Mergers and acquisitions

If, at first

Sep 1st 2005 From The Economist print edition

Will the latest cycle of European mergers produce better results? COMPANIES have embar ed on !hat "oo s "i e the be#innin#s o$ a re%r&n o$ the mer#ers and ac'&isitions (M)A* !ave that de$ined the second b&bb"+ ha"$ o$ the 1,,0s- That period. readers mi#ht reca"". !as characterised b+ a co""ective sp"&r#e that sa! the creation o$ some o$ the most indebted companies in histor+. man+ o$ !hich "ater !ent ban r&pt or !ere themse"ves bro en &p- /i"d biddin# $or te"ecoms. internet and media assets. not to mention the madness that !as 0aim"er1s 230 bi""ion motorin# ta eover in 1,,4%,, o$ Chr+s"er or the Time%/arner5AO6 me#a%mer#er in 2000. he"ped to #ive mer#ers a thoro&#h"+ bad name- A consens&s emer#ed that M)A !as a #reat !a+ $or investment ban s to reap rich $ees. and a s&re !a+ $or ambitio&s mana#ers to betra+ investors b+ trashin# the va"&e o$ their sharesNo! M)A is bac - Its ret&rn is a #"oba" phenomenon. b&t it is perhaps most stri in# in E&rope. !here so $ar this +ear there has been a stream o$ dea"s !orth more than 2700 bi""ion in tota". aro&nd 308 hi#her than in the same period o$ 2003 (see artic"e*- The "atest e$$ort came this !ee !hen France1s Saint% 9obain. a b&i"din#%materia"s $irm. &nvei"ed the detai"s o$ its :;-7 bi""ion (27-5 bi""ion* hosti"e bid $or <P<. a <ritish riva"- In the $irst ha"$ o$ the +ear. cross%border activit+ !as &p three%$o"d over the same period "ast +ear- Even France Te"ecom. !hich !as "e$t a"most ban r&pt at the end o$ the "ast mer#er !ave. recent"+ bo&#ht Amena. a Spanish mobi"e operatorShareho"ders1 approva" o$ a"" these dea"s raises an interestin# '&estion $or companies ever+!here= are investors ri#ht to thin that these mer#ers are more "i e"+ to s&cceed than ear"ier ones> There are t!o ans!ers- The $irst is that past mer#ers ma+ have been ?&d#ed too harsh"+- The second is that the present rash o$ E&ropean dea"s does "oo more rationa". b&t@and the caveat is cr&cia"@on"+ so $ar- The pattern ma+ not ho"dM)A1s poor rep&tation stems not on"+ $rom the strin# o$ spectac&"ar $ai"&res in the 1,,0s. b&t a"so $rom st&dies that sho!ed va"&e destr&ction $or ac'&irin# shareho"ders in 408 o$ dea"s- <&t more recent st&dies b+ economists have introd&ced a note o$ ca&tion- Investors sho&"d "oo at the n&mber o$ dea"s that s&cceed or $ai" (t+pica""+ meas&red b+ the impact on the share price*. rather than (as +o& mi#ht thin * !ei#hin# them b+ siAe- For eBamp"e. no one do&bts that the 0aim"er%Chr+s"er mer#er destro+ed va"&eThe combined mar et va"&e o$ the t!o $irms is sti"" be"o! that o$ 0aim"er a"one be$ore the dea"- This sin#"e dea" acco&nted $or ha"$ o$ a"" 9erman M)A activit+ b+ va"&e in 1,,4 and 1,,,. and probab"+ dominated peop"e1s thin in# abo&t mer#ers to the same de#ree- Thro! in a $e! other s&ch monsters and it is no !onder that broad st&dies have tended to $ind that mer#ers are a bad idea- The tr&e pict&re is more comp"icated-

Of course, it's different this time

Severa" $actors s&##est that E&ropean companies. in common !ith their co&nterparts e"se!here. are not bein# rec "ess in the "atest ro&nd o$ dea"s- Important"+. some o$ the $eat&res o$ the b&bb"e +ears have disappeared or become "ess in$"&entia"- For eBamp"e. mana#ers are "ess "oaded &p !ith share options. !hich has red&ced their temptation to chase dea"s that de"iver a short%term pa+%o$$ at the cost o$ "on#% term va"&e creation- Companies a"so seem more intent this time on strate#ic. rather than $inancia""+ motivated dea"s@b&i"din# on core stren#ths and b&+in# into ne! #eo#raphic mar ets are common themes in the "atest ro&nd o$ dea"s. !hereas cost"+ diversi$ications are "itt"e in evidence- In addition. a bi##er proportion o$ dea"s are bein# paid $or in cash. a c&rrenc+ !hich mana#ers tend to harbo&r more pr&dent"+ than shares and !hich is a "ess $or#ivin# meas&rin# rodAnd $ina""+. as "abo&r%mar et and other re$orms (ho!ever modest* in E&rope have s"o!"+ eased the !a+ to!ards a #en&ine sin#"e mar et. $irms are &nderstandab"+ $oc&sin# on b&i"din# a stron#er pan%E&ropean competitive position- Sometimes the best !a+ to do this is thro&#h mer#ersCo!ever. there are a"so #ood reasons to be !ar+- The "atest dea"s ma+ seem more tar#eted and strate#ic. and there$ore better ?&sti$ied. than man+ in the 1,,0s- <&t most mer#er !aves be#in in this sensib"e !a+ be$ore spira""in# o&t o$ contro"- The recent #ro!th o$ hed#e $&nds and private%e'&it+ $irms means that there are man+ more potentia" bidders $or an+ tar#et compan+- Private e'&it+. in partic&"ar. is a potent competitor capab"e o$ p&shin# &p prices $or a compan+ "oo in# $or a strate#ic mer#er- And cash. toda+1s c&rrenc+ o$ choice. is a remar ab"+ cheap commodit+ than s to "o! interest rates and ab&ndant "i'&idit+In other !ords. the in#redients $or eBcess eBist- Pa+in# too m&ch $or a rep&tation%enhancin# ac'&isition or head"ine%#rabbin# ta eover remains an ever%present dan#er $or an+one at the top o$ a bi# compan+-

Mergers and acquisitions

Europe's nascent merger boom

Sep 1st 2005 D PAEIS From The Economist print edition

European mergers are booming, but economic nationalism remains an obstacle

/CEN is a cross%border ta eover in E&rope a #ood thin#> For the French #overnment. the ans!er seems to be c"ear- It is to be app"a&ded !hen the compan+ doin# the b&+in# hai"s $rom France. b&t treated !ith deep s&spicion !hen the tar#et is French- Spoo ed b+ r&mo&rs that 0anone. a $ood compan+ that o!ns m&ch%"oved French brands. mi#ht be ta en over b+ America1s PepsiCo. the #overnment has anno&nced its intention to come &p !ith a "ist o$ strate#ic French ind&stries that !i"" be protected $rom $orei#n ta eoverFO&r po"ic+ is not to oppose b+ princip"e ever+ ac'&isition o$ a French compan+.G sa+s FranHois 6oos. minister $or ind&str+- <&t i$ +o#h&rt is a strate#ic ind&str+. Mr 6oos1s promised "ist ma+ be '&ite "on#/hi"e French po"iticians contemp"ate an ind&stria" Ma#inot "ine. French b&sinessmen are snappin# &p companies e"se!here in E&rope- Accordin# to 0ea"o#ic. a research $irm. French $irms spent a"most 270 bi""ion on $orei#n ta eovers in E&rope a"one in the $irst seven months o$ this +ear (see tab"e*- Pernod Eicard. a drin s compan+. bo&#ht its <ritish riva" A""ied 0omec'I S&eA. a &ti"ities compan+. bo&#ht E"ectrabe" o$ <e"#i&mI France Te"ecom too over Spain1s Amena. a mobi"e%phone operator- J&st this !ee . another French $irm. Saint%9obain. a b&i"din#%materia"s compan+. had a :;-7 bi""ion (27-5 bi""ion* hosti"e bid $or <ritain1s <P< re?ectedF/e are in the ear"+ sta#es o$ a ne! mer#er c+c"e.G sa+s Je$$re+ Eosen o$ 6aAard. an investment ban 0ea" activit+ in a"" ma?or E&ropean mar ets is &p b+ abo&t 508- There is #reat potentia" $or va"&e%creatin# dea"s !ithin the EK. as $ra#mented nationa" economies mer#e into a rea" sin#"e mar et- <&t there are bi# obstac"es too- As France sho!s. man+ po"iticians c"in# to the idea o$ Fnationa" championsG and create obstac"es to cross%border mer#ersSti"". there are po!er$&" $orces p&shin# in the opposite direction- Stron# corporate pro$its are drivin# the c&rrent increase in mer#ers and ac'&isitions (M)A*- A$ter atonin# $or the past mer#er !ave1s eBcesses !ith cost c&ts and sa"es o$ &nre"ated b&sinesses. man+ bi# companies have hea"th+ ba"ance sheets- Credit is cheap. and shareho"ders are een on ta eovers once a#ain- France Te"ecom shares ?&mped a$ter the anno&ncement o$ its ac'&isition o$ Amena. as did those o$ Pernod Eicard and S&eA a$ter their respective ta eovers !ere made p&b"icCompan+ bosses are more cheer$&" too. accordin# to recent opinion s&rve+s- This ma+ re$"ect a be"ated &ptic in the EK1s economic per$ormance- The E&ropean Commission $orecasts the econom+ !i"" eBpand b+ aro&nd 0-38 and 0-78 in the third and $o&rth '&arters respective"+@the $astest #ro!th since the $irst ha"$ o$ 2003. tho&#h m&ch depends on oi" pricesAt present. E&ropean mer#ers represent abo&t one%third o$ #"oba" dea"s !hi"e American dea"s acco&nt $or ha"$- E&rope1s share is set to #ro!. b&t on"+ i$ po"iticians resist their instinct to medd"e !ith internationa" mer#ers. !hich represent more than ha"$ the tota"- <an in# and &ti"ities. $or instance. remain "ar#e"+ nationa" ind&stries in E&rope. beca&se the+ are considered Fstrate#icG- Cross%border ta eovers in these sectors are intense"+ po"itica"- The French and Ita"ian #overnments s'&abb"ed $or more than a +ear abo&t !hether to a""o! E"ectricitL de France (E0F* to b&+ Edison. an Ita"ian po!er compan+- Antonio FaAio. the #overnor o$ the <an o$ Ita"+. spent months this +ear emp"o+in# &n&s&a" methods (!ith the tacit approva" o$ the #overnment* to b"oc a Spanish and a 0&tch bid $or t!o o$ the co&ntr+1s mid%siAed ban s<&t E&ropean po"iticians1 inter$erence is not +et e#re#io&s eno&#h to disco&ra#e the <ritish and American private%e'&it+ $irms that are becomin# an increasin# presence in the e&ro Aone- Abo&t one%$i$th to one% third o$ c&rrent E&ropean mer#er activit+ is #enerated b+ private%e'&it+ $irms- These $irms mana#e $&nds that ta e contro""in# sta es in !hat the+ thin are &nderva"&ed and bad"+ mana#ed companies- On A&#&st 22nd Permira. a $irm based in 6ondon. and Moh"ber# Mravis Eoberts. a Ne! Nor $irm. too over S<S <roadcastin#. a pan%E&ropean broadcaster- Severa" private%e'&it+ companies are r&mo&red to be e+ein# bits o$ <oots. a <ritish chemistThe rise o$ private e'&it+ sho&"d be #ood ne!s $or corporate E&rope- S&ch $irms specia"ise in b&+in# and $iBin# companies that $e! !ant and provide "i'&idit+ to the mar et. sa+s 9ordon 0+a" o$ 9o"dman SachsThe+ can a"so sharpen &p b&siness per$ormance. b+ snappin# &p ne#"ected bits o$ con#"omerates and

r&nnin# them as independent b&sinesses- There is obvio&s scope $or this in E&rope. !here the de#ree o$ con#"omeration is sti"" $ar hi#her than in AmericaAn+ hi#h%pro$i"e move b+ an FAn#"o%SaBonG private%e'&it+ $irm in continenta" E&rope is s&re to be controversia"- <&t even so. &nder c&rrent E&ropean "a!. nationa" #overnments can do ver+ "itt"e to b"oc bids $or private companies- EK o$$icia"s have been '&ic to point o&t that. i$ France #en&ine"+ tries to protect a ran#e o$ Fstrate#icG ind&stries $rom ta eover. even b+ $irms $rom !ithin the E&ropean Knion. it !o&"d be in F$"a#rantG breach o$ EK "a! on the $ree movement o$ capita"- Those re#&"ations are indeed soon to #et a boost. !ith the passa#e o$ a ne! ta eover directive. !hich m&st be "a! in a"" EK states b+ Ma+ 2007This co&"d be the best +ear $or E&ropean M)A since the internet%b&bb"e +ears o$ the "ate 1,,0s- I$ there !ere another me#a dea" s&ch as "ast +ear1s O55 bi""ion (275 bi""ion* mer#er o$ Sano$i%S+nthL"abo and Aventis. t!o French pharmace&tica" $irms. mer#ers co&"d cross the 21 tri""ion thresho"d $or the $irst time since 2000- <&t i$ the dea" is a cross%border mer#er. and the tar#et is French. stand b+ $or $ire!or s-

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