Why Merger Mania Is Rocking The Continent

The single market forces rapid change, and it's just beginning

The deals have come so thick and fast that they have crowded nearly everything else off the front pages. A $39 billion marriage between Britain's Guinness PLC and Grand Metropolitan PLC groups is finally getting the green light. Across the channel, Italy's Assicurazioni Generali is trying to snap up Assurances Generales de France in the biggest hostile bid in French history. Anglo-Dutch media group Reed Elsevier PLC is buying Amsterdam-based publisher Wolters Kluwer, to form one of the world's largest publishing groups. And these are only the biggest deals.

If you're an investment banker or a stock market player and you didn't make money on any of these takeover plays, don't despair. Merger mania in Europe is just beginning. Corporate chieftains from Munich to Madrid know that Europe's single market is no longer a vague dream in the minds of a few visionaries. It's real, and it's almost here. Managers are under huge pressure to cut costs and to focus. To do that, they have to play on a European, if not global, scale. That spells more mergers and acquisitions.

Until recently, the Old World's 15 national markets were essentially 15 rich niches in which individual companies could prosper. In the new single market, companies will use one currency, operate under one set of regulations, and vie for money from investors who measure them all against the same financial benchmarks. So industries are screaming for consolidation.

The political fallout from this corporate-driven merger wave could be heavy. So far, Europe's leaders have tried to have their cake and eat it, too, pushing monetary union while promising voters to protect jobs and social benefits. But as companies restructure to stay competitive, politicians will face severe pressure. In a single market, executives will coldly assess which locations in Europe are most desirable for investment. Their scrutiny, says Thomas Mayer, senior economist at Goldman, Sachs & Co. in Frankfurt, "will expose inappropriate fiscal and wage policy more ruthlessly."

For the time being, most of Europe Inc.'s mergers are being driven by solid industrial logic, with companies buying others in the same sector. That sets what is happening apart from much of the spin-off frenzy that shook up Corporate America in the 1980s. But already Euromergers are starting to change. When France's Francois Pinault made an audacious bid to break apart Worms on Sept. 19, he turned the spotlight on other potential targets, such as Paris-based Schneider and Milan's Compart, that might be quarry for would-be European raiders trying to unlock value by spinning off assets. Investment bankers in London are drawing up lists of vulnerable companies. "There will be European kkrs," says Roger Abravanel, senior partner at McKinsey & Co., referring to U.S. leverage buyout firm Kohlberg Kravis Roberts & Co.

irrelevant frontiers. On the Paris Bourse, raids used to be as rare and frowned-upon as oysters in August. Now, in the space of less than one month, France has seen hostile, multibillion-dollar bids for the country's second-largest insurer, a venerable family-controlled conglomerate, and the third-biggest retailer. And in Italy, Generali's $9.4 billion bid for Paris-based agf shows that management knows it must look beyond nearly irrelevant frontiers--or accept obsolescence.

Where will the action be in the next weeks and months? Auto parts manufacturers, banks, and perhaps even a major Continental carmaker could get swept up in the merger wave. The food industry, still dominated by legions of small, regional companies, is an obvious candidate for consolidation. And in the longer term, generational change at tens of thousands of family-owned European companies will spawn many more corporate marriages. Today's deals are just the organ music.