European takeovers. To the barricades

A wave of cross-border mergers in Europe provokes a nationalist backlash

"IT IS again time to stop the countries of the European Union from erecting national barriers," warned Giulio Tremonti, the Italian finance minister. "If not, we will risk an August 1914 effect... with, at the end, a war that no one wanted." Roberto Maroni, another member of the Italian cabinet, was more defeatist: "Europe is dead," he said, urging Silvio Berlusconi, the Italian prime minister, to do for his country's textile industry what Dominique de Villepin, his French counterpart, has done for France's energy companies.

In a hastily arranged meeting over the weekend at the prime minister's mansion with the chief executives of Suez, a formerly state-owned water and power company, and Gaz de France (GDF), the state-controlled gas giant, Mr de Villepin had told the two bosses to merge their companies. The deal--which would create an energy giant with annual sales of euro64 billion ($76 billion) and more than 200m customers on four continents--has been under discussion for more than a year. But Mr de Villepin had considered it politically unfeasible. He changed his mind to pre-empt a hostile bid for Suez by Enel, the biggest Italian electricity firm.

Mr de Villepin denies that he is trying to rebuff the Italians. But, oddly enough, his announcement of the proposed merger came a few days after the boss of Enel had made noises about his interest in Suez, or in Electrabel, a Belgian electricity company owned by Suez. The Italians took the French rejection badly: Italy's industry minister cancelled a meeting on February 27th with his French counterpart. Mr Berlusconi called on the European Union (EU) to intervene against what he regards as blatant protectionism.

But Mr de Villepin is unabashed. On March 1st he announced plans to make big French companies harder to take over, by increasing the shareholdings controlled by the state.

The French furore is part of a disturbing pattern. The Spanish government is taking defensive measures of its own, to try to prevent E.ON, a German energy company, from taking over Endesa of Spain. Like the French, it would prefer to create a national champion from a domestic merger. Nor, despite Mr Berlusconi's protestations, are the Italians innocent of this sort of behaviour: they recently entertained the rest of the world with the soap opera featuring attempts by the governor of the Bank of Italy to prevent foreigners from buying two mid-sized Italian banks. And in Poland the government is trying to block a banking merger driven by foreigners.

An optimistic interpretation is that all this fuss is, in fact, a sign of the success of European corporate restructuring. A European merger wave has been gathering momentum since last year, when firms came out of a period of tough restructuring. Strong corporate profits in 2004 encouraged companies to make acquisitions--particularly since credit was cheap and plentiful. By the end of 2005 the value of European deals that year had reached almost euro1 trillion, a volume not seen since the technology bubble of 2000.

The mergers are also the fruit of the many legal moves taken by the European Union to create a single market. Firms have started to develop Europe-wide ambitions, especially in three fragmented industries--telecoms, banking and energy. A few biggish cross-border takeovers such as Suez's acquisition of Electrabel passed by without much controversy. But as cross-border takeovers have become more common, so they have begun to affect companies governments regard as the crown jewels of their economy. Moreover, this has come just as a new and more defensive political mood has taken hold of the French establishment, following the rejection of the EU's draft constitution in a referendum last May.

In the aftermath of the referendum defeat, the French establishment talked itself into a state of advanced paranoia because of rumours of a bid for Danone, a French food firm, by PepsiCo, an American one. It produced a list of 11 "strategic sectors" it thinks should enjoy legal protection from foreign takeover. At the end of January the French government was surprised by Mittal Steel's hostile bid for Arcelor, a steelmaker with 30,000 employees in France. Then came E.ON's bid for Endesa, which pushed Enel to think about its own cross-border takeover plans--and so created the momentum for the Suez-GDF merger.

Will politicians really be able to turn back the tide of mergers? The French government can do little directly to prevent the Arcelor takeover, since it is neither a shareholder nor regulator of the firm, and steel is not on its recently published list of protected sectors. In any case on February 28th the European Commission in Brussels--which enforces EU law--started to scrutinise France's "security" justification for protecting its 11 sectors. The commission will also be concerned by the increasing number of countries, including Luxembourg where Arcelor is based, that are making it easier to use "poison pill" defences against foreign takeovers. EU officials have also warned the Spanish government against using its "golden shares" to shield Endesa from foreign bidders.

A clash between the Spanish government and the commission seems inevitable anyway, after the Madrid authorities overhauled Spain's energy regulation to give its national regulator power to block the E.ON bid. And the commission may yet intervene in the proposed marriage of Suez and GDF. A commission spokesman has fretted that France's defensive move has flouted the "spirit of the European internal market"; and the commission says the fact that Suez has less than two-thirds of its European turnover within France could give the EU competition authorities the grounds to intervene.

Some pessimists now see attempts to undermine the single market as a graver threat to the EU than last year's constitutional crisis. Most bankers and analysts are more sanguine. The consensus is that today's backlash will turn out to be the last thrashings of an old order and that it cannot stop further global mergers--increasingly involving Chinese, Indian and Russian firms. The logic for cross-border mergers in Europe may be compelling. But--as some politicians discovered in 1914--economic rationalism is sometimes swamped by atavistic nationalism.

A wave of cross-border mergers in Europe provokes a nationalist backlash.

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