European Commission Prohibits Siemens Acquisition of Alstom

On February 6, in a major rebuff to two leading global companies, the European Commission (EC) announced that it had prohibited the proposed acquisition of French transportation/mobility company Alstom by German conglomerate Siemens under the EC’s Merger Regulation.  The proposed merger, as the EC described it,

would have combined Siemens’ and Alstom’s transport equipment and service activities in a new company fully controlled by Siemens. It would have brought together the two largest suppliers of various types of railway and metro signalling systems, as well as of rolling stock in Europe. Both companies also have leading positions globally.

The EC recognized that the merger “would have created the undisputed market leader in some signalling markets and a dominant player in very high-speed trains,” but also concluded that it ”would have significantly reduced competition in both these areas, depriving customers, including train operators and rail infrastructure managers of a choice of suppliers and products.”

The EC reported that it “had serious concerns that the proposed transaction would significantly impede effective competition in two main areas: (i) signalling systems, which are essential to keep rail and metro travel safe by preventing collisions, and (ii) very high-speed trains, which are trains operating at speeds of 300 km per hour or more.”  It identified two sets of concerns for each of those product markets:

• Signalling Systems: For this market, the EC stated that the proposed transaction “would have removed a very strong competitor from several mainline and urban signalling markets.”  In particular, it found that the merged entity

would have become the undisputed market leader in several mainline signalling markets, in particular in ETCS automatic train protection systems (including both the systems installed on-board a train and those placed along the tracks) in the EEA and in standalone interlocking systems in several Member States.

It also found that in metro signalling, “an essential element of metro systems, the merged entity would also have become the market leader in the latest Communication-Based Train Control (CBTC) metro signalling systems.

• Very High-Speed Rolling Stock: For this market, the EC stated that the proposed transaction

would have reduced the number of suppliers by removing one of the two largest manufacturers of this type of trains in the EEA. The merged entity would hold very high market shares both within the EEA and on a wider market also comprising the rest of the world except South Korea, Japan and China (which are not open to competition). The merged entity would have reduced competition significantly and harmed European customers. The parties did not bring forward any substantiated arguments to explain why the transaction would create merger specific efficiencies.

“In all of the above markets,” the EC concluded, “the competitive pressure from remaining competitors would not have been sufficient to ensure effective competition.”

Responding to concerns that the merger was necessary to meet “the possible future global competition from Chinese suppliers outside of their home markets,” the EC also noted that it “carefully considered the competitive landscape in the rest of the world.”   With regard to signaling systems, it stated that its investigation “confirmed that Chinese suppliers are not present in the EEA today, that they have not even tried to participate in any tender as of today and that therefore it will take a very long time before they can become credible suppliers for European infrastructure managers.”  With regard to very high-speed trains, the Commission considered it “highly unlikely that new entry from China would represent a competitive constraint on the merging parties in a foreseeable future.”

Finally, the EC concluded that the companies’ proposed remedy package “did not adequately address [its] competition concerns” for either product category:

• Mainline Signalling Systems: The EC determined that the proposed remedy “did not consist of a stand-alone and future proof business that a buyer could have used to effectively and independently compete against the merged company.” It commented that the remedy proposed “was a complex mix of Siemens and Alstom assets,” which would have required businesses and production sites to be split, and personnel to be transferred “in some cases but not others. Moreover, the buyer of the assets would have had to continue to be dependent on the merged entity for a number of licence and service agreements.”
• Very High-Speed Rolling Stock: The parties reportedly offered to divest an Alstom train that is “currently not capable of running at very high speeds . . . . or, alternatively, a licence for Siemens’ Velaro very high-speed technology.”  The EC, however, concluded that the license “was subject to multiple restrictive terms and carve-outs, which essentially would not have given the buyer the ability and incentive to develop a competing very high-speed train in the first place.”

Note: Although the EC has not often rejected proposed mergers, this decision has strongly signaled the EC’s resolve in enforcing the Merger Regulation when it thinks it necessary, even in the face of intense political pressure from both the French and German governments.  The companies did not pursue a legal challenge to the decision, instead offering critical but muted reactions to the decision:

• Alstom: Alstom stated its regret “that the remedies offered, including recent improvements, have been considered insufficient by the Commission,” and calling the decision “a clear set-back for Industry in Europe.”
• Siemens: Siemens Chief Executive Officer Joe Kaeser blamed what he characterized as outdated legislation, saying, “We must not confuse antitrust laws with industrial policies, we need to respect that. But if the future of the world’s mobility is being determined with law that is 30 years old, that may have to be revisited — for the future, not for the past.”

French Finance Minister Bruno LeMaire echoed Kaeser’s theme of outdated law.  According to CNBC, LeMaire “call[ed] for competition rules to be changed to enable European firms to become stronger on the global stage,” and warned that “we are facing a huge challenge with the rise of the Chinese [rail] industry.”  In addition, the German Economic Minister, Peter Altmaier, declared that the two countries “were preparing a joint initiative which would make it easier to carry out cross-border deals.”

French production-line workers at Alstom, however, reportedly shed no tears about the decision.  In the view of one French union member at Alstom, “Alstom and Siemens are capable of looking after themselves, on their own, and of pushing back against China.”  In any event, Alstom has wasted no time in leaving the altar, and reportedly is now in talks to merge its rail business with Canadian firm Bombardier.