (phase II). In 2001, the Commission authorised 13 deals after phase I out of a total of 23 authorisations.
The basic difference between phase II, which can last up to three months, and phase I, is the obligation for companies to offer concessions no later than the last day of phase II. In practice, these three months are used mainly for negotiations between the companies and the Commission. But experience has shown that it is in the last few days of these three months that companies and the Commission actually negotiate concessions to gain approval and by then there is not enough time. It is therefore worth offering serious concessions in phase I in order to obtain its approval, and foregoing phase II.
The Commission can follow a fast-track procedure lasting just one month when the deal has no negative impact on competition (small companies with, together, no more than €100m in revenues and assets, etc.). The fast-track procedure was instituted in September 2000. Between September 2000 and April 2001, 39% of the notifications came under this procedure, which lasted 25 working days, on average.
Lastly, let's keep in mind that, under European rules, no link-up is allowed unless the Commission has been notified and unless it has been declared compatible with the common market principle (this creates conflicts with some national takeover regulations).

From theory to practice: why are more deals being vetoed?
The Commission operates under two broad principles when it comes to industrial consolidation. The first principle is that consolidation that creates or increases a dominant position that significantly prevents effective competition is incompatible with rules of the common market. This is a founding concept and serves as a guiding principle for the Commission. On the other hand, the Commission's operating principle is that of a constant learning curve. It is therefore important to keep in mind that the initial 1989 rules are constantly being improved and revamped. The Commission regularly tests the relevance of its analysis criteria to market trends, in accordance with two principles that are almost at odds with each other: the immutable concept (perhaps not for long) of a dominant position and the constant leaning curve. It is this apparent paradox that could be the reason for the Commission's current tougher stance.
Of the eight Commission vetoes of the last two years, six were based on a stricter application of the principles put forward above, in particular:

• TetraLaval/Sidel: the deal was deemed harmful to competition within the common market, as the new entity would have been able to use TetraLaval's dominance in cartons to penetrate strongly into the similar market of plastic packaging. This case reveals a relative narrow interpretation of a dominant position by building up a conglomerate of similar activities. From this point of view, TetraLaval is a repeat of the GE/Honeywell case.
• GE/Honeywell: the Commission deemed that this deal would have allowed the new entity to sell a mix of GE products (aircraft engines) and Honeywell products (avionics systems) at a price discounted compared to separate sales of the two items; to benefit from the financial wherewithal of GE Capital, one of the top aeronautics leasing companies; to impose GE/Honeywell products; and to make the two companies products available only if purchased together.

These two cases illustrate the recent shift in the Commission's thinking that a dominant position can be created or strengthened by the merger of similar activities. This new theory of business portfolios or conglomerates differs from the traditional view that dominance is the result of a concentration of players on the same market. However, it remains an extension of the principle under which a dominant position is harmful. However, dominance is bad news for competitors but not necessarily for customers (at least in the short term), since it allows them, in the event of a merger of similar activities, to buy different, packaged items for less than if they were sold separately. This notion of dominance is increasingly criticised by the business world, which interpret it as the result of active lobbying by competitors of the merging companies. The Commission consults these competitors more and more (the infamous "market testing") and consumers less and less. Didn't we tell you that the Commission operated on a constant learning curve?
The Commission's veto of the Volvo/Scania deal is revealing of its intention to apply the more American notion of "substantial lessening of competition standard". Community precedent had tended to set a market share threshold at 40%, beyond which the deal would be deemed contrary to the interest of the common market. The Commission felt that a merger of Volvo and Scania would have constituted an obstacle to competition by demonstrating, though extensive economic calculation of market share - a rather new development, given the notification criteria (revenues and not market share) - that the new entity would control more than 35% of the European heavy trucks market, with a strong presence on some markets (particularly Nordic markets).

The Green Paper
The Commission has toughened its message on all fronts. But its positions are surprising in that they appear to be based more on protecting competitors than on preserving consumer interests. Similarly, it seems to be out to veto any deal that would increase the efficiency of merger partners. Isn't this, after all the purpose of mergers? In response to these criticisms, Mario Monti has launched a major debate on reforming community regulations, the main items of which are as follows:

• Is the dominant position standard always relevant or should we switch to the "substantial lessening of competition" standard? The latter standard is broader in scope and seems to have been more flexible in US mergers.
• Should the Commission's attitude on efficiency gains be modified?
• Doesn't a rapid process, which until now had been an undeniable plus of the community process, make it more difficult to come to an agreement on company concessions?
• Should the Commission be notified on deals involving more than three member-states, i.e. should the net be made denser in order to forestall multiple notifications?

Keen observers will have noticed that at least two core subjects are missing alongside these themes: can the Commission continue to review applications, negotiate with companies on its terms of authorisation and decide to ban them or authorise them? In other words, be a judge in one's own case? Secondly, can the Commission continue to do what it has done with increasing frequency - apply market tests with competitors who wish only to see the merger collapse (Schneider/Legrand is said to be an example of Siemens' clout)?
Green paper proposals are currently being discussed. In addition to the changes that will be made to the founding rules, the European Commission will have managed in 12 years no longer to be a detail to be dealt with at the last minute in major merger projects. The issue comes down to this: is the common market that it is defending that of the producer of that of the consumer? Until now, in a nascent common market, the Commission's main concern has been to ensure that all common market companies are treated equally and that companies' size rise in the same proportions as the opening of business frontiers within the European economic area. It is for this reason that the Commission has focused on the notion of dominant position. But, now that the European market appears to be more mature and that national champions are increasingly in competition with each other, it may be time for the Commission to focus on the consumer's interest, as is the case in the US.