EU red tape slowing down M&A boom

THE increase in M&A activity in recent weeks has been taken in some quarters as a tentative sign of economic recovery. The potential Kraft and Cadbury deal, Disney’s $4bn acquisition of Marvel, health company Johnson & Johnson’s purchase of 18 per cent of Dutch biotech business Crucell, and Ticketmaster’s attempt to buy Live Nation are the vanguard of booming M&A, say optimists. However, we should not get too excited. M&A is complicated and deals can be held up, especially when they cover more than one jurisdiction.

Take the case of Oracle and Sun Microsystems. Oracle, one of the world's largest suppliers of database programmes and other business software, announced in April that it had struck a deal to buy Sun Microsystems, which sells computer servers, data storage systems and a variety of software, including the Java programming platform.

But things have not gone smoothly. So far – and to Oracle’s surprise – the antitrust scrutiny of Oracle/Sun on both sides of the Atlantic has been troublesome. Both US and EU antitrust approval is a condition for the closure of the transaction, and in particular at this stage the pending EU antitrust clearance is crucial for the transaction to go ahead. Closing the deal without approval could result in the EU imposing huge financial penalties. First, and rather unexpectedly for Oracle, which initially anticipated an easy ride with the US Department of Justice, last June US antitrust regulators intensified their investigation on the deal. Despite the unexpected delay due to the lengthier US scrutiny, on 21 August the US Department of Justice approved the takeover.

Investors crossed their fingers and the more optimistic expected a nod of approval by the EU at the beginning of September. However, Oracle/Sun suffered an unexpected blow when the EU antitrust watchdog announced on 3 September that it was going to withhold approval for the deal until it finished probing the impact of the deal on the database software market. The deadline for its final ruling is 19 January 2010.

As the Oracle/Sun case and others such as 2008’s TomTom/Tele Atlas show, US antitrust clearance by no means guarantees that EU authorities will automatically follow, or at least will do so at the same speed as their US counterparts. Referring to a very extreme case approved in the US and blocked in the EU, we cannot forget the words of Jack Welch, CEO of General Electric when the EU blocked the GE/Honeywell deal in 2001, who said: “The European regulators’ demands exceeded anything I imagined and differed sharply from antitrust counterparts in the US and Canada”.

We are now six weeks into the EU’s probe, so what can we expect to be its conclusion? We should not ignore the Oracle/PeopleSoft case in 2004, which was also a tough antitrust journey for Oracle and where it eventually “persuaded” the EU to allow the deal to proceed. It’s not unreasonable to be optimistic that Oracle can do it again with the Sun deal.

The recent US announcement that the Obama administration plans tougher antitrust scrutiny that could affect merger plans is positive, and could result in a regime more consistent with the EU’s stricter approach.

However, a word of caution for investors remains: it is always necessary to conduct a separate antitrust assessment of the EU antitrust implications of a deal that requires transatlantic clearance. All those with a stake in M&A should remember that announcing a deal is a very different thing from getting it rubber-stamped in Brussels.

Maria De Heaver is the founder of Merger Antitrust Review