Commentary: Why Europe Keeps Gobbling Up U.S. Companies

Europe's framented economy tilts investment away from the Old World and toward America

At the height of the Internet gold rush, Europeans routinely waved to each other across the tables at Il Fornaio, the dealmakers' restaurant of choice in Palo Alto, Calif. These were Europeans from Alcatel (ALA ), Siemens (SMAWY ), and Nokia (NOK ), and they were on the prowl for Internet smarts. Last year alone, European companies poured a quarter of a trillion dollars into the U.S. This represented 80% of all direct foreign investment, according to the U.S. Commerce Dept.

Now, of course, the Internet has lost its luster. The Europeans' two takeover currencies, their shares and the euro, are both down. Corporate profits are falling. And Alcatel's $23 billion buyout of Lucent Technologies Inc. (LU ) just collapsed under a heap of transatlantic acrimony. Could all of this signal that Europe's buying binge in America is on the wane?

Don't count on it. The U.S. continues to cast a strong enough spell over Europeans to keep drawing mergers-and-acquisitions teams across the ocean. It was the appeal of the powerful U.S. market that pushed Alcatel to shop for Lucent, even as the French company was facing a painful $2.7 billion write-down. Days later, on May 31, French media conglomerate Vivendi Universal (V ) spent $2.2 billion on U.S. publisher Houghton Mifflin Co. (HTN ) And Germany's Bayer (BAYZY ) is jousting with Bristol-Myers Squibb Co. (BMY ) for DuPont's (DD ) pharmaceutical arm, a deal that could be worth $8 billion. "It's easier to raise return on equity by buying in America than by restructuring back home," says Eric Chaney, an analyst with Morgan Stanley Dean Witter & Co. in London.

So investments will keep flowing west. Net flow in direct investment out of Europe reached $43 billion in the first quarter of this year, says Morgan Stanley Dean Witter. That shows no letup from the last two years. Moreover, while many economists expected the investment flow to reverse in 2001 as European growth outstripped America's, U.S. companies are sitting on their wallets. Why? First, with earnings falling, they have less money burning holes in their pockets. And Europe's slowing growth, expected to reach barely 2% this year, dampens the appeal.

But the Europeans keep shopping, and they benefit from post-crash bargains. In recent months, the focus of their fascination has shifted from technology to customers. Alcatel, for example, spent $17 billion for North American tech companies during the Net boom. The company needed routers and optical switches to make a go of it as a Web supplier. But in its failed bid for

Lucent, the French company was far less interested in Lucent's tech jewels at Bell Laboratories than in the company's stable of megaclients, including Verizon Communications (VZ ) and AT&T (T ). Even though the Alcatel deal failed, other European suitors, such as Germany's Siemens or Britain's Marconi PLC (MONI ), could soon be angling for Lucent.

COHESIVE MARKET. Europeans find in America precisely what they're struggling to build back home: a cohesive, united market. With Houghton Mifflin, Vivendi's Jean-Marie Messier can sell textbooks throughout the world's largest sales territory. Vodafone Group (VOD ) and Deutsche Telekom (DT ), which spent a combined $114 billion in their deals for AirTouch Communications Inc. and VoiceStream (VSTR ) in the U.S., can peddle cellular service from coast to coast. By contrast, American operators like Bell South Corp. (BLS ) and SBC Communications Inc. (SBC ) attacked Europe country by country--a fabulously expensive proposition. Now, both companies are selling their European holdings and retrenching in the Americas.

Here's the paradox: Europe's fragmented economy, still divided by languages and varying regulations and customs, hampers growth on the Continent and tilts investment away from the Old World. Yet this westward migration is transforming Europeans from Vivendi to Deutsche Telekom into global giants. Europe has plenty of other would-be giants. They'll keep busy growing in America, down cycle or no.

By Stephen Baker

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