Could the biggest shake-up of EU merger rules in 30 years change the industry for the better?

Together with Germany, France is pushing for the largest change of EU merger rules in over three decades. This agenda has stepped up a level following the veto of the merger between the train manufacturers, Siemens-Alstom, which angered both countries.

Siemens AG was poised to acquire Alstom SA, joining the two companies to form a titan of the rail industry with a combined revenue of £12.89bn enabling it to take on foreign rivals with strength.

However, the merger was denied due to concerns that it would stifle competition in the region’s train equipment market by driving up prices and forcing smaller companies out of business.

Consequently, France’s economy minister, Bruno Le Maire said the decision would “serve the interests of China”.

Chinese state-owned Railway behemoth CRRC is the largest global player and has been bidding aggressively for overseas contracts in recent years.

“Europe urgently needs structural reform… protecting customer interests locally must not mean that Europe cannot be on a level playing field with leading nations like China, the United States and others.”

Siemens’ chief executive- Joe Kaeser

What are the proposed changes?

The proposed changes are designed to allow national EU ministers the opportunity to overturn decisions made by Brussels.  This may have resulted in the Siemens-Alstom merger being able to go through, regardless of a veto.

Leading the charge, Bruno Le Maire, has made clear his ambition to see the creation of new industrial champions for Europe. Bruno Le Maire and Olaf Scholz, who is the German finance minister, both warned that blocking the Siemens-Alstom merger risks allowing China to further their domination of global technology markets.

As part of the push towards the merger rules shakeup, the French and German finance ministers outlined a three-point plan. This was originally devised in France and will be further discussed and developed in Berlin in the near future. This plan already includes a few of the key objectives of the rule changes, including the following:

  • Allow EU national leaders, the ability and right to overturn decisions and vetoes issued by the European Commission regarding mergers & acquisitions.
  • Ensure Brussels retains the ability to approve mergers & acquisitions in the future, by having the authority to ensure that the combined companies make essential divestments should competitive issues arise.
  • Create a dynamic analysis procedure that allows Brussels to systematically evaluate competition based on market share on a global level.

When will the shakeup begin?

Mr. Scholz has not yet lent public endorsement to France’s plan, but the upcoming talks in Berlin are expected to align the countries in this push. This is in line with a broader agenda between the two to revamp Europe’s industrial strategies in a bid to ensure Europe remains at the center of innovation and expertise.

As such, the first draft of conclusions was approved in Brussels in February, with amendments and final approval expected in the coming months.

Opposition to the proposed changes

France and Germany argue that the current rules are too rigid. Brussels making individual judgement on competitive risk of market share on a national and global level would mean that mergers and acquisitions which could improve Europe’s global competition are being held back by more regional disputes. Speaking in support of the current rules and against the merger and acquisition shakeup, competition lawyers are concerned that changes to those rules could mean a subordinate role for the commission and the loss of consistency and transparency when it comes to the application of EU merger control.

Amongst the voices that have come out in opposition against the push is the European Commissioner for Competition, Magrethe Vestager, who has warned that allowing such mergers and limiting the commission’s authority to block them could result in higher prices and less innovation due to an environment that doesn’t allow for competition. Similarly, a Polish newspaper claimed to see a letter where the Baltic States, Belgium, Czech Republic, Denmark, Finland, Ireland, the Netherlands, Poland, Portugal, Slovakia and Sweden have joined forces to oppose France and Germany. They have shared concerns to the European Council President Donald Tusk about the “growing risk of protectionism” and possible power balance shift once Brexit concluded

What has led to the proposed changes?

China already has a strong grasp on the robotics, AI, and computer learning industries as well as a competitive manufacturing industry. Against this, EU Commission members in Brussels argued that the combined entities may effectively create a monopoly in the high-speed train and signaling industries in Europe, eliminating the ability for manufacturers to compete.

Meanwhile, officials in the EU suggest that the push from France and Germany’s financial ministers is a sign of growing concern towards the growth of China’s state-backed companies, including acquisitions of technology firms once based in Europe. One such case that has led to this shifting political climate is the 2016 takeover of Kuka, a German robot development company, that was bought for €4.5bn by Midea, a Chinese appliance maker.

Their argument highlights that European firms are having trouble against Chinese and other rivals that can take advantage of state funding that is propelling them to a global level, while European firms see no such help from their own countries. With this difference in state cooperation, mergers and acquisitions are looked upon as one of the few ways firms in the EU can stay competitive with Chinese rivals on a global level.

The proposed changes mimic similar powers that have been used in France in recent times, particularly by Mr. Le Maire who used them to loosen restrictions on a 2017 agricultural merger. This proposed ability for EU ministers to veto merger decisions made by the European Commission follows a model already set by ministers that already have existing veto powers over state aid decisions.

The European Commission’s authority

This is not the first challenge against the European Commission’s antitrust watchdog. Others have spoken out against the large fines given to companies seeking large-scale mergers, including the divestment of valuable assets. In the past, others seeking mergers have simply cancelled their plans instead of following the Commission’s concessions.

It’s uncertain just how much the leaders of Europe will approve the Franco-German push for the diminishing power of the Commission’s merger authority, with some arguing it as the most successful control against the formation of monopolies in the entire world. While some argue that it could eliminate smaller country’s ability to compete, the French and German finance ministers are ready to ensure the European firms get the support they need to compete on a global stage.

As identified by Mr Tusk, the cooperation should be “for integration, and not instead of integration” and has echoed the concerns of smaller European countries about a powershift with an emergence of a Franco-German alliance.