Europe's Behemoths Shouldn't Wed

In business, as in life, one can embrace change or retreat from it. The economic changes currently taking place in Europe, the result of globalization and the new euro, are triggering a wave of mergers and acquisitions designed to make corporations more competitive. Unfortunately, European banks, insurers, and other companies with historically close government ties are using mergers to ward off market forces. Like King Canute, they expect to hold back the tides of change. In the long run, markets, like the tide, cannot be denied.

Nowhere is the tactic of defensive mergers more apparent than in Europe's telecom sector. There, German giant Deutsche Telekom is being courted by Italian giant Telecom Italia to block a hostile bid by Olivetti. Two former state-owned, uncompetitive behemoths are embracing each other in an ill-fated attempt to stop their loss of market share to new, smaller rivals. If the German and Italian governments agree to the merger--and their approval is necessary, since they own about 70% of the outstanding shares--a $180 billion super-behemoth would result. Both companies are hugely overstaffed, and they are among the most inefficient operators in the industry. Both are losing market share to a host of European and U.S. players that are piling into new technologies. And even before a deal has been inked, the two are already battling over control, headquarters, organization, and jobs. This doesn't augur well for the kind of restructuring Europe needs.

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