Euro brings US-style business culture to corporate Europe

Date: 20/05/1999

By Bruce Barnard

THE euro's daily pummelling in the foreign exchange markets, which has shaved more than 10% off its value against the dollar since its launch in January, is a sideshow compared with the fledgling currency's impact on corporate Europe.

Talk of a weak euro is overdone anyway, as its rate against the dollar is about the same as that of its constituent currencies 12 months ago and most pundits are sticking to their initial forecasts that it will strengthen by the end of the year.

But its early decline against the greenback, which it is widely expected to challenge eventually as the world's reserve currency, continues to dominate the headlines. Moreover, the fact that euro coins and notes will not enter into circulation until 2002 has fuelled the feeling that its arrival is an overhyped non-event.

But away from the public eye, the euro is having an impact on corporate Europe, and more quickly than most commentators expected.

The new currency did not alter the way business is transacted overnight, but it has accelerated changes which were already under way as European firms belatedly respond to globalisation.

The surge in hostile take-overs - until recently an entirely alien phenomenon to continental Europe - the infusion of seed capital into high-tech start-ups and the quickening moves toward the establishment of a pan-continental stock exchange all owe something to the new currency.

The most dramatic and visible impact of economic and monetary union was provided by Deutsche Telekom's decision to aim at least half of its planned €10-billion share offering at small investors in the 11 euro-zone countries.

This is the first time any company has moved beyond its own borders to sell shares to individual investors and DT's chief executive Ron Sommer directly linked the move to the arrival of the euro. "This approach breaks new ground in Europe and signals a new way forward at a time when European states are growing together within the framework of economic and monetary union," he said.

DT's move underlines a fundamental shift in thinking over the past few months. It was only a year ago that the Spanish telecoms group Telefónica pulled out of a planned cross-border sale to retail investors.

The euro's arrival has set in train a domino effect across corporate Europe which is forcing firms to abandon decades-old business practices.

While the single market prompted firms to rationalise their production, distribution, sales and marketing, the single currency is forcing them to rethink the way they finance and run their operations.

The euro is rapidly creating a giant single capital market, compelling companies to compete for funds on a Europe-wide basis and enabling financial institutions to be more selective in providing loans.

There is a long way to go, as Europe's financial markets are much more fragmented than almost any other sector. Barely one-fifth of financial assets in the UK, Europe's most open nation, are invested abroad, while the figure in Germany and France is under 5%.

The euro's arrival has allowed investors to select stocks in the 11 euro-zone countries without currency risks, freeing them to focus on corporate management, strategy, margins and profits. This in turn is forcing companies to improve returns by selling non-core businesses and contemplating mergers with - and take-overs of - rivals they would not have considered in pre-euro times.

The frenzied merger and acquisition activity of the first five months of the year, the growing popularity of share buy-backs and the increased emphasis on shareholder value is testimony to the influence of the new currency.

There is already evidence that monetary union has led to radical changes in the way companies raise finance, with an increasing number of firms switching from bank finance to bonds, following the introduction of the euro and the flanking fall in interest rates.

The volume of euro-denominated corporate bond issues in the first quarter of 1999 was seven times higher than in the same period last year. More significantly, the average credit rating of the corporate bonds bought by investors tumbled sharply after the introduction of the new currency, suggesting that they are less risk-averse.

Europe's corporate bond market trails way behind that of the US (at the beginning of the year it was worth around €150 billion compared with h1 trillion across the Atlantic), but the gap is sure to narrow.

The strong likelihood that low euro-zone interest rates are here to stay is forcing Europe's growing pool of high-worth professionals to seek more rewarding outlets to finance their retirement.

Many are turning to Europe's booming secondary stock markets such as Germany's Neuer Markt, which are providing finance for high-tech start-ups which previously relied on venture capitalists in the United States.

Germany, until very recently a no-man's land for equity capital, has seen a record 40-plus initial public offerings in the first four months of 1999.

The net inflow into European equity funds totalled h85 billion in 1998, nine times more than in 1996, with individual investors rather than pension funds fuelling the boom, according to Merrill Lynch. And lower transaction costs, the end of currency risks, price transparency and lower interest rates mean Europe can look forward to a US-style equity culture.

The successful launch of the euro has also accelerated plans to establish a pan-European stock market: the Frankfurt and London exchanges recently agreed to extend their bilateral talks to the Amsterdam, Brussels, Madrid, Milan, Paris and Zurich bourses.

With the euro less than six months old, it is too early to deliver a verdict on its impact. But there is no doubt that it has changed Europe's corporate mind-set.

It is hard to imagine Olivetti's audacious bid for Telecom Italia, the ferocious battle between Bernaud Arnault and François Pinault for Gucci, and the current rash of other hostile take-overs happening in the days before the single currency was launched.

The euro may eventually topple the dollar from its perch, but right now it is helping to 'Americanise' corporate Europe.

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