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 In The Deal International, Carsten T. Gromotke, a partner in charge of international law firm Jones Day's German antitrust practice, examines antitrust issues in Germany. Ever since the General Electric Co.-Honeywell International Inc. debacle in 2001, dealmakers on both sides of the Atlantic are well aware that European merger approval cannot always be taken for granted, even if involving transactions between parties that have their headquarters and principal business outside Europe.
The huge publicity, which the European Commission's prohibition decision received, was of course the direct result that it came when the Department of Justice had already approved the transaction. Hence, it marked the first time the U.S. agencies and the EC arrived at a different assessment over the legality of the very same transaction. While this case has remained isolated as trans-Atlantic consultation in merger control proceedings between Washington and Brussels, it is far less known that a number of essentially foreign transactions did not fare any better before Germany's antitrust enforcement agency, the Federal Cartel Office.
Certainly, Germany has always been a bellwether of antitrust enforcement in Europe. But what may be news to many is that its jurisdictional coverage can hardly be regarded as being confined to its own territory these days. If the simple legal principle that the application of national merger control provisions can lead to the collapse of a worldwide transaction that has only limited effects in the country needed some reinforcement, there have been a number of recent precedents that suggest that there can be little doubt the FCO has no qualms about blocking international mergers in the spirit of national merger control enforcement. As merger control before the EC is limited to certain large-scale transactions exceeding the monetary sales thresholds established by the European Merger Control Regulation, or EMCR, many transactions falling short of the EMCR still require notification to one or more of the national antitrust agencies in the 27 European member states of which the European Union is composed. Germany, by contrast, has very low notification thresholds capturing all transactions where the parties' combined global sales exceed €500 million ($772 million) and either the acquirer or the target derives more than €25 million of its sales from German customers. That only one of the parties must satisfy the local sales test has lead to a significant number of foreign transactions being notified to the FCO each year, most involving U.S. acquirers or targets. While Germany has never been a country known for a low-key approach as far as its merger control enforcement is concerned, most essentially foreign merger cases undergo a rubber stamp procedure and are cleared in a single-stage review often lasting less than a month. In recent years, however, the German agency has shown its teeth to a number of transactions involving foreign parties that have received clearance elsewhere, but not so in Germany. The first such case involved the proposed acquisition by Pennsylvania-based Synthes-Stratec Inc. of Mathys Medizinaltechnik AG, a Swiss manufacturer of osteosynthesis products. After an extended merger review and multiple agreed-upon extensions of the statutory review period, the FCO moved to enjoin the transaction in its entirety by arguing that it was impossible to limit the prohibition to the effects of the transaction in Germany as the parties maintained only a local distribution network in Germany while all production facilities were located abroad. The flip side of this argument meant, of course, that the parties' scope of business in Germany was quite limited compared to the overall size of their operations. For the same reason, the German agency also did not accept the parties proposal to sell off the German distribution business of Mathys as a sufficient remedy. Still, this case had a number of facets to it that seemed to suggest market impacts of the transaction in Germany might have been more severe than elsewhere. The markets were considered to be national in scope, Synthes-Stratec had a very strong presence in Switzerland, hence just across the border, both parties had sales in excess of the domestic merger control threshold of €25 million, and the German agency argued that although both companies were operating on a worldwide basis, there was significant overlap only in Germany leading to combined market shares exceeding 45%. Perhaps somewhat more startling were the facts in the subsequent Coherent-Excel Technology case. In early 2006, California-based Coherent Inc. announced its intention to acquire Excel Technology Inc., a Nasdaq-listed company based in New York with, at the time, total sales of $138 million. Irrespective of the DOJ having cleared the proposed acquisition in early May, the German agency required more than five additional months and, after the parties had pulled back the original notification and refiled the deal after securing U.S. antitrust approval and agreed to multiple further extensions of time, in late October issued a prohibition decision by concluding that the transaction would lead to a dominant market position in the area of sealed-off CO2 lasers. Interestingly enough, in this case the parties just barely exceeded the worldwide sales threshold under the German merger control rules, and only Coherent met the domestic sales test. While the German agency agreed with the parties that the relevant market was worldwide in scope, it did not accept the position taken by an economic analysis suggesting the market was characterized by intense competition. Rather, in relying on a structural market analysis, it determined that the parties' combined market share post-merger would be significantly above the rebuttable presumption for market dominance which kicks in under German law if the share of the merging parties amounts to at least one-third of the total market. Surely, the outright prohibition of the entire deal must have been anything but anticipated by the parties which, in an early stage of the proceedings, requested the German agency to let them proceed with closing the transaction pending the completion of the German merger review process. If any further evidence of the FCO's autonomous approach was needed, in two more recent cases involving the acquisition of GN ReSound, a Danish hearing aid business, by Swiss competitor Phonak Holding AG (now Sonova Holding AG), and the purchase by Finland-based Cargotec Corp. of Italian manufacturer of container handling equipment CVS Ferrari, the FCO confirmed that it does not shy away from blocking essentially foreign transactions that have received clearance in all countries but Germany. In the Phonak-GN ReSound case, the parties obtained unconditional clearance for their transaction in the U.S. and Spain before they learned that Germany would enjoin the transaction altogether. Before the prohibition, the parties had again unsuccessfully tried to convince the German agency that a carve-out and separate sale of the German businesses of GN ReSound should remove competitive concerns in Germany. Despite Phonak having derived only about 9% of its total sales from German customers and GN ReSound less than 5%, the FCO concluded that the acquisition would lead to an oligopolistic market structure between the three leading players in this market, Siemens Hearing Instruments Inc., Phonak and Oticon A/S, thereby resulting in a prospective market share of close to 90%. Similarly, in the Cargotec-CVS Ferrari matter, the target's total German sales were below €10 million, well under the domestic merger control threshold of €25 million. Both the Phonak-GN ReSound and the Cargotec-CVS Ferrari transactions did not even require antitrust clearance on any parties' home turf. In all of these transactions, the German agency gave little heed to notions of public comity or limitations of its enforcement powers on the grounds of foreign sovereignty. As the foregoing cases illustrate, the German agency is not concerned about stepping onto foreign nations' toes when it comes to protecting effective competition in Germany. In the agency's eyes, an abuse of its own territorial jurisdiction could only become an issue in situations of a manifest disproportion between its domestic regulatory interest and the disadvantages faced by affected foreign businesses. As of yet, however, the FCO has still to find itself a case where it would reject its own authority to block a foreign transaction on such grounds. Consequences that should be drawn from the expansive approach taken by the German regulator are quite obvious: Even in transactions where Germany appears insignificant in the grand scheme of things, careful transaction planning suggests that one should pay close attention to German market impacts, even with respect to markets that are truly global in scope. With Germany's focus on a more structural market analysis and strict emphasis of long-term risks associated with high combined market shares, sound economic reasoning may not do the trick. At an early stage of a transaction, solutions can often be developed that effectively prevent a transaction from falling into the German merger control trap while it is often next to impossible to find a remedy that meets the German agency's expectations once the deal has been notified. Those, of course, who think this is perhaps too gloomy a picture to paint may simply wish to rely on the numerical evidence that less that a quarter percent of the close to 2,000 transactions notified in Germany are blocked each year. Categories Deal Video
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