How Jack Fell Down

By Michael Elliott With Reporting by Frank Gibney and Eric Roston/New York, and James Graff and Joseph Kirwin/Brussels

On the evening of Wednesday, June 13, Jack Welch, CEO of General Electric, retreated to his room at the Conrad Hilton hotel in Brussels and wrestled with an unfamiliar feeling--one of impending defeat. Just eight months before, he had, it seemed, pulled off a stunning coup. Welch had always coveted Honeywell International, whose business making advanced electronics for the aviation industry, he thought, made a perfect fit with GE, one of three leading global manufacturers of airplane engines. In October 2000, during a visit to the New York Stock Exchange, he had learned that United Technologies Corp.--whose Pratt & Whitney division is another huge enginemaker--planned to buy Honeywell. Within 45 minutes, on the phone from his car, Welch had lined up his board to make a counter-offer. Two days later he had Honeywell in the bag; it would be the largest ever merger between two industrial companies. Welch delayed his retirement to oversee the integration of GE and Honeywell--and to set the capstone on his legendary career.

And now, in the European capital, his last big deal was falling apart. On that day in June, Welch had met twice with Mario Monti, the European Union's Commissioner for Competition. Monti believed that the combination of Honeywell's cockpit controls with GE's engines and powerful aircraft financing division would stifle competition. In other words, he viewed with suspicion precisely those synergies that, for Welch, made the deal so attractive. Monti would approve the merger only if Welch made the kind of concessions that, from GE's standpoint, wrecked its whole point. The next morning Monti called Welch once more, to discuss how the apparent breakdown in talks should be handled. GE issued a statement saying that attempts at compromise fell "far short" of Monti's "extraordinary demands."

Welch placed a call to Andrew Card, chief of staff to President Bush, who was about to sit down with European leaders in Goteborg, Sweden. As the GE boss recounted the conversation to TIME, he told Card that he would appreciate "whatever help you can give us." In the formal meetings in Sweden, GE never came up. But on June 15, in Warsaw, Bush said he was "concerned" that the Europeans had rejected the merger. Monti was furious--not with Bush, he told TIME, but with those who had sought the President's help. Three days later Monti said he "deplore[d] attempts to...trigger political intervention." And though the case dragged on for two more weeks, the deal was dying a slow death.

Welcome to globalization. The collapse of the GE-Honeywell merger shows that companies that benefit from a global market can now be governed in all they do by any of the countries or regions in which they do business. There's no settled code of rules in the global marketplace, just a haphazard collection of local practices and habits. Still, the GE case is extraordinary. Never before have officials outside the U.S. nixed a merger between two giant American corporations already approved by the DOJ. Never before have U.S. companies lobbied so ferociously against their U.S. rivals in a foreign capital. And that's why, for any company that seeks to profit from globalization, there are abundant lessons in the story of how Jack fell down.

For months, nobody thought he would. After Welch stole Honeywell from United Technologies, he said: "This is the cleanest deal you'll ever see." Honeywell and GE were both industrial conglomerates, but their product lines had few overlaps. A combined company, however, would be a powerful force. So United Technologies, Rolls-Royce of Britain--the third of the trio that dominates jet engines--and other businesses were determined to stop the deal.

They didn't find the going easy on either side of the Atlantic. "At the beginning, we weren't invited in the front door or the back door," says an executive with a competitor. (With legal actions still a possibility, many of those interviewed for this story insisted on anonymity.) In Washington, the antitrust division of Justice would wait until June 14 for the arrival of a new head--Charles James, Bush's nominee, who was considered to be probusiness. "The DOJ would not and did not meet with us," says John Briggs, who represented Rockwell, an American competitor of Honeywell. "There was just no real constituency for taking on Jack Welch without political leadership in place."

Things looked no better in Brussels. Since 1990 the European Commission, the executive arm of the 15-nation European Union, has exercised jurisdiction over all mergers between firms with combined revenues of $4.2 billion, of which $212 million must be within Europe. The GE-Honeywell deal easily met the criteria. When U.S. lawmakers ask what business it is of the Europeans if two U.S. companies want to merge, part of the answer is that GE alone employs 85,000 people in Europe and collected $25 billion in revenue there last year.

Still, Commissioner Monti wasn't looking for a fight. The Italian economics professor is sufficiently conservative that he was offered the foreign ministry in Silvio Berlusconi's new right-wing Italian government. Moreover, Monti was proud of the working relationship he had forged with his American counterparts; he told TIME he had "profound respect" for the U.S. regulators and described his own agency as a "junior institution." Before Christmas, when GE's competitors called on the case officer assigned to the merger, Enrique Gonzalez-Diaz, to persuade him to start a lengthy "phase two" investigation of the deal, Gonzalez-Diaz accused them of whining.

That wasn't good. For the merging companies and their opponents, Gonzalez-Diaz was the man to see. The Spaniard, 39, a native of the Canary Islands, is known as a brilliant mathematician and lawyer, hardworking and intensely ambitious. One source (on the losing side of this case) also calls him "deeply cynical about the motivation of business and a nightmare to deal with." GE's opponents knew they would never convince Monti without first winning over Gonzalez-Diaz. The principals came to a rough division of labor: Rolls-Royce stressed the dangers of allowing GE to "bundle" engines and avionics in packages that other firms couldn't match, and United Technologies concentrated on GE's role as a buyer of planes through GE Capital Aviation Services, its finance and leasing subsidiary. GECAS, it was argued, would insist that those from whom it bought aircraft should buy both GE engines and Honeywell avionics, hence reducing consumer choice and stifling technological innovation.

"I got the impression that Enrique was interested when we explained to him that GECAS was frequently a launch customer for airplanes," said a lawyer. "He said, 'Really? I thought they only dealt in secondhand machines.'" GECAS, according to Welch, has only an 8% share of the new-plane market. Yet GE's competitors were starting to make headway. GE, for its part, was beginning to discover that while Monti was always a gentleman, his staff could be as hard as nails. On Feb. 26, all parties met in Brussels. Monti, said Welch, "listened carefully to our case...I thought we had a shot." But at 6:30 that evening, GE and Honeywell were called back to the Commission's offices. Armed with answers to the detailed questionnaires Gonzalez-Diaz's staff had sent to competitors and customers, Monti was going to phase two, a full-blown investigation.

The European capital then experienced the most intense politicking old hands there have seen."There were journalists, lobbyists and lots of arbitragers from Wall Street calling constantly," says a lawyer.

Gonzalez-Diaz's team visited Rockwell's operations in Cedar Rapids, Iowa. By this point, sources close to the case say, Monti's team had not only heard an earful from GE's competitors but had also registered concerns from 15 airlines, whose identities were kept secret from GE. On May 8, the Commission issued a 155-page statement of objections to the merger, and on May 29, the parties gathered for a two-day hearing.

GE and its lawyers took their seats along one side of the room, the complainants faced them, representatives of the E.U. member states and the DOJ watched from the sidelines, and the Commission's task force sat on a raised dais at one end of the room. (Unlike the procedure in the American system, the Commission's staff both investigates a case and makes a judgment on its merits.) GE's advisers claim that they had been left with less than two weeks to examine the Commission's objections and complain that the Commission and the competitors had been working together for six months. "It's very much an ambush," says a lawyer, "but that's the way it often is. The process is deeply flawed."

Of the 15 airlines said to have commented on the deal, only one--Lufthansa, whose executives gave evidence in secret--showed up at the hearings. The Commission staff concluded that if the carriers were that frightened, then Welch's company really must be an overbearing bully. A Commission official said, incredulously, that one American airline didn't attend because it feared it would lose the fares of GE executives.

Still, GE didn't do so badly. Most observers consider that it destroyed the Commission's case on bundling. But for Monti's staff, the "vertical" merger of the aircraft leasing division with GE's engines and Honeywell's electronics threatened to diminish competition. As the price of approval in Washington, GE had already agreed to divest itself of a helicopter-engines division--the one area where GE and Honeywell had a product overlap. Monti wanted much, much more; Welch agreed to sell off businesses with revenues of $2.2 billion--not including the helicopter-engines division--and was prepared to "ringfence" GECAS to ensure that its activities would not be anticompetitive. It wasn't enough.

When Welch arrived at Monti's office on June 13, the Commissioner was flanked by seven aides. Monti stiffly read out his conditions. "It wasn't a negotiating session," said a GE lawyer who was present. GE, said Monti, had to sell 19.9% of the leasing arm in such a way that it "would assure nondiscrimination in the purchasing policies of GECAS."

Monti told TIME that the key point was that GE could not restrict those who would buy the shares. But to some GE advisers, this could mean only one thing--Monti wanted GE to sell part of GECAS to a competitor. That was never going to fly. "It would have been like asking [Ford CEO] Jacques Nasser to drive a Toyota for 20% of the day," says Yale economist Barry Nalebuff, who advised GE. Monti asked Welch to consider the terms and return that afternoon. Welch did, and rejected them. The next day, Welch called Card and flew back to the U.S. Jeff Immelt, his successor as CEO of GE, went to the Paris air show to pronounce the deal dead.

Which, in effect, it was. GE made a last-ditch effort, suggesting that it sell a part of GECAS in a private placing to a handpicked buyer. Monti didn't take that seriously. Honeywell's CEO Michael Bonsignore desperately offered to drop the purchase price of his company, but Welch wasn't interested. And so, on July 3, the full European Commission endorsed the decision that Monti had made. "We remain," said Monti, "distinctly unimpressed by any political pressure."

Welch says GE's lawyers are considering an appeal to the European Union's Court of First Instance in Luxembourg. That won't save the Honeywell deal--such a case might not be settled for two years. But it would give GE a chance to disprove the allegation that it had a "dominant position" that it was likely to abuse. If that stain remains on the record, GE is going to find it hard to make any significant acquisitions in Europe. Honeywell has a new CEO; when the deal went down, so did Bonsignore. His successor: Larry Bossidy, a longtime GE colleague (and golfing partner) of Welch's whose job, he says, is to fix Honeywell or sell it.

And did GE's competitors down a bottle or two of Belgium's cherry-flavored beer in celebration? Probably not. Some of the opponents wanted the deal weakened, not killed. "I feel like a golfer who's just overshot the green," said an executive on the "winning" side. Had the deal gone through, GE's opponents would have been able to pick up some of the Honeywell businesses Welch was ready to divest. Now they can't. At least some on the GE side of the case felt that the competitors' appetite for GE's spare parts would trump their fear of a merger. That didn't happen.

Those Washington Senators and Cabinet members who seem to think Monti was acting mainly to protect European companies are laughably off base. In Europe, everyone knows that GE's most determined opponent was United Technologies, Honeywell's jilted American suitor. Chris Bright, one of GE's lawyers in Brussels, says the Commission sent United Technologies away "to find the mud, and in the end, unfairly, the mud stuck." One more lesson: the slow confirmation process in Washington has a cost. Had James been confirmed as antitrust chief at the Justice Department by March, say, regulators on both sides of the Atlantic would have been able to discuss the merger at a high level--and maybe come to common conclusions. As it is, Treasury Secretary Paul O'Neill has described the Commission's action as "off the wall," while James said the European decision "reflects a significant point of divergence" with American practice.

The biggest lesson of all from the GE case is this one: soon, something like it will happen again. The Commission in Brussels is currently engaged in three investigations of Microsoft, one of them driven by an American competitor, Sun Microsystems. Monti's staff is looking at the behavior of chipmaker Intel, at the behest of one competitor from the U.S. and one from Taiwan. U.S. regulators will review Switzerland-based Nestle's purchase of Ralston Purina, which would consolidate more than 50% of the $3 billion U.S. cat-food market. For now, the only antitrust authorities that really matter are in Brussels and Washington. But as other nations develop their economies, that may not always be the case. Activists in South Africa, for example, have forced American and European pharmaceutical companies to reverse their policies on the patent protection of drugs.

Monti and his counterparts around the world aren't taking on these cases because they want to stick it to the ugly Americans. They are doing so because in a globalized world, the country where a company has headquarters matters much less than where it does business. If one person understands that truth, it's Jack Welch. Why, TIME asked Welch, should a European be able to shape a merger between two American companies? "That's the law," replied Welch. "That really is just the way the world works." We'd all better get used to it.

--With reporting by Frank Gibney and Eric Roston/New York, and James Graff and Joseph Kirwin/Brussels