In an unexpected move that rocked the global music industry, one of Europe's highest courts Thursday threw out regulators' approval of the 2004 merger that created Sony BMG Music Entertainment, the second-largest music company in the world.
The European Union's Court of First Instance ruled that regulators had made a "manifest error" when they approved uniting the music units of Japan's Sony Corp. and Germany's Bertelsmann. The court found that regulators did not sufficiently investigate whether the combination would create a monopoly.
The decision, which came in response to a challenge filed on behalf of 2,500 independent music labels, caught executives at Sony, Bertelsmann and Sony BMG by surprise. Sources at the companies said they would re-submit the deal for approval within a week. A decision could take as long as five months.
If that petition fails, executives may be forced to undo the partnership that collected $4.2 billion in revenue last year and was responsible for more than 25% of U.S. album sales. The Sony BMG combination reduced the world's major record companies to four and brought such artists as Aerosmith, Barbra Streisand and Elvis Presley under one roof.
Whatever the outcome, Thursday's decision put an immediate chill on negotiations between EMI Group and Warner Music Group -- the world's third- and fourth-largest music companies, respectively. Insiders at both companies said further talks about combining them were unlikely until the Sony BMG issue was resolved.
The court's complete annulment -- the first of its kind -- could remake landscapes within the industry and elsewhere.
"This is uncharted territory," said Ian Forrester, a Brussels-based antitrust attorney at White & Case. "This could signal that there will be many fewer European mergers. It could call into question approval of mergers from the past half-decade."
Sony's U.S.-listed shares fell 3.9%, while EMI slid 9.2% in London, its biggest decline since February 2005. Warner shares fell $5.23, or 18%, their largest one-day drop since the company went public last year. Bertelsmann is not publicly traded.
In an e-mail to employees, Sony BMG Chairman Rolf Schmidt-Holtz said the court's decision "will have no immediate effect on the day-to-day running of the Sony BMG joint venture, which continues with business as usual."
What effect the decision will have on consumers is less clear. Sony BMG has lost more than 3% of its world market share since the companies were combined and has been racked by internal power struggles.
