One would think when two American companies decide to get together, the pertinent regulatory approval would have to come from American entities. One would be wrong. For the second time in a year, the European Competition Commission seems likely to scupper a U.S.-based acquisition.

Last year the commission effectively ended WorldCom's (Nasdaq: WCOM) proposed acquisition of Sprint (NYSE: FON). Now the $41 billion acquisition of Honeywell (NYSE: HON) by General Electric (NYSE: GE) is laying on death's door.

Never mind that the U.S. Justice Department has approved the merger with minor concessions. If the European Commission (EC) says no, the merger won't go through. And the current European demands essentially dictate massive divestitures: GE would end up with the contents of one coat closet and a coffee mug that says "I Love my Jack Russell Terrier," but that's about it.

Many may wonder how it is that Europe even plays a part in determining whether two American companies can merge. Japan doesn't exercise that power. Neither do our NAFTA (North American Free Trade Agreement) partners. And could you imagine if mergers had to pass muster in all countries? Hell, they can't even decide on the shape of conference tables at the United Nations, and we have to worry that Malawi is happy with a proposed merger?

The rationale is actually quite simple. The EU dictates that any merger that would create an entity with Europe-derived revenues in excess of a certain level must be cleared by the EC. Technically, a U.S. company could tell the Europeans to pound sand, but the reprisals for doing so -- levies or other business restrictions, for example -- would be, to say the least, unpalatable.

General Electric has already offered several terms to the EC. First, it would divest several components of Honeywell's avionics division. GE had already agreed to sell the helicopter engine business, but added proposals to sell several aircraft safety equipment businesses, jet engines, and a maintenance facility in Germany. In addition, GE offered to put a fence around GE Capital's Aviation Services division, which provides leasing and financing services for airplanes.

The Europeans evidently fear that the GE/Honeywell combination would cause a combination in regional aircraft engines that would simply be too powerful. Moreover, they are afraid that GE Capital's access to major avionics components in house would provide too much competitive advantage over European counterparts.

The total divestitures proposed by GE fell way short of what the EC wanted, but GE stated that the offer they have made is final, and that they will not consider further concessions. With the deadline now passed, the next step will be either for the EC to reject or approve the merger as it stands, or for Honeywell and GE to withdraw the merger application for later resubmission. Neither course is ideal.

Investors are already voting with their feet. A spread often develops between the offer price for the acquired company and the current market price. This spread is a good proxy for the odds that the market is giving that the merger will go through. In the last three days GE stock (the acquirer) has skyrocketed, while Honeywell has plunged, widening the gap between GE's offer and Honeywell's current price. The risk to GE would be that it so badly wants to do the deal that it accepts the draconian limitations placed upon it by the EC, making the deal too expensive.

The trouble is, some of these concessions are already extremely painful for GE, one of the world's largest services companies. Its offer to exit the aviation safety business, for example, is extremely onerous, as the business is expected to be worth over $1 billion in the next few years. Moreover, given GE's other aviation activities, the company was counting on using its safety technology to leverage other related goods and services it offers.

Perhaps GE and Honeywell could go a different route with their concessions and use more culturally effete ones. Like, for example, in exchange for approval of the merger, GE swears that it will observe all 307 French national holidays, including all 11 Liberation Days and the Peugeot-Is-Really-a-Good-Car Day. Jack Welch could offer to set up a series of Belgian restaurants throughout the United States, complete with special Luxembourg days.  I have it on high authority from a 43-year-old Dutch graduate student that the EC might be amenable to these proposals.

GE's European problem is a vexing one. It shows once again that there is a significant disconnect between the regulatory and antitrust philosophies of the U.S. and Europe. If Europe is going to maintain effective veto power over U.S. mergers, this must be addressed.

Indeed, GE called upon the White House and President Bush -- who is currently in Europe -- to speak out in support of the merger. In response, top U.S. antitrust officials were sent to the EC to explain why they believed the merger could be approved without many concessions. Many wags doubt the intervention by the U.S. government on GE's behalf to be much help. 

Investors need to watch these developments carefully. I joke about some of the quirks of Europe and its tendency toward a more heavy-handed approach to governance, but the reality is that many of the biggest American companies derive the majority of their revenues from overseas. As such, the laws and regulations of those jurisdictions will play an increasingly important role in American companies' performances, and thus, our investments.

The world's getting smaller and smaller, but don't expect everyone to play by the same rules just yet. Where U.S. regulators saw a combined company that required a few tweaks, Europe sees a two-headed behemoth capable of snuffing out half of Portugal with a swat of its tail.

And evidently they like Portugal just the way it is.

Bill Mann wants to know where they came up with the word "Bronx." He owns shares of General Electric. His other holdings can be viewed online, as can The Motley Fool's disclosure policy.