GE – Electrolux Deal Blocked by Justice Department

The Department of Justice in the US filed an antitrust suit to block the sale of General Electric Co (GE) to Electrolux AB in early July 2015. The authority argued that a combination of the two appliance businesses would reduce competition and options for consumers. It found that the acquisition would create a duopoly in built-in hobs and ovens, with only Whirlpool Corp and Electrolux in the market for both categories. This would be bad news for Electrolux, since the main purpose of acquiring General Electric is to expand volume share in the US market, in addition to gaining resources synergies. We will therefore have to wait and see how GE and Electrolux will now react to this decision – whether they drop the deal altogether or offer to divest the categories that are causing the antitrust issues.

Electrolux AB’s Sales Volume Breakdown in Major Appliances Before and After Acquiring General Electric

Electrolux

Source: Euromonitor International

Why Electrolux needs to acquire GE

Electrolux announced its intention to buy General Electric in September 2014, two months after Whirlpool Corp announced the acquisition of Indesit Co SpA in order to expand volume share in major appliances in Western Europe, mainly in Italy and the UK. Similarly, Electrolux also planned to expand volume share in major appliances, but in North America, although other benefits that Electrolux could enjoy include synergies in production resources as well as the retailing networks for online and offline channels, since both brands are compatible in terms of brand value as well as product quality.

How would the acquisition impact on consumer appliances in the US?

A merger of GE and Electrolux would make Electrolux market leader in microwaves as well as all products under refrigeration appliances and large cooking appliances in the US market. A major player in the US like Whirlpool Corp would automatically become market follower in built-in hobs and ovens, after being a market leader in both categories in the US since 2006. However, Whirlpool would still remain market leader in home laundry appliances and dishwashers.

Apart from the shift in market volume ranking, the acquisition of GE by Electrolux would narrow down the number of market players in both built-in hobs and ovens in the US market, leaving only Electrolux and Whirlpool competing with each other. Other categories, such as home laundry appliances and refrigeration appliances, however, would still continue to have diverse competitors, mainly due to the entry of Asian companies such as Samsung Corp, LG Corp and Haier Group.

The acquisition would create a duopoly in built-in hobs and ovens

A duopoly occurs when two players dominate the market volume in a certain industry or area of the market, which can give them the power to control unit prices, resulting in restrictions on competition. In this case, according to Euromonitor International’s data on consumer appliances in the US, in 2014 there were only three major players in built-in hobs and ovens – Whirlpool, General Electric and Electrolux. The acquisition of GE by Electrolux would give consumers only two major options of either the Electrolux or Whirlpool brands in both built-in hobs and ovens. After the acquisition, Electrolux would have a volume share of 36% and Whirlpool 35% in built-in hobs, as well as 37% and 36%, respectively, in ovens. This is causing concern at the Justice Department in terms of the vulnerability of American consumers to price increases for built-in hobs and ovens, which are important products in American households, as there would be only two major players in the market.

Built-In Hobs Volume Breakdown by Players (Before and After GE-Electrolux Deal)

Electrolux-2

Source: Euromonitor International

Ovens Volume Breakdown by Players (Before and After GE-Electrolux Deal)

Electrolux-3

Source: Euromonitor International

What the future holds?

After the Justice Department’s block on the sale of GE to Electrolux, GE therefore needs to find another compatible player, but with volumes that are not significant in the US market, so that the duopoly issues will not be raised by the Justice Department again. Alternatively, if Electrolux insists on buying GE, the company might have to sell its shares in built-in hobs and ovens to other players in the US market to avoid the antitrust issue, while holding on to other acquired categories that have no duopoly issues. Electrolux could still enjoy volume expansion in other categories in which GE has a strong presence in the US market, such as cookers, microwaves and home laundry appliances.