Acquisitions, mergers and other business agreements are facing increasing regulatory scrutiny, even when they are among firms domiciled outside the territory of the regulatory authorities. Some noteworthy recent examples involve mergers between American firms that were prohibited by regulators from the European Commission. Reciprocation by regulators from other jurisdictions seems a likely future trend. There are obvious consequences for the successful completion of proposed global business arrangements. This paper explains the regulatory procedures of the European Commission with respect to business combinations. It documents the price reactions of subject firms on various dates from the initial announcement to the final regulatory decision. It tests the hypothesis that European regulators are actually motivated by protectionism of European Community (EC) firms against foreign competition. Finally, it studies the market’s anticipation of regulatory outcomes at the initial announcement of the proposed business combination. The empirical results are: (1) the market clearly reacts to European regulatory intervention; (2) the probability of intervention is not related to the nationality of the bidder. However, (3) when intervention does occur, the market anticipates that it is more costly when the bidder is a non-EC firm, so protectionism cannot be rejected outright. Finally, (4) the market incorporates regulatory intervention into its initial evaluation of the proposed business combination. The initial market reaction is a wealth effect conditioned by the probability and costs of intervention.

Why do regulatory authorities scrutinize mergers and acquisitions? The authorities themselves claim to be combating monopoly power and protecting consumers, but the last two decades of empirical research has found little supporting evidence for such laudatory motives. An alternative is that M&A regulation is actually designed to protect privileged firms. In this paper, we provide a test of protectionism by studying whether European regulatory intervention is more likely when European firms are harmed by increased competition. Our findings are unambiguous: European regulation is protectionist. The results are robust to a variety of statistical difficulties, including endogeneity between investor valuations and regulatory actions.