Europe's "Buy American" Policy
The Europeans are coming. Or rather, they've arrived. In the past 14 months, a period that included the massive Daimler-Chrysler and British Petroleum-Amoco deals, European companies have dipped into their wallets to spend more than $280 billion to buy U.S. companies. That compares with just $58.5 billion spent by Europeans for Yankee ingenuity in 1996, and $48.4 billion in 1997. U.S. companies were the subjects of 80% of Britain's cross-border investments last year.
Why the accelerating buying binge? With growth rates two to three times that of European economies, the U.S. looks like the place to be in coming years. In addition, taxes and labor rules are relatively light in the New World.
But, most important, the acquisitions solve vexing problems. "Large European companies in the last 12 months have become very focused on resolving strategic challenges that came about over the last few years, and they're looking to use mergers and acquisitions as a tool to do that," says Steven Koch, co-head of mergers and acquisitions at Credit Suisse First Boston.
"ROOM FOR GROWTH." Vodafone Group PLC, Britain's leading wireless company, will suddenly become a major global player through its $55 billion deal to buy AirTouch Communications Inc., for example. And in its $10.8 billion transaction for San Francisco-based Transamerica Corp., Dutch insurer Aegon is vaulting to the top of the insurance charts, and will become the third-largest life insurer in the U.S. "This deal reaffirms our faith that the U.S. is a huge market with lots of room for growth," says Donald J. Shepard, chairman of Aegon USA.
Expect more cross-Atlantic deals in the coming months, bankers say. Even though U.S. corporate earnings fell an estimated 3% in the fourth quarter, the U.S. is still seen as a huge growth market by foreigners. Already, there are rumors that Volvo's truck division may be looking to acquire an American truck company, and that Faurecia, a French auto-parts maker, might purchase UT Automotive, a division of United Technologies, for about $2 billion, analysts say.
Even at today's prices, deals promise to solve strategic problems in a hurry. "Companies like Deutsche Bank realize it's easier to do one large acquisition like Bankers Trust for creating critical mass than a series of small transactions," says Fred H. Marcusa, a senior partner at Kaye, Scholer, Fierman, Hays & Handler, an international law firm specializing in transnational mergers and acquisitions. As European stock markets have risen, once unattainable Americans companies "now look like low-hanging fruit."
Deutsche Bank CEO Rolf E. Breuer sees his $10.1 billion bid for Bankers Trust as a way of acquiring a well-known franchise in the U.S. while adding strength in mergers and acquisitions. Deutsche could use the help: Its huge effort to expand in investment banking has been faltering. But some analysts think Deutsche overpaid for BT. "On a multiple of earnings the deal price was very high," says Steven Eisman, an analyst at CIBC Oppenhiemer. "BT was a very wounded franchise."
Vodafone's deal wasn't cheap either. After Vodafone clinched the AirTouch acquisition by upping its bid to head off Bell Atlantic Corp., Moody's Investors Service put Vodafone on review for possible downgrade based on concerns over its ability to pay down debt.
On the other hand, Nick Holmes, a senior analyst at Moody's in London, thinks Europeans are getting U.S. life insurers at good prices--at least relative to intra-European deals. "Life insurance companies in Europe are really quite expensive at the moment," he says.
Still, warns Phillipe Camus, co-CEO of Paris-based Lagardere Groupe, buying a U.S. company is never easy. His company, a $12.1 billion defense and media conglomerate that is about to buy a 33% stake in Aerospatiale, the French aerospace group, has bought four American companies, including the former magazine division of CBS-TV. "You have to take into account that management's motivation is closely tied to stock options," he says. And without their loyalty and their ability to run the operation, the cost of deals can soar. So acquirers must figure out how to retain talent.
Without doubt, some of the deals being done in this buying binge will run into trouble. Foreign companies can have a tough time figuring out just what they're buying, says Herve Mathe, a professor in international management at ESSEC graduate school of management in Paris. "Sometimes, when they do figure it out," he says, "it can be too late." That's O.K., too. The lawyers and bankers are always prepared to negotiate transatlantic divorces, too.