German Federal Cartel Office Vetoes Coherent’s U.S. Acquisition of Excel – GE/Honeywell Revisited?

November 3, 2006

Germany’s Federal Cartel Office (“FCO”) recently prohibited laser manufacturer Coherent, Inc.’s proposed acquisition of its competitor Excel Technology, Inc. Although the deal concerned only U.S.-based companies and had already been approved by the U.S. Department of Justice in May 2006, the German regulators initiated in-depth investigations in July, which resulted in the recent prohibition order.

Clearance from the FCO was required as a significant portion of Coherent’s revenue is made in Germany. Furthermore, Excel operates a subsidiary which has its European headquarters in Germany. The FCO found that the merger of the two major providers of laser-based systems would lead to the creation of a dominant position in the German market for low-power carbon-dioxide lasers. Several remedies, which the parties to the deal had proposed in order to meet competition concerns, did not satisfy the FCO’s requirements.

First reactions regard the FCO’s decision as a possible turning point for a new generation of “GE/Honeywell”-type decisions.

Background:  In 2001, a transatlantic divergence in merger regulation was created when the European Commission vetoed General Electric’s bid for Honeywell, which had already been approved by the U.S. At that time it was felt that the divergent decision was mainly caused by the different substantive tests applied in merger control in the U.S. and Europe: while the U.S. method is to apply the substantial lessening of competition test, the European Commission’s GE/Honeywell decision was based on the dominance test, i.e. whether the merger leads to the creation or strengthening of a dominant market position. Following the GE/Honeywell decision, the European Commission changed its substantive test to a hybrid construction, i.e. the significant impediment to effective competition, in particular as a result of a dominant position. With this and some further procedural changes, it was hoped that future diverging decisions between Europe and the U.S. could be prevented in most cases. Although German merger legislation has been reformed recently, Germany did not follow the EU approach and still applies the dominance test.

The importance of the FCO’s decision should, however, not be over-estimated as it is unlikely that this decision is such a turning point in transatlantic merger assessments. While mergers may have anti-competitive effects in some jurisdictions, they may not raise any such concerns in others. The FCO did not contradict any of the findings of the U.S. regulator but based its objection on concerns within the German market only. Therefore, it would be wrong to regard the German decision on Coherent/Excel as an opposition to the approval of the merger in the U.S. Rather, the FCO regards itself as an independent monitor of competition with a long tradition in Germany and Europe. This should always be kept in mind in transactions that involve joint market shares above 30% in Germany – even if no legal entities or other assets in Germany are involved.

The FCO’s decision may be appealed to the Higher Regional Court of Düsseldorf within one month. A decision on such an appeal would, however, be likely to take a year. Obviously, it would be interesting from both a legal and political perspective, but Coherent has not yet publicly announced that an appeal was or will be launched.

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work or Michael Walther (+49 89 18933-180; [email protected]) in the firm’s Munich office.  

© 2006 Gibson, Dunn & Crutcher LLP

The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.