The Big Grab
It's a statistic no one in the corporate world would have thought possible just a few years ago. In 1999, the value of mergers in Europe hit $1.5 trillion, almost double the $988 billion total for 1998 and approaching the record $1.9 trillion in the U.S. "European chief executives are feeling pressure from shareholders and boards to focus on mergers and acquisitions in an effort to improve returns," says Daniel M. Dickinson, head of European M&A at Merrill Lynch & Co. in London. And when there's pressure, there are deals.
The elements are there for another hot twelve months on the European merger scene. Bankers predict that deals involving European companies will approach the $2 trillion mark this year. Taboos against takeovers continue to tumble, and the euro makes big deals much easier. Having a common currency allows companies across the euro zone to use their shares for purchases. And fund managers' bottomless appetite for euro-denominated paper means that giant bond issues can be sold to finance acquisitions. "The scarce commodity is good ideas," not money, says John S. Wotowicz, head of leveraged finance at Morgan Stanley Dean Witter in London. But the ideas are there, too. The big themes for 2000: rapid-fire dealmaking in telecom, the rise of the cross-border deal, and Germany's full-fledged entry into the game.
MINDSHIFT. Germany, Europe's biggest economy, has long lagged the rest of Europe in restructuring. But last year, German companies were the targets of bids worth $265 billion--second only to Britain with $384 billion. Driving the deals is a shift in the mindset of German CEOs. Not long ago most German bosses didn't think that cutting deals was part of their job description. They worried about potential culture clashes and about the risk of criticism for spending wagonloads of money. Now, says Ernst Fassbender, co-head of investment banking for Merrill Lynch in Frankfurt, the chiefs of just about all sizable German companies are considering big transactions.
German businesses may be influenced by the deal mania raging next door in France. One banker predicts one-third of the top 40 blue chips in France's CAC 40 index will either be taken over or will gobble up somebody else in 2000. Still, Germany's CEOs remain skeptical. One reason: The high-profile merger of Daimler Benz and Chrysler in 1998 has disappointed Daimler shareholders.
Cross-border deals will play a bigger role this year. Many of last year's deals, including Olivetti's grab of Telecom Italia and TotalFina's $49 billion gulp of French rival Elf Aquitaine, were one-country affairs. But a hefty 60% of last year's European action crossed national borders, according to J.P. Morgan analyst Paul Gibbs. Bankers figure such deals will increase when obvious domestic merger possibilities are exhausted.
Financial services could well be ripe for such a shift. The bold movers could be ING Group and ABN Amro of the Netherlands, Banco Santander Central Hispanico and Banco Bilbao Vizcaya of Spain, and the big Swiss banks. Having survived consolidation in their home markets, they are hunting for acquisitions that will give them entree to Europe's biggest markets. ING has just bought a German bank, BHF-Bank in Frankfurt, and is trying to gain control of Credit Commercial de France, in which it holds a 19.2% stake. Banco Santander is putting up $2 billion to back a bid by Royal Bank of Scotland for National Westminster Bank.
Deregulation could send European utilities into other markets. Germany's VEBA and VIAG merged last year. Along with RWE, they are now rolling up the German electric power sector, which still has some 900 companies. Bankers think it won't be long before these cash-rich heavies try to extend their reach to other European markets.
Once again the telecom sector is the most likely source of monster deals. It is consolidating fast, and valuations are astronomical. A senior Paris investment banker says that Prime Minister Lionel Jospin is putting the heat on France Telecom CEO Michel Bon to do a deal that makes the company a world player. Former monopolies such as Deutsche Telekom are worried about being eclipsed by alternative players and are on the prowl. Even British Telecom, which had professed to be comfortable with buying minority stakes in other European players, seems to have been jarred into a more aggressive approach by British mobile king Vodafone AirTouch, which made a hostile $134.5 billion takeover bid for Germany's Mannesmann. On Jan. 11, BT put up a winning $2.5 billion bid for Ireland's Esat Telecom Group, trumping a hostile foray by Norway's Telenor.
U.S. telecoms are also keeping a close eye on what goes on across the Atlantic. Bell South Corp., which last year outmaneuvered France Telecom to grab a 60% stake in Germany's No. 3 mobile operator, E-plus, could well be an aggressive buyer with its partner, KPN Telecom of the Netherlands. Bankers say that SBC Telecommunications, which is now invested in Belgium, Denmark, and Hungary, could be eyeing deals to give it entree to the major markets.
The telecom hunt could spill over into related industries. The AOL-Time Warner merger is likely to spur thinking about such moves. Microsoft is already a big investor in European cable systems and has strong links with Sweden's mobile systems leader, Ericsson. More such deals are likely as companies shop to fill holes in their technology spectrum.
MOTOR MERGERS? More traditional consolidation deals are likely as well. Bankers think Fiat is preparing to sell its auto division. Peugeot could come on the block, and the Quandt family, which controls BMW, may be tempted to sell a stake to an outsider. The logical buyers: DaimlerChrysler, Ford, and GM. And bankers say Swiss drugmakers Novartis and Roche may attempt to shore up their positions in the U.S.
What could stop the deal parade? A market crash certainly would devalue the deal currency and might make players queasy about valuations. Higher interest rates, too, would make financing deals harder. An ugly local reaction to a hostile takeover could also give pause. But there are no red flags at the moment, and companies are drawing up their battle plans. Let the deals roll.