Merger Mania Strikes Againby
Martin Broughton is enjoying his stint as a jet-setting dealmaker. In May, the chief executive of London-based BAT Industries PLC plunked down $1 billion for the Lucky Strike, Pall Mall, and other cigarette brands of American Tobacco Co. As American antitrust authorities pore over the deal, Broughton keeps shopping. This time, he's scouring Europe for an insurer or savings institution to expand BAT's financial-services business. Says Broughton: "We've been pleasantly surprised by the number of companies we've been invited to look at."
After a dry spell that began in 1991, Europe is again pursuing deals around the world (table). For the first half of 1994, the accounting firm of KPMG Peat Marwick figures European companies announced 638 acquisitions outside their home countries. That's $28 billion worth of cross-border deals, three-fourths of the way toward last year's $35 billion total. In contrast, American companies have confined their buying largely to the U.S., negotiating only $20 billion of cross-border acquisitions in the past two years.
One factor behind Europe's buying binge is the improved outlook for its economies. "A lot more people are thinking about buying than battening down the hatches," says Stephen Murphy, who heads the Salomon Brothers merger group in London. Unlike the acquisitions of the 1980s, which peaked in 1989 at $60 billion, today's deals take longer and make more sense strategically.
BACK TO BASICS. As European companies get their houses in order, even more properties promise to become available. Corporations are repairing tattered balance sheets by holding asset sales. In some cases, spin-offs are helping state-owned companies prepare for privatization. Thus, cash-strapped Air France is selling its Meridien hotel chain, while bank giant Credit Lyonnais is peddling its 65% stake in electronics retailer FNAC to Artemis, the department-store holding company. Others have decided to focus on what they do best. British Aerospace, returning to its roots as a military and civil aircraft company, is unloading its commercial satellite division to France's Matra Marconi Space.
With business improving, European companies also are eager to strengthen their positions overseas. Drugmakers are crossing the Atlantic to buy market share, get a window on leading-edge technology, or counter the growing clout of distributors by buying them out. They don't know what U.S. health-care reform will bring, but they figure it's always better to have more marketing muscle. Within weeks of each other, Switzerland's Roche agreed to buy Syntex, France's Elf Sanofi went for Eastman Kodak's Sterling Winthrop unit, and Britain's SmithKline Beecham gobbled up Diversified Pharmaceutical Services, a benefits-management company.
CAUTIOUS MOVES. Are the Europeans overpaying for their new U.S. assets? The Europeans have stayed away from some of the most speculative Information Highway plays, but prices they are paying do seem out of line in the health-care sector--SmithKline is paying a rich 50 times earnings for Diversified. Yet for the most part, the decline in share prices in the U.S. and Europe has brought valuations down, and the Europeans also have been helped by a weak dollar. So seen from European eyes, the U.S. assets are priced right. "I see a much greater level of caution when talking to CEOs about how many times earnings they'll pay," adds Murphy. BAT, for example, paid only six times earnings for its cigarette purchase.
The U.S. isn't the only hunting ground, since global dominance in one product or area is increasingly critical. France's Danone, formerly BSN, has been buying food companies in Asia and elsewhere: On July 25, it announced plans to buy Aquaterra, Canada's largest mineral-water company. Latin America is getting hot too. French auto-parts maker Valeo, for example, is buying the clutchmaking unit of Argentina's Sevel.
Europe's financial-services companies, meanwhile, are buying one another up to bolster their capital bases and profit from recent deregulation. In Britain, for example, the government is proposing to let building societies own property insurers. At the same time, retail banks can now sell insurance products out of bank lobbies. Under Europe's single market, insurers licensed in one country can now sell across borders without having to be licensed all over again.
It all adds up to a major consolidation trend. Britain's largest insurer, Commercial Union Assurance, made a June bid for the insurance business of France's Groupe Victoire. Lloyds Bank, Britain's fourth-largest bank, is trying to buy one of the country's largest building societies, Cheltenham & Gloucester. Germany's Allianz, Europe's largest insurer, has taken a 30% stake in accident and health insurer Berner Holding of Switzerland.
Overall, British companies, which recovered sooner from recession than their Continental counterparts, have been the most active buyers. They more than doubled the value of their acquisitions, from $4.2 billion to $8.7 billion, between the second half of last year and the
first half of 1994. But French companies are quite busy as well, with 84 purchases worth $3.6 billion in the first half.
There's more to come. With paper and packaging prices climbing again, deals are expected in Scandinavia's forest-products industry. Financial services and food will remain active, and Europe's airline sector faces a shakeout. If there's less financial engineering and more strategic thinking in these deals, all the better for Europe.
EUROPEANS ON THE TAKEOVER TRAIL Buyer Target Price Billions PHARMACEUTICAL/HEALTH CARE ROCHE HOLDING SYNTEX U.S $5.3 SWITZERLAND SANDOZ SWITZERLAND GERBER PRODUCTS U.S. 3.7 SMITHKLINE DIVERSIFIED PHARMACEUTICAL 2.3 BEECHAM BRITAIN SERVICES U.S. ELF SANOFI STERLING WINTHROP UNIT OF 1.8 FRANCE EASTMAN KODAK U.S. FINANCIAL SERVICES LLOYDS BANK CHELTENHAM & GLOUCESTER 2.7 BRITAIN BUILDING SOCIETY BRITAIN COMMERCIAL INSURANCE OPERATIONS OF 2.2 UNION BRITAIN GROUPE VICTOIRE FRANCE MEDIA GRANADA BRITAIN LWT HOLDINGS BRITAIN 1.2 PEARSON BRITAIN SOFTWARE TOOLWORKS U.S. 0.5 MISCELLANEOUS BMW GERMANY ROVER BRITAIN 2.3 ALLIED-LYONS BRITAIN PEDRO DOMECQ GROUP SPAIN 1.1 BAT INDUSTRIES AMERICAN BRANDS' 1.0 BRITAIN AMERICAN TOBACCO DIVISION U.S. ARTEMIS 65% OF ELECTRONICS 0.4 FRANCE RETAILER FNAC FRANCE DATA: SECURITIES DATA CO., BUSINESS WEEK GENE GREIF