Justus Capital Advisors

From time to time we publish insights on this page. However, feel free to contact us for examples of our work. 

February 2019

The Macro impact of the Siemens / Alstom merger prohibition

In February 2019 the European Commission prohibited the merger between the mobility units of Siemens and Alstom. This is a very rare occurrence. Since 2009, the European Commission has approved approximately 3000 mergers and only prohibited 7. Given prohibitions are so rare, how did we end up with a prohibition in the current case when the Commissioner for Competition Magrethe Vestager is not a hard liner and DG COMP are not dogmatic enforcers; but are able to negotiate with companies?

There are the technical and political aspects to consider.

Technically, competition concerns were raised in the areas of signalling and rolling stock. Despite national competition authorities endorsing the DG Competition led European Commission’s approach, the prohibition provoked a political backlash in France and Germany.

The rationale behind the merger used by Siemens and Alstom and taken up by the French and German Governments was to create a European rail champion to ‘fend off’ competition from Chinese State owned rail company CRRC. It was also argued by the merging parties and the French and German Governments that the merger was needed to compete in tenders against CRRC.

In brief, the merger was prohibited on a technical level because there was no evidence that CRRC was a competitor to Siemens and Alstom in Europe but more importantly from a competition enforcement perspective, the merger would have led to Siemens / Alstom holding monopolies in rolling stock and signalling in many EU Member States.

The merging parties gambled on political support bullying the European Commission and forcing the merger through. This strategy could have worked if they had offered just a bit more in terms of remedies. However, a lot of tactical mistakes were made in pre-notification discussions, and during the phase 1 and 2 formal investigation by Siemens and Alstom that meant that their political lobbying did not work. With our network of contacts in the EU institutions, you will know when companies are making these mistakes and what the impact could be.

Although internally the French and German administrations were split on the deal with economic counsellors advising against the deal, the deal had high level Ministerial support. The political fall-out from the prohibition decision has thus been swift and aggressive. The current French and German governments have published their joint ideas on a new EU industrial policy that explicitly calls for the creation of European Champions, despite leading economists, including the national council of economic advisers in Germany, ridiculing the plan. The proposal argues for a change to merger control rules to enable this. The proposal also tries to further politicise competition policy by calling for new powers for the European Council [EU Heads of State] to be able to veto a DG Competition/European Commission merger decision.

The questions, assumptions and consequences this measure would create for the wider economy challenge basic free market economy principles.

1.       Is it the role of the State to decide who gets patronage to grow unhindered by competition rules and who does not? Are companies going to lobby for patronage and under what conditions will it be given? 

2.       At precisely the moment China is experiencing some of the negative aspects of the creation of State champions (low productivity growth, low levels of innovation, process failures being made in order to meet politically stated objectives and leading to scandals e.g. fake vaccines), Europe seems to be heading in that direction with no regard to the economic consequences.

3.       Explicitly protecting companies is the fastest way to make them lose their competitive instincts and to lose global competitiveness. This is a dangerous strategy for ‘protecting’ European industry, which will need to be massively efficient, with high service and product quality as well as innovative to counter the future Chinese import explosion once Chinese growth slows and excess domestic industrial capacity is re-tuned for export.

Why the shift to overt protectionism? Is it just to do with Siemens / Alstom?

This protectionist move by the current governments of France and Germany reveal some of the consequences of Brexit and a no-longer influential UK in the EU. Without the UK to moderate some of the more protectionist tendencies of France [Spain and Italy as well] and to bolster the traditional countervailing free market position of Germany, we are seeing a new dynamic in the EU. Germany is being stretched, trying to reconcile the free market liberalism of the North and the Baltics; the pro-regulatory and protectionist views of France and the South; as well as the security concerns and anti-immigration tendencies with her Eastern neighbours. As Germany trades off its positions to maintain good relations with its EU partners, she is having to sacrifice some of her geo-political anchor points e.g. on trade, on economic and fiscal beliefs to name a few.

At the moment it looks like the EU is headed towards a more interventionist and protectionist economic policy. The Siemens/Alstom political reaction may be a taster of what is to come. Of course there are short-term opportunities in targeting investments in companies with political patronage, but over the long-term this trend might necessitate a change in traditional investment strategies in Europe.  

You can also see from this merger case that political pressure may not be enough for a deal to succeed. Maybe political pressure will work in some cases but not in other cases. We can keep you up to date on EU thinking to maximize your returns.

January 2019

Opportunities for financial investors in EU merger control

The approval or prohibition of mergers in the European Union (EU) is one of the most misunderstood and complex areas of EU regulatory powers. Tight deadlines, complex economic analysis, extensive and intrusive investigatory powers, legal norms and political influences compete and combine to influence the final approval or prohibition decision.

In practice, about 60 percent of approvals that go through the regular procedure, as opposed to a simplified uncontested procedure, end up as conditional approvals (an approval conditional upon the divestiture of an asset).

Conditional approvals present particular opportunities for financial investors who can purchase good assets at distressed prices. Asset prices are distressed because the regulator, DG Competition, imposes tight deadlines under which the merging parties are forced to sell good assets (usually including relevant staff, customer lists etc.) with strict conditions. Conditions include the buyer not being able to create a further competition problem; the buyer having sufficient expertise and incentive to run the business and the buyer not closing down the business in the short-term.

In practice, a financial investor can easily meet the first condition as it generally would be a new market entrant. An industry competitor on the other hand might be ruled out of the asset sale as it would create a further competition problem. This reduces the pool of purchasers in favour of a financial investor.

The second condition of expertise and incentive can usually be met by showing a track record in the sector or by partnering with an industrial player (a player outside the EU is usually a good practice as it would pose no further competition problems in most cases).

The tight sales deadline is also important because the longer a sale goes on for, the more likely it is that financing for the original merger can lapse or change. The merging parties are thus incentivised to sell quickly to a small pool of purchasers.

Another important issue to look at is whether a ‘fix it first remedy’ can be done. A fix it first remedy is where the merging parties agree to a sale of divestments to a specified buyer in advance of the merger control procedure. This saves time and can facilitate clearance for the merging parties. This occurs quite rarely but is very effective e.g. it was a feature of the ABI / SAB merger when the EU SAB business was divested to Japanese brewer Asahi.

We can help you to identify divestitures, guide you through the merger control process (including working with DG Competition) and facilitate joint ventures or 'fix it first' mergers. Specifically for hedge funds, our expertise in, and proximity to, the merger control process and DG Competition can help you to act at critical moments in proceedings e.g. we can shadow the entire merger control process sharing our insights on phase 1 progress, alerting you to remedy proposals, market tests, the probability of a phase 2 in depth investigation, and likelihood of an approval, conditional approval or prohibition decision.