Opinion: Siemens-Alstom fallout exposes the weak underbelly of EU merger law

12 June 2019 11:51am
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By MLex Chairman Robert McLeod.

The Siemens-Alstom merger prohibition has left many antitrust practitioners clinging to the purity of EU competition law and its unsullied application, free from political interference and industrial policy.

They should shake off their complacency, fast.

The application of antitrust law, particularly in relation to merger control, is about to become overtly political in Europe. Companies and their counsel would be wise to start preparing for that moment.

The political ramifications of the EU decision to block the Siemens-Alstom rail deal are likely to emerge over the five-year term of the next European Commission, due to take office in the autumn. The debate will pit French and German interventionists who want to nurture "European champions" to compete with Chinese giants against the antitrust purists, who say consumers will pay the price.

But how pure is antitrust law, really? Not very, it turns out. At least not all of it.

Past and future

There are three principal strands in EU competition enforcement: Classic antitrust infringements involving cartels and abusive single-company conduct; state-aid reviews; and merger investigations. Although rulings on subsidies have always involved political judgements, merger probes are equally problematic.

Price fixers and monopolists break laws. Rulings on cartels and monopolies examine what companies have done in the past. There are arguments about intent and effect and C-suite culpability, but the misbehavior has been recognized, regulated and prosecuted for more than a century.

Companies seeking mergers or acquisitions, by contrast, are going about a perfectly legal and legitimate business. Merger reviews attempt to assess how competition might be affected in the future. Given the dynamics in an increasingly global and digital economy, the ability of regulators to accurately predict the effectiveness of a particular corporate M&A strategy over the next five years may be just slightly less than that of the executives executing the deals.

Plenty of studies highlight how bad that predictive capacity is. Harvard Business Review, hardly a bastion of corporate bashing, routinely puts the failure rate for M&A deals at between 70 percent and 90 percent.

Digital flop

Regulators have hardly done better. If merger control is a preventative policy, it has spectacularly failed in the all-important digital industries. Merger rules proved all but useless as Google, Facebook and the like bought up all manner of real and potential competitors in what we now call killer acquisitions. The fallout from this will be one of the principal drivers of change in EU competition rules over the next five years.

The application of merger-control rules also tends to be more subjective than in other areas of antitrust. Massive resources are given over to the construction of economic models by some of the smartest people one could possibly hope to meet. Their ability to produce diametrically opposed views based on the same set of facts is breathtaking.

The simple reality that one of these analyses will underpin a final merger decision undermines any claims that the "law is the law". A senior industry official was once asked if a consultant ever put forward a view that contradicted his client's arguments. "Not after the first draft", he retorted.

This is where complex economic theory meets popular comprehension. The meeting is rarely pretty. When train factories in Europe end up shuttering in the face of cheaper competition from Chinese locomotive builders, voters aren't going to reflect on the ability of a combined Siemens-Alstom to push through price increases of more than 5 percent.

Political intervention

The idea that merger control isn't political is also a stretch. European governments retain the right to intervene in deals involving the military, media, financial services and healthcare industries representing, by some measures, up to a quarter of the EU economy.

National governments have for years ridden roughshod over their own regulators. The UK government overrode its merger regulator when it pushed for the Lloyds TSB acquisition of HBOS, with the combined bank eventually being bailed out by the government. In Slovenia, the government ignored its own antitrust guidelines and blocked a foreign takeover in the brewing business for the sake of creating a national champion. The French government doesn't need a law to prevent a US food giant from buying a French one. It just needs to raise an eyebrow. No sooner is one hole plugged than another emerges.

The on-again-off-again potential $40 billion merger of Fiat Chrysler Automobiles and Renault to create the world's third-biggest carmaker underlines just how political this industry is.  It would make the politics of Siemens and Alstom seem like a walk in the park. Whether or not this deal goes ahead is moot. It won't be the last megadeal in the auto industry, which has suffered from overcapacity for decades. What if Europe's Big Six carmakers Volkswagen, PSA, Renault, FCA, BMW and Daimler were reduced to, say, three? Or the global 10 cut to four?

To some extent, populism has already gained a toehold in the antitrust world: In the uniquely European realm of state-aid law, EU competition chief Margrethe Vestager has elevated the question of "fairness" in corporate tax liabilities to the level of a moral crusade.

Next up: environment

This is what is coming down the road, and it won't stop here. Voices in government, industry and the wider populace are calling for merger reviews to address employment, trade imbalances and the environment. Arguing that these social and industrial policy objectives don't have a place in merger regulation is going to get harder, particularly when, frankly, the decision to have a merger control regime was based on industrial-policy considerations in the first place.

Revising the rules is hardly unthinkable: The EU merger regulation was already overhauled in 2004, following court decisions that threw out a string of merger prohibitions. Those changes introduced more checks and balances into a system that still empowers the commission to rule on mergers without effective judicial redress. If governments decide they want the rules to change, they can be changed.

Unlike cartel and single-company conduct, merger control is seen as having a weak underbelly. Just this week, German Chancellor Angela Merkel herself said EU merger rules must be altered to counter China's rising economic clout.

Until now, the antitrust community has sat back, resting on its well-worn argument of ideological purity. Faced with the Franco-German backlash against the Siemens-Alstom decision, dozens of prominent lawyers and economists signed an open letter to the Financial Times defending the commission's "fair, even-handed and fact-based" merger enforcement. The only glaring absence among the signatories was anyone from Freshfields Bruckhaus Deringer, which had represented Siemens.

Having defeated attempts at loosening the rules in the past, practitioners have grown far too complacent about the potential for change. That will surely be challenged during the next commission.

Popular concerns about the environment, jobs, privacy, trade, globalization, tax and corporate responsibility are manna to leftist and green politicians as much as to nationalists. The commission's sweeping powers in the relatively malleable field of merger control will be seen as an effective tool to give voice to at least some of them.

In the past, dealmakers have had little success in overcoming antitrust obstacles by lobbying EU commissioners and national governments. That is going to change.

Merger control is about to become a lot more unpredictable. Companies will need to get a lot more political. They will need to promote the wider social and economic benefits of their deals and deflect attention from the competitive drawbacks.

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