Davos Dealmakers Defy Doubters by Discussing Takeovers
The chief executive officers of some of Europe’s richest companies, gathering at this week’s World Economic Forum amid a flood of negative economic forecasts, have a message for doubters: don’t count us out.
The heads of Nestle SA (NESN), Royal Dutch Shell Plc (RDSA) and Vodafone Group Plc (VOD), who are scheduled to attend the meeting of executives and politicians in Davos, Switzerland, are starting 2012 with the resources for dealmaking: strong cash piles, robust balance sheets and emerging-market operations that are blunting the impact of slowing profits at home. Roche Holding AG (ROG)’s $5.7 billion hostile bid for Illumina Inc. this week shows European CEOs are already stepping up deals as the debt crisis lingers.
“What’s happening in the markets is not perfectly aligned with the confidence CEOs are expressing in doing deals because they’re armed with strong balance sheets and lots of cash,” said Pip McCrostie, who oversees Ernst & Young’s mergers and acquisitions practice as global vice chair of transactions, and is attending the forum. “Europe has large corporations that are among the strongest and most diversified. The broader question for them will be whether there is a way to grow and use M&A to do that.”
The biggest European companies by market value have cash reserves of $1.54 billion on average, 23 percent more than in 2007, according to data compiled by Bloomberg. More than $100 billion in divestments by European companies last year helped the largest nonfinancial members of the Stoxx Europe 600 Index, the region’s benchmark, boost their average profit margin to 12.6 percent, compared with 11.1 percent in 2006, in the midst of the last economic boom.
One measure of investor confidence in future profits, price-to-earnings ratios, shows European companies are faring just as well as their U.S. peers. The largest companies in the Stoxx 600, including Shell and Novartis AG, have an average ratio of 18.2, compared with the 15.7 average of their U.S. counterparts, according to Bloomberg data.
Business leaders and policy makers are gathering in Davos after the World Bank cut its global growth forecast this month by the most in three years, saying that a recession in the euro region threatens to exacerbate a slowdown in emerging markets. Economists predict that the euro area will contract by 0.4 percent this year after 1.5 percent growth in real gross domestic product last year, estimates show.
“When you are a global player, you need to put bets on many markets, and also have a geographic strategy to manage the risk of a slowdown in any one place,” said Maurice Levy, CEO of Publicis SA, the world’s third-largest advertising company, which gets about a third of its revenue from Europe. “We are all looking at the difference in growth rates between places like Europe and the emerging markets.”
While European companies slowed the pace of dealmaking last year as the debt crisis roiled markets, many haven’t been shy about setting ambitious plans. Siemens AG (SIE), which still gets 50 percent of its revenue in Europe, has about 16 billion euros ($20.8 billion) in cash and short-term investments, and is on the hunt for takeovers after a 27 percent drop in fiscal first- quarter profit. Nestle, led by CEO Paul Bulcke, is armed with about $8 billion in cash, and set a goal of obtaining 45 percent of revenue from developing countries by 2020, compared with about a third now.
“There is greater uncertainty and greater speed of movement because companies are anxious about where to invest in new growth markets,” said Chris Zook, a partner and co-head of the global strategy practice at Bain & Co., who is attending Davos. “The companies that are strongest in their industries will consider acquisitions. The cash is piling up.”
Davos, where Levy, Bulcke and more than 500 CEOs will be gathering, has proven ripe for dealmaking in the past. At least two significant takeovers by European companies were partly negotiated at the 2011 forum. Sanofi CEO Chris Viehbacher and Genzyme Corp.’s Henri Termeer moved closer to cementing the Paris-based company’s offer for the U.S drugmaker, agreeing to a $20.1 billion deal the following month. Deutsche Boerse AG (DB1) and NYSE Euronext CEOs also met to discuss the German exchange’s planned $7 billion takeover of NYSE.
While European leaders have rallied to keep the debt crisis under control, some large companies have felt the pinch. Daimler AG (DAI), the maker of Mercedes cars, in October reported its first quarterly profit decline since 2009. In the same month, ABB Ltd. (ABBN), the largest maker of power-transmission gear, reported its smallest profit increase in a year, and France Telecom SA (FTE) blamed slow growth in its domestic market for a profit drop.
Still, many European companies are benefiting from years of purchases in developing economies, which reduced dependence on their home markets. Takeovers by European acquirers in Latin America, Africa, the Middle East and emerging Asian countries totaled $323 billion from 2006 to 2011, compared with $201 billion for U.S. buyers, data compiled by Bloomberg show.
Shell, the largest member of the Stoxx 600, obtains just 37 percent of its revenue from Europe, where London-based Rio Tinto Plc (RIO) gets about 13 percent of its sales. Vevey, Switzerland-based Nestle generates more than 80 percent of revenue abroad.
Publicis (PUB) is seeking to expand in Russia, Turkey and “a couple of other places” after building up operations in China and Brazil, said Levy, who has attended the Davos forum about 20 times since the 1980s. Diageo Plc (DGE) CEO Paul Walsh, who led the world’s largest maker of spirits to make acquisitions in Turkey, China and Vietnam last year, places a similar emphasis on developing markets.
“The consumer demand that will emerge from these new wealth-creating economies in the next 10 years is outstanding, and people should make their choices on whether to play in that game or not, mindful that there’s going to be incredible growth in consumer spending,” said Walsh, who is also attending Davos.
European companies protected from slowing domestic markets by geographic diversification may accelerate acquisitions after takeovers fell 5 percent to $486 billion last year. While the euro’s more than 9 percent decline in value since July has eroded one advantage, it’s unlikely to derail dealmaking.
“If a deal is a very close call, the exchange rate could make a difference,” said Matthew Czepliewicz, an analyst at Collins Stewart Hawkpoint Plc. “It’s unlikely to be a swing factor.”
’Poised to Strike’
Paris-based Danone SA (BN), the biggest yogurt maker, is vying with Nestle for Pfizer Inc.’s baby-formula unit, which may fetch as much as $10.5 billion, people familiar with the matter said last year. Glencore International Plc, the global commodities trader based in Switzerland, sold $10 billion of stock in an initial public offering in May to help fund acquisitions and expansion.
“Large caps will be in Davos and are poised to strike,” said Ernst & Young’s McCrostie. “The volatility is not affecting sentiment in their boardrooms and they’re feeling more robust about growth.”
Net income for companies in the Stoxx 600 index may rise by 10.5 percent this year after increasing 11 percent in 2011, led by carmakers such as Porsche SE (PAH3) and retailers including Burberry Group Plc (BRBY), according to more than 12,000 analyst estimates compiled by Bloomberg in November. The gauge is headed for four straight years of income growth exceeding 10 percent, the longest streak since 1998.
Signs of Improvement
Some early signs of a recovery may also prompt executives to invest at home. German investor confidence jumped the most on record in January, causing some economists to suggest the worst of the crisis is over. Standard & Poor’s decision this month to strip France, the second-largest euro-area economy, of its AAA rating barely affected investors, with yields on 10-year bonds little changed about a week after the announcement.
“The first three weeks of this year have been much better than the final quarter of 2011,” Christian Meissner, Bank of America Corp.’s co-head of global corporate and investment banking, said in an interview in Davos. “Certainly the ECB’s actions before Christmas were a big component in that, but on the other hand, there is not yet a clear sense that the end game is clear or imminent. It’s more positive for sure, but there is some ways to go.”
The European Central Bank last month lent banks an unprecedented 489 billion euros for three years. Since then, financial stocks have rebounded while the cost of insuring bank debt against default has fallen.
More broadly, the Stoxx Europe 600 has climbed 20 percent from its September low, entering a bull market, amid signs that the U.S. economy is recovering and speculation that the euro area will contain its debt crisis. Analysts describe a bull market as a gain of 20 percent from the most recent low, and such an increase in stock prices gives European companies more fire power to make acquisitions.
Those signs of health may convince some companies that doing business in Europe is still worthwhile.
“It’s very important that we don’t divest from our base,” said Publicis’ Levy. “We don’t want to throw the baby out with the bathwater. Along with the U.S., Europe is still the world’s most important economy.”
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