Within the European Union, the merger of companies is subject to the approval of the European Commission. Yet the Commission’s rules are loose, since 1990 it has vetoed only 31 times and more than 6,400 mergers have been authorized.
However, on February 6, 2019, the Commission issued a decision which was heavily criticized: it banned the proposed acquisition of Alstom by Siemens under the EU regulation of January 20, 2004 on the control of concentrations between companies. The purpose of this transaction was to combine the activities of the two companies in the field of transport equipment and services in a new company exclusively controlled by Siemens. This merger made sense for Alstom and Siemens at the economic, technological and political levels. Economically, it would have been a way to respond to larger calls for tenders than those which the two companies can face separately. Technologically, the merger would have enabled economies of scale to be fostered and new technologies to be developed more effectively in order to establish themselves in the market. The political advantage would have been to allow the European Union to impose itself on the world market and to compete with China and the United States. Despite these benefits, the Commission refused the merger of Siemens and Alstom, what explains this decision?
The European institution considers that this concentration would have harmed competition within the market for rail signaling systems and very high speed trains because it involves bringing together the two largest suppliers of signaling systems for rail lines and subways. and rolling stock in Europe but also two world leaders.
The Commission had no choice but to ban the merger
Competition Policy Commissioner Margrethe Vestager said: “Both Siemens and Alstom are spearheads of the rail industry. In the absence of sufficient corrective measures, this concentration would have resulted in higher prices for signaling systems that ensure passenger safety and for future generations of very high speed trains. “. Indeed, a concentration between these two giants would have resulted in a monopoly on the rail market. Considering that the companies did not propose any measures to correct this situation, the Commission had no choice but to ban the concentration.
To deliver its decision, the European body conducted an in-depth investigation from which it emerged that the merger would have harmed competition by creating a dominant player in the high-speed train sector and in the signaling market, a player that the competitive pressure could not have withstood effective competition therefore could not have been ensured. This would have had the effect of reducing competition, to the point of creating a real monopoly on the European market and therefore restricting customers’ choice of suppliers and products. For example, Alstom and Siemens would have held more than 90% of the railway signage market in Great Britain, inevitably leading to illegitimate competition with its competitors. In addition to the consequences for competition, market participants feared that this operation would lead to reduced innovation and higher prices. So this merger would have been carried out to the detriment of the internal market and the other players.
In view of the expansion of global players, particularly Chinese, the following question arises: would the Siemens and Alstom merger not have made it possible to cope with the arrival of Chinese companies on the European market in the field of signaling systems for rail and metro lines and rolling stock, to prevent companies from outside the Union from establishing themselves as dominant players on the European market? The Commission considered that the Chinese players are not, for the moment, present in the European Economic Area and that they cannot, for the moment, be considered as competitors for signaling systems at European level. Regarding high-speed trains, the Commission considers that “ China’s entry into the market will not constitute a competitive constraint for the merging parties in the foreseeable future . “.
The decision of the European Commission corresponds to a stricto-sensu application of European rules but, these will besustainable in a context of global competition? Indeed, foreign players could impose themselves at European level, and European companies must be powerful enough to compete with them, failing which one of the solutions would be the establishment of protectionist European policies. Today, the European Union is a fervent defender of the open and liberal market, yet this conception seems complicated to implement in a situation where the two world giants, China and the United States, adopt regulations aimed at restricting the entry of foreign companies into their market. Another solution would be to create a climate of reciprocity: foreign companies could enter the European market and take market share, provided that European companies can do the same abroad.
Massive investment in innovation, adaptation of the European regulatory framework, and the implementation of effective measures
The arguments put forward by the European Commission failed to convince European players who opposed the Commission’s decision to reject the Siemens and Alstom merger. According to them, she refuses to see the importance that global players could take on the European market. To demonstrate their opposition, only 13 days after the refusal of the Alstom and Siemens merger Commission, the French and German governments published, on February 19, 2019, a Franco-German manifesto for a European industrial policy adapted to the 21st century by which they” call for a more ambitious European industrial strategy with clear objectives for horizon 2030 ”. They point out that in order to remain an international and globally competitive player, the European Union must put in place a genuine industrial and manufacturing policy. The Union must develop a long-term strategy. To achieve these objectives, the German and French governments maintain that the member states must pool their funding, skills and expertise. This manifesto is based on 3 pillars: massive investment in innovation, adaptation of the European regulatory framework, and the implementation of effective measures to protect European companies and European markets.
The massive investment in innovation is based on the idea of putting in place a European strategy to finance technology through the support of different programs. The manifesto puts forward the idea, for the European Union, of becoming a world leader in artificial intelligence, which implies supporting companies for research in this field.
The second measure would be to adapt the regulatory framework, which would involve various measures such as “ taking into account the increased role of state control and the subsidies granted to companies in the context of merger control.” em> ”, or even the establishment of concentration guidelines.
But this creation of new technologies and the expansion of European businesses cannot be achieved without effective protection of the technologies of EU businesses and markets. European companies are at a severe disadvantage compared to global companies. Indeed, European law prohibits subsidies for the benefit of companies – except in certain exceptions – therefore the question arises as to how European companies can compete fairly on the world market but also in the face of the entry of new foreign players on the Union market? Consequently, the French and German governments propose to put in place protective rules for European Union companies, for example by filtering foreign investments in Europe.
The European Commission will refuse any concentrateation which is likely to have a negative impact on the European Union market
Finally, the Commission received many criticisms following its decision, yet it only applied the Union rules concerning the authorization of mergers, rules that the States themselves have set in the < a href = “https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32004R0139&from=FR”> Council Regulation No 139/2004 of January 20, 2004 on the control of concentrations between undertakings . The Commission is responsible for monitoring the potential negative effects that a concentration could have on the European market and in particular on free competition. In accordance with the principle of attribution of powers, the Commission intervenes only if the merger of companies has a European dimension. How do we know whether or not this operation has a European dimension? Concentrations of companies whose cumulative worldwide turnover of the 2 companies concerned by the concentration exceeds 5 billion euros and whose turnover exceeds 250 million euros are considered to be European. But it will not be considered as such if each of the 2 companies achieves more than 2/3 of its turnover in one and the same Member State of the Union. The European Commission will also intervene when a proposed concentration is likely to negatively impact competition in at least 3 Member States.
In the absence of competence of the Commission, it is the authorities of the States which are competent to control the concentration operations. The European Commission will refuse any concentration that is likely to have a negative impact on the European Union market, for example leading to a situation of dominant position of one of the market players, which the other market players would be unable to cope with. . The abuse of a dominant position could lead to a monopoly situation that would impact consumers with a reduction in consumption choice but also an increase in prices.
We have therefore seen that the Commission wishes to strengthen its control over companies to avoid any situation which could prove harmful for the internal market. To this end, the Commission has amended the rules for a posteriori control of merger operations. On March 26, 2021, the European Commission adopted a communication aimed at interpreting Article 22 of Regulation 139/2004 according to which “ One or more Member States may request the Commission to examine any concentration, as defined in Article 3, which does not have a Community dimension within the meaning of Article 1, but which affects trade between Member States and threatens to significantly affect competition in the territory of the State (s) members who make this request […] ”. The Commission has identified sectors in which innovation is an important parameter which influences competition and for which mergers may prove to be problematic for competition. These operations were very little controlled because the turnover of the companies concerned is below the threshold set from which the national competition authorities must control the concentration operations. To remedy this problem, the Commission has adopted an interpretative communication of Article 22 of the Merger Regulation allowing the referral of a merger operation by the national competition authorities to the European Commission. This communication opens up a new situation in which the Commission can examine mergers. However, this communication is only an interpretation of the text and does not modify the article in any way. Consequently, the question of its real legal value arises. Traditionally, the committee’s communications are considered “soft law”, ie rules of law which contribute to the interpretation of a text and its clarification but which are not binding. However, this communication does not only interpret the law, it creates a whole new ex post control of concentration operations. The French competition authority did not wait to apply this provision and to refer to the commission the takeover of Grail, an innovative biotechnology company, by Illumina, the world leader in genomic sequencing. On April 21, 2021, the European Commission announced the opening of a review procedure for this buyout operation.
The question now arises as to what will be the consequences of this new procedure for companies? This historic novelty will upset the legal security of companies. In fact, until then, merger operations whose turnover was below the notification threshold could be carried out almost without control and without barriers. Now, companies will have to take this potential control into account in their operations. Consequently, legal and financial managers will have to analyze the situation to know which transactions are likely to be referred to the Commission and potentially be prohibited and which could take place freely and without barriers. Finally, once a merger is carried out in innovative sectors companies will have to consider whether it could have a negative impact on competition and take measures to avoid it.
Eternoscorp remains at your disposal to ensure that your merger transactions comply with European market rules and to take all necessary measures to ensure that they do not impact it.