Mergers make the weather

The spring meeting of EU leaders is customarily devoted to the European business agenda and when those leaders meet in Brussels today and tomorrow (8-9 March) they will be tempted to exaggerate their effect on European business.

The EU can indeed shape the regulatory environment for business, but the law-makers are not all-powerful: they cannot micro-manage their national economies and the ebbs and flows of the financial markets do not always respond to the bidding of the European Council. European leaders would do well to acknowledge that there are other weather-makers shaping the business climate.

The level of mergers and acquisitions (M&A) testifies to the determination of companies to restructure themselves rather than wait for politicians to act. M&A was at record levels of activity in Europe in 2006 and looks set to remain there or thereabouts in 2007. According to Thomson Financial, in 2006 deals with European involvement increased 38% from 2005 to $1.7 trillion (€1.3 trillion). E.ON’s bid for Endesa and Suez’s bid for Gaz de France were the largest European deals, with the Mittal-Arcelor merger close behind. Unsurprisingly, the energy and power sector was the dominant sector. According to Thomson Financial, UK companies were the most targeted in Europe in 2006, with 2,759 deals worth $349 billion (€266bn) followed by Spain (759 deals worth $182bn/€139bn) and France (1,271 deals, $162.4bn/€124bn).

The expectation is that European M&A activity will intensify still further in 2007. Surveys of dealmakers suggest that there will be greater activity in Europe as the national economies pick up.

There is no shortage of capital. One of the features of M&A deals in recent months has been the part played by private equity. According to mergermarket data, private equity was behind almost a quarter of Europe’s overall M&A value and volume in 2006. Indeed, the quantity of funding held by private equity finance houses and the high levels of liquidity in debt markets, which makes borrowing easier, are fuelling expectations of greater M&A activity. "Very few corporate targets are out of reach for financial buyers," says mergermarket. The expectation of mergermarket is that Europe will see more out-and-out hostile bids, as the market becomes more competitive. The expectation is that whereas private equity activity has been concentrated in the UK, it will spread to other parts of the EU.

Although some siren voices have been raised warning that private equity must be reined in, the EU has limited regulatory options. Private equity houses attempting a buy-out are much less likely to fall foul of the EU’s anti-trust regulators than other corporate challengers, although such restrictions could affect their ability to exit from acquisitions later. But financial services regulators are discussing what might happen if a large deal went wrong. How would the markets respond if a company was backed by private equity and its backers were unable to sell on their debt? Accidents will happen and, depending on their seriousness, could increase pressure on governments to step in. But the Commission will be wary about stepping in to interfere with M&A activity (and its financing) that could contribute to greater cross-border financial flows and encourage a single market.

The spring meeting of EU leaders is customarily devoted to the European business agenda and when those leaders meet in Brussels today and tomorrow (8-9 March) they will be tempted to exaggerate their effect on European business.