Union merger boom driven by domestic deals

Date: 29/06/2000

By Bruce Barnard

Europe's single market appears to be gelling at last, seven-and-a-half years after its launch, as mergers and acquisitions break all records and protectionist governments finally concede defeat in the battle to shield 'national champions' from the impact of globalisation.

Mergers and acquisitions (M&As) in Europe were worth around €414 billion in the first three months of this year, the second highest level ever after the previous quarter's €528 billion, according to figures from US investment bank J.P. Morgan.

The pace of activity has quickened in the second quarter, with a spate of big deals topped by France Telecom's €40.3-billion acquisition of Orange, the UK's third largest mobile phone company. The deal was a truly pan-European affair as Orange was briefly owned by Germany's Mannesmann, which was bought by Vodafone in the world's biggest take-over, and one of its closest British rivals is One2One, owned by Deutsche Telekom.

Swissair's take-over of Sabena, the current merger negotiations between British Airways and KLM, and the sale of the brewing activities of the UK's Bass entertainment group to Interbrew - only weeks after the privately-owned Belgian brewing giant acquired the beer business of another British company Whitbread - illustrate how key industries are being reshaped by pan-European consolidation.

But cross-border deals like HSBC's take-over of the French bank CCF and the Franco-German life sciences merger between Rhone-Poulenc and Hoechst in the first quarter, are not driving the M&A boom.

The majority of transactions are purely domestic affairs and their share of total M&A activity is rising, reaching an all-time high in the first three months of the year, and 65% up on the previous quarter. The top three mergers in the first three months of 2000 were all domestic, involving British drug makers Glaxo Wellcome and SmithKlineBeecham, British insurers CGU and Norwich Union, and a telecoms/media tie up in Italy between Tin.it and Seat Pagine Gialle.

The predominance of these 'ethnic' deals suggests Europe is still far from creating a continental-scale economy to challenge the US, except in 'new' economy telecoms, media and technology sectors, where the lightning pace of technological change is forcing companies to ignore cultural and nationalistic taboos and do deals in weeks or risk being marginalised.

But even here there are limits, as the collapse of the hastily crafted merger between Spain's Telefónica and its Dutch counterpart KPN illustrated.

The conditions are in place for cross-border M&As as the euro fosters a single capital market in the 11 participating countries. But why pursue targets across borders when even the most carefully planned domestic deals can come unstuck, like the planned alliance between Deutsche Bank and Dresdner Bank?

Reports that negotiations on a fallback all-German merger between Dresdner and Commerzbank are facing difficulties, coupled with the failed attempts to consolidate Italian banking, underline the (mainly self-erected) hurdles facing Europe as it seeks to build a single US-size economy.

True, continental Europe is finally embracing hostile take-overs, albeit more than 20 years after they peaked in the US. But while they make the headlines, they still are a rarity and are likely to remain so as companies seek friendly alliances to forestall unwanted bids from domestic and foreign predators

Deregulation and privatisation have completely rewritten the rules for many sectors, forcing companies to join forces. A 40% plunge in wholesale electricity prices since Germany's power market was deregulated in 1998 is the main spur to the merger of Veba and Viag, which began trading as E.ON on the Frankfurt stock exchange on 19 June, and RWE's bid for VEW, which is awaiting regulatory approval.

But to compete globally, domestic mergers - even between market leaders in Germany and France, Europe's biggest economies - are not enough.

That is why France's Suez Lyonnaise des Eaux is tipped to merge with E.ON if Spain's Endesa does not pip it to the post. It is also why ThyssenKrupp, the German steel and engineering group whose merger had to be recrafted to appease government and trade union critics a couple of years ago, is said to be considering linking up with the French steel giant Usinor to create the world's biggest steelmaker.

Some mergers which would have succeeded three or four years ago are being snared by a tougher stance by anti-trust authorities, say analysts, citing the European Commission's rejection of a planned merger between French industrial gas supplier Air Liquide and the UK's BOC.

Meanwhile, there have been unexpected changes in Europe's cross-border M&A league table, with Spain - until recently a second-ranking EU economy - emerging as the leading net acquirer in the first quarter of the year with an outflow of €32 billion followed by France, and Finland. The UK, by contrast, was a net target with an M&A inflow of €5.4 billion.

Europe is close to matching the US, accounting for €1.7 trillion of the global total of €4.1 trillion worth of of M&As in 1999, including a 40% share of deals in the telecoms, media and technology sectors. It is now on target to overtake the US in the M&A rankings for the first time this year.

The trouble is that Europe is not spending as much on its own companies as on outside firms, despite the attractions a single market topped up by a single currency. In the first quarter, European companies spent €104 billion on non-European targets compared with €77.2 million on intra-European deals.

The US remains the favourite hunting ground for European firms, despite the euro's 20% plunge against the dollar and high US share prices. In fact, the transatlantic spending gap has widened since the launch of the euro, partly contributing to its weakness against the dollar.

In the first 15 months of the single currency's life, a net €251 billion left Europe while the US attracted €168 billion, and the trend is continuing: in the first quarter, Europe experienced a net outflow of €68.6 billion, with the bulk going to the US, which enjoyed a net inflow of €34.3 billion.

Pan-European M&A activity, could, however, begin to gather pace as companies become accustomed to buying across borders. More firms will come onto the market as government privatise state concerns, while the German government's proposal to slash capital gains taxes on the sale of corporate holdings is likely to trigger a spate of deals next year.

The increase in M&A activity is spurring restructuring as managers, living in constant fear of take-overs, take action to boost the value of their com-panies' shares thus making bids more expensive.

Shareholder value - an alien concept in continental Europe a few years ago - is now all the rage as managers embrace Anglo-Saxon business culture.