Completed acquisition by Finmeccanica S.p.A. of the strategic communications business of Marconi plc

No. ME/1484

A report under S125(4) of the Fair Trading Act 1973 on the advice of the Deputy Director General of Fair Trading, given on 5 November 2002 to the Secretary of State for Trade and Industry under section 76 of the Act

JURISDICTION

The merger falls for consideration under the EC Merger Regulation (ECMR) and was notified to the European Commission on 4 October 2002. Although the Commission has sole jurisdiction to investigate the competition aspects of the merger under the ECMR, Member States may exercise a residual power under Article 21(3) of the ECMR to take 'appropriate measures to protect legitimate interests other than those taken into consideration'. Legitimate interests are defined in Article 21(3) as including public (or national) security. The merger satisfies the assets test of the FTA. You may therefore make a reference to the CC under section 64(1) of the FTA to address public security concerns arising from the merger.

THE PARTIES

FINMECCANICA SpA (FNM) is the holding company of the Finmeccanica Group, a diversified high technology group active in the design and manufacture of aircraft, helicopters, satellites, missile systems, radar, components for power generation, trains and information technology services. FNM is partially owned and controlled by the Italian State (34 per cent).

MARCONI MOBILE HOLDINGS SpA (MMH) is a wholly owned subsidiary of Marconi (Bruton Street) Limited, which is, in turn, a wholly owned subsidiary of Marconi plc. MMH is a company incorporated under Italian law and is the holding company of the strategic communications business of Marconi. The strategic communications business is engaged in the design, manufacture, supply and support of communications and information systems for military customers, police forces and government agencies. It provides defence, communication and cryptographic systems for the UK MoD.

THE TRANSACTION

On 2 August 2002, FNM acquired the entire issued share capital of MMH.

ASSESSMENT OF NATIONAL SECURITY ISSUES

The MoD has made representations that the merger might adversely affect the public interest on national security grounds. The MoD has identified two main areas of concern arising from this merger: the maintenance of strategic UK capabilities and the protection of classified information.

Undertakings in lieu

The test in the FTA relates to the effect of the merger on the public interest. The MoD has identified national security concerns arising from the transaction which relate to the protection of classified information and the maintenance of a strategic capability.

The attached draft FTA undertakings are intended to remedy or prevent the particular effects adverse to the public interest identified by the MoD. Specifically, the undertakings seek to address the two areas of concern identified above. They include provision for a compliance regime consisting of the appointment by FNM of a 'Compliance Officer' for the purposes of facilitating, overseeing and reporting to the MoD on the security undertakings.

As the acquisition has been completed, the MoD has obtained interim undertakings, in the form of a contractual deed, directly from FNM, to protect national security interests in the short-term. However, the deed has no statutory force and therefore the MoD would prefer its concerns to be addressed under the public interest test in the FTA. This would both provide a legal mechanism for imposing undertakings (either following or in lieu of a reference to the Competition Commission) and provide direct UK government influence over the strategic communications business if an appropriate mechanism was put in place to monitor compliance with the undertakings.

FNM has confirmed that it is willing to sign the FTA undertakings in the form attached.

Conclusions on national security considerations

The OFT is not expert in national security matters and must, therefore, rely heavily on the representations made by the MoD. I consider the MoD to be a body having a substantial interest in the above transaction within the meaning of section 76 of the FTA.

I have no reason to doubt the representations made by the MoD on the appropriateness of the security undertakings in order to remedy or prevent the specific effects adverse to the public interest identified by it and which are briefly described above. I have therefore concluded that the transaction should be referred to the CC for further investigation unless the parties provide FTA undertakings in lieu of reference.

CONCLUSIONS

It appears that this transaction raises national security concerns. FTA undertakings (in lieu of reference) have been prepared to deal with the security concerns of the MoD. It remains open to you to make a reference to the CC on such public interest grounds, or to accept undertakings in lieu of such a reference. The MoD believes that FTA undertakings in lieu of a reference to the CC are the most effective means of remedying its national security concerns.

Following discussions with OFT officials, the parties have confirmed that they are prepared to sign the attached draft FTA undertakings. However, this will in no way bind your decision whether to accept the proposed undertakings in their current form, nor in a modified version, if found appropriate following public consultation.

I therefore recommend that you accept the attached draft undertakings in lieu of a reference, but that before doing so, you publish them for consultation.

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