Why European companies are rushing to the altar

Just a few years ago an adviser to Veba, a German utility, made a bold suggestion to Ulrich Hartman, the firm’s chairman: why not consider an unsolicited takeover bid for Mannesmann, a company then in the early stages of a remarkable transformation from engineering to telecoms (and valued at about one-tenth of what it cost Vodafone to buy earlier this year)? Mr. Hartmann’s response, the adviser recalls, was “to the effect of ‘no, no, dear fellow, we just don’t do that here.’”

How things have changed. The Mannesmann takeover is the strongest sign yet that once-unthinkable mergers and acquisitions are becoming fashionable. Another pointer is the surge in merger activity since the euro’s birth. Last year, deals involving European firms added up to $1.5 trillion, a new record by a large margin. For the first time since the early 1990s, Europe did a higher volume of deals than America as a percentage of stock market capitalization. The continent has become a paradise for (mostly American) investment bankers..

At the same time Europe is becoming more European. Last year saw almost as many cross-border deals as domestic deals, with European firms spending three times more in other continental countries than in any previous year. French firms have been on a buying spree in Britain, the Germans everywhere. Technology firms have started to move across geographical and sectoral borders in one go as media, telecoms and the Internet converge: witness the bid by Telefonica, Spain’s former telephone monopoly, for Endemol, a Dutch television company.

More remarkable still, Europe is producing its own crop of corporate pillagers. Since the start of last year it has seen more than $400 billion-worth of hostile deals, over four times the combined total for 1990-98. In the past, such bids rarely succeeded in Europe because the financial and political establishment would rally round to frustrate them. Last year, however, over half the bids launched produced results. As senior managers see it, this is a one-off fight for control of the European arena. No wonder insurers are scrambling to offer policies that cover defense costs in case of hostile takeovers.

One big reason for all this activity is the euro, which has highlighted the fragmentation of European industry. Many sectors, including banking and retailing, remain largely domestic. As the single market develops, pressure on them is growing to strike out across the continent and reap cost advantages already enjoyed by American firms in their home market.

Fear also plays a part, in two ways. The first is fear of disappointing investors. As stock markets become more influential, they are demanding ever higher returns. When these cannot be achieved through organic growth or internal restructuring, a cost-cutting merger might save the day. The other is fear of being dwarfed by rivals. The merger between Veba and Viag, another German utility, was partly a response to saber-rattling by the much bigger Electricitè de France – and a good example of what the Germans call Torschlusspanic (fear of being shut out). But such defensive mergers often disappoint. By some measures, more than half of them fail to achieve planned synergies or create value.

At the same time, the euro’s creation of a single, liquid capital market has encouraged deal-making. Although Europe’s market for corporate bonds still pales beside America’s, it is growing quickly. Last year, as global issuance dipped, the size of this market more than tripled. European firms are issuing euro-denominated bonds to refinance higher-interest bank debt, their traditional source of finance, and to raise money for takeovers.

The euro has also allowed investors to become much more flexible. In the past, European investment funds kept a big chunk of their money for their home market, often because of currency concerns. Now they are free to plan by industry rather than by geography, and to invest in the best companies, wherever they are based.

As capital becomes more mobile, companies in small markets or hidebound industries have to work harder to attract it. For good or ill, many executives see mergers as a way to get investors’ attention and persuade them that their companies are worth backing.

Liberalization and privatization are also boosting consolidation. Former monopolists in industries being open to competition have gone on a defensive buying spree. Take German’s Deutsche post, due to be partially privatized before its market is fully liberalized. Fearful that its core letters business will wither, it has been snapping up logistics firms all over Europe, and has forged a link with Lufthansa, Germany’s biggest airline. Private-sector rivals complain that Deutsche Post is subsidizing its expansion with profits from its remaining monopoly, and want it to be broken up.

The wav of hostile deals may have upset consensus-seekers, but it has brought a new transparency to murky markets. Although Vodafone’s bid for Mannesmann was the first open, fairly contested hostile tender in German corporate history, hostilities behind the scenes were already a well-established feature. Tim Jenkinson, an economist at Oxford University, studied a sample of of German takeovers from the past decade and found some 20 examples of hostile stake-building. Most of these involved clandestine shuffling of stakes between rivals, with core shareholders getting fat premiums for relinquishing control and hapless minority investors getting nothing. An open hostile bid seems a fairer way of settling things.

But the Vodafone bid also sent Europe’s managers a chilling message: put your house in order, or someone else will do it for you. Many of them are now acting on that message.

Will Europe’s passion for hostile acquisitions prove to be a passing fad, just as America’s epic corporate battles of the 1980s fizzled out in the early 1990s (though not before bringing a dose of efficiency to many a lackluster company)? Perhaps, but not yet. Now that a precedent has been set, would-be corporate raiders who had previously been put off by legal and cultural complications are starting to reconsider. In Germany alone, there is no shortage of undervalued targets, including BASF, Bayer and Veba/Viag.

 

Hidden value

That leaves the question of whether bidders are getting value for money. At first glance it seems not. The shares of some of them have underperformed their peers, suggesting they may be wasting shareholders’ money. Paul Gibbs, a merger-and-acquisitions analyst at J.P. Morgan, is not so sure. In his view, the euro has greatly increased the potential rewards of continent-wide dominance in many industries. Offering a large premium in a hostile bid may unnerve financial markets, he says, but the price may be worth paying to meet long-term strategic goals. Moreover, such deals provide buyers with a splendid opportunity to reorganize profit centers and boards, slim headquarters and the like, because the defeated target’s managers are in no position to resist.

For all the recent hubbub, however, Europe has not yet been fully converted to no-holds-barred capitalism. With the odd exception – Vodafone/Mannesmann, Hoechst/Rhône-Poulenc – the biggest European mergers have so far been domestic affairs; indeed, some look like attempts to create old-style national champions. Elf’s bid for Total-Fina in France and Olivetti’s tilt at Telecom Italia may have seemed hostile to the targets’ boards< but they were quietly welcomed by politicians who saw a chance to forge domestic giants. “More a case of friends and countrymen than barbarians at the gates,” reckons a banker

who worked on one of the deals. When Carrefour and Promodès, two French supermarket chains, tied the knot last year, it was with the tacit support of the French government, wary of a big French retailer falling into the hands of America’s acquisitive Wal-Mart.

Economic nationalism still seems strongest in France. In “strategic” industries, the state continues to discourage foreign bidders in order to give French companies a chance to get together and, with luck, create European champions. Foreigners have certainly been deterred in large numbers: last year, French firms did four times as many deals abroad (by volume) as foreigners did in France. And most of those foreign firms plumped for small purchases to avoid attracting public ire. “Even today, the best, if not only, way to push through tough cost-cutting mergers is to present them as the proud creation of national champions,” says Michel Fleuriet, chairman of HSBC France.

But public policy is not the only hindrance to cross-border consolidation. Local partners offer all sorts of attractions that foreign ones cannot match: the two sides are more likely to know each other’s business, speak the same language, and have shareholders in common; they may have more scope to strip out costs; and, not least, joining a local rival can stop it falling prey to a voracious foreign competitor with a long shopping list. There is also the matter of cultural compatibility. “British firms are run by accountants, German firms by engineers and Italian firms by designers. We don’t always share the same vision,” says one European manager. Giovanni Agnelli, Fiat’s chairman, put the point more bluntly when he explained why the Italian car maker recently formed an alliance with America’s General Motors. He said he simply trusted the Americans more than the Germans.

Despite the difficulties, the number of hybrids is sure to grow. Analysts reckon that in industries such as retailing, car making and mobile telephony, Europe will soon be dominated by two or three giants, which will squeeze out their rivals and leave room only for niche operators. Even if they are only half right, the deal-making will remain frenetic.

 

Economist

Vocabulary

1. utility зд. компания, работающая в сфере

коммунальных служб

2. takeover bid предложение о поглощении:

поглощение одной компанией другой

путём предложения акционерам

купить контрольный пакет акций

to launch (make) a bid сделать предложение

unsolicited takeover bid “непрошенное” предложение

bidder 1) лицо, предлагающее цену; участник

торгов 2) компания, делающая предложение

о поглощении

hostile bid (hostile takeover) враждебное поглощение

 

3. mergers & acquisitions (M & A) cлияния и поглощения

cost-cutting merger слияния, цель которых - сокращение

издержек

defensive merger слияние с целью защиты

4. to do (make, cut, strike) a deal заключить сделку

to frustrate a deal расстраивать, срывать сделку

cross-border deal сделка с участием партнёров из

разных стран

domestic deal сделка между партнёрами из одной

страны

5. buying spree покупательский бум

to be on a buying spree переживать, испытывать

покупательский бум

shopping spree увеличение объёма потребительских

покупок

spending spree рост (потребительских) расходов

6. refinancing рефинансирование

1) выпуск новых ценных бумаг для

погашения бумаг с истекающими

сроками

2) изменение условий займа (обычно по более низкой ставке и с более

длинным сроком

 

7. to break up (a company) раздробить компанию

8. corporate raider корпоративный “налётчик”

9. cultural compatibility культурная совместимость

 

Assignments

I. Suggest the Russian for the following:

1. to the effect;

2. by a large number;

3. in one go;

4. corporate pillager;

5. one-off fight;

6. fragmentation of European industry;

7. to reap cost advantages;

8. to be dwarfed by rivals;

9. to fail to achieve planned synergies;

10. hidebound industries;

11. clandestine shuffling of stakes;

12. no-hold-bars capitalism;

13. to fall prey to a voracious foreign competitor.

 

II. Find the English for the following:

1. рассматривать вопрос о поглощении компании;

2. французские фирмы приобретали большое количество фирм в Великобритании;

3. помешать осуществлению сделки;

4. спасти положение;

5. по некоторым оценкам;

6. европейский рынок облигаций не идёт ни в какое сравнение с американским;

7. отказаться от контроля;

8. создать прецедент;

9. компания, являющаяся предметом национальной гордости, национальным достоянием; 10. молчаливая поддержка.

 

III. Explain the following:

1. Last year’s merger between Veba and Viag, … was partly a response to sabre-rattling by the much bigger Electricitè de France – and a good example of what the Germans call Torschlusspanik (fear of being shut out).

2. The wave of hostile deals may have upset consensus-seekers, but it has brought a new transparency to murky markets.

3. The shares of some of them have underperformed their peers….

4. When … two French supermarket chains, tied the knot last year, it was with the tacit

support of the French government.