The European Commission took a gutsy but wrongheaded stand when it recently rejected Tetra Laval BV's acquisition of Sidel SA.
The rebuff, coupled with EC's recent decision to halt General Electric Co.'s takeover of Honeywell Inc., must give pause to any company considering a major acquisition that has implications in the European market.
On the surface, both decisions make little sense. Yes, Sidel is the major force in machinery for two-step PET blow molding. As a result, no matter who ends up owning the franchise, they will hold a huge position in that portion of the PET bottle machinery market.
Tetra Laval officials recognized that, and they were prepared to jettison pieces of their own, much smaller PET machinery business in order to win regulatory approval. In past years, that would have been enough to win a green light for the deal.
But that wasn't enough for EC bureaucrats. No, the regulators looked also at Tetra Laval's paperboard carton business, which they considered closely related to PET bottles. Customers are willing to substitute cartons with plastic bottles, their reasoning went, so giving one company a dominant position in both products would give it too much leverage over customers and competitors.
The GE/Honeywell deal, which was rejected in July, was blocked for similar reasons.
Both deals had significant plastics-related story lines, so industry observers might have a distorted view of EC regulators' propensity to reject mergers. The fact is, the Tetra Laval/Sidel decision was the 18th time the commission had blocked a deal since the body became the controlling authority in 1990. That's 18 out of more than 1,900 cases. Five deals have been blocked this year, but the EC claims that's because of the rapid rise in mergers and the complexity of the more recent deals, not because regulators are giving the proposals more rigorous scrutiny.
Still, it's not the numbers that are a concern, but the logic behind the decisions. The fact is that European regulators suddenly are far more likely to reject mergers than their counterparts in the United States. And in cases like Tetra Laval/Sidel, they're stretching pretty far to find a rationale to back up their decision.
