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From Antitrust Law Daily, February 29, 2016

United Technologies rejects Honeywell’s $90.3B merger bid, based on expected antitrust challenges

By Linda O’Brien, J.D., LL.M.

Any merger with multinational conglomerate Honeywell International would face insurmountable regulatory challenges in the United States, European Union, China, Brazil, and Canada, as well as undermine shareholder value, said United Technologies Corp. (UTC) president and chief executive officer Gregory Hayes in a February 26 press release.

Responding to Honeywell’s release of the details of its $90.3 billion proposed acquisition of UTC, Hayes noted that the merger would be blocked outright or, if allowed to proceed, would be subject to regulatory delay and require divestitures due to shifts in the regulatory environment in 2015. “It would be irresponsible for UTC to move forward with the proposed combination under these circumstances.”

Regulatory environment. In an analysis of UTC’s regulatory position, the company noted that the current U.S. and global environment has become more aggressive toward “mega-deals.” Recent successful merger challenges have emboldened regulators to continue challenging large transactions and demand increasing broad remedies. In addition, the U.S. Department of Defense has indicated its strong opposition to any further consolidation of major defense contractors.

Bill Baer, Assistant Attorney General in charge of the Department of Justice’s Antitrust Division, stated in July 2015 that “[t]here are some ideas that should never get out of the boardroom.” Even transactions in which the parties were represented by former heads of the DOJ Antitrust Division or FTC Bureau of Competition were not immune from being blocked, abandoned, or made contingent on large divestitures. As an example, UTC cited the Electrolux/GE merger, which was abandoned in December 2015 after 15 months in the midst of DOJ litigation. The FTC successfully enjoined the Sysco/US Foods deal following a 15-month investigation and five months of court proceedings. The FTC has sued to block the Office Depot/Staples merger after a ten-month investigation, and divestiture offers have been rejected by the DOJ and FTC in the Halliburton/Baker Hughes transaction, UTC said.

The European Union, China, Brazil, and Canada also would carefully review the proposed transaction and have independent authority to challenge the deal, impose divestiture remedies, and reject divestiture buyers. These regulatory reviews could take up to 18 months or longer, given recent experience with transactions involving fewer areas of overlap, the analysis stated.

Competitive overlap. UTC said that “pervasive and complex competitive overlaps and customer opposition” present overwhelming barriers to regulatory approval. The two companies are global leaders in supplying aerospace systems and are head-to-head competitors in numerous business lines in aerospace and building systems. Moreover, the four largest airframe manufacturers—Airbus, Boeing, Bombardier, and Embraer— have already voiced their opposition to this potential combination.

Divestiture process. According to the analysis, there are also questions of whether divestitures on the scale of what would be required may even be feasible. Regulatory authorities’ increasing insistence of robust remedies to ensure continued competition make it unlikely that anything short of stand-alone business unit divestitures would be acceptable. In the United States, the DOJ and FTC must ultimately sustain their determinations in court and appeals from a European Commission prohibition could take years. After a prolonged review and uncertainty weighing on the company, the options would be to accept the required divestitures regardless of the impact on the business and shareholder value, abandon the transaction, or have the merger blocked, the analysis concluded.

Headquarted in Farmington, Connecticut, United Technologies researches, develops, and manufactures high-technology products, such as aircraft engines, heating and air conditioning, fuel cells, elevators, fire and security, building systems, and industrial products. The company also is a large military contractor, producing missile and aircraft systems.

Companies: United Technologies Corporation; Honeywell International, Inc.

MainStory: TopStory AcquisitionsMergers Antitrust

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