European Takeovers: The Big Chill
It was a true-life drama, pitting a cross-border raider against a national champion. And last year's $183 billion takeover war between Britain's Vodafone Group PLC and Germany's Mannesmann appeared to mark a turning point for European business. Vodafone grabbed for the German company with a startlingly simple rationale: shareholder value. While German consumers and unions pushed their government to step in and save their national treasure, Chancellor Gerhard Schröder left it up to the markets. Vodafone won, giving Europe a towering wireless champion, perhaps one strong enough to lead the world.
Equally important, the Vodafone deal promised to turn Europe into an investment banker's dream come true. Here was an entire continent full of national champions in every industry, from finance to pharmaceuticals. The job ahead was simply to mix and match those players in a frenzy of cross-border deals. This consolidation would produce a host of Euro-heavyweights.
And...the winners? Don't hold your breath. The consolidation fiesta's not happening. In fact, Europe is now marching fast in the other direction. Frightened by raiders, European CEOs--led by the Germans--pushed the European Parliament on July 4 to reject a long-awaited takeover code. This vote will make future cross-border acquisitions more difficult. Just a day later, an influential official at the European Court of Justice bolstered anti-takeover defenses by rejecting a challenge to so-called golden shares, the state-controlled stock ownings that enable governments to veto takeovers of recently privatized companies on their turf. Europe, it's clear, is retrenching.
Why now? With America's vaunted New Economy stumbling, and tech markets crashing from London to Helsinki, Europeans are focusing on the losing side of these Darwinian struggles: The layoffs, plant closings, and the disappearance of companies with historic ties to communities and nations. "There's a growing feeling that the untrammelled American free-market formula isn't the right way for Europe," says Peter Alexiadis, an antitrust expert at law firm Squires, Sanders & Dempsey in Brussels.
It's not a pretty picture, and Europeans, naturally enough, are scurrying backwards. But retreating behind national defenses threatens to deepen Europe's troubles. While golden shares and other takeover protection may keep predators at bay, European companies could still face a pummeling in global markets. A company that goes it alone in a weak economy could end up in far worse shape than one that agrees to be bought by another.
It's time to team up. But Europe may not be able to, if the gathering sentiment against hostile deals prevails. And the shield against takeovers will undoubtedly suppress share prices: Investors are reluctant to invest in companies in which they can have no influence on management.
HANDCUFFED. The clearest threat is in technology. Major European tech companies like Infineon, Alcatel, Nokia, and Marconi have all announced profit warnings, some of them severe. Now, many of these companies are not only battered but handcuffed. Dutch telecom Royal KPN, for example, is courting Belgian neighbor Belgacom. The idea is that the two companies together might muster the cash flow to service KPN's $20 billion debt and give the pair enough size to survive in a market dominated by Vodafone and France Telecom's Orange. But the Belgian government, which owns just over 50% of Belgacom's stock, is fretting over the disappearance of a national champion and threatening to kill the deal. "It's like saying New York should be able to protect its corporations from takeovers by California companies," says Richard Weiner, a lawyer at Hogan & Hartson in Brussels.
Alcatel, still smarting from its failed Lucent Technologies Inc. bid, may now try to bulk up for the global battles ahead by bidding for a weakened Marconi. The British government won't necessarily oppose the hostile deal. But because there are 15 different takeover rules, cross-border deals remain complicated to pull off. And now there's no new, uniform code to make mergers inside the EU easier.
Indeed, the demise of the takeover code embodies the obstacles Europe faces as it struggles to become a single market, one that can compete with the U.S. The legislation took 12 years to meander through Brussels' complicated institutional maze. It would have made hostile takeovers--still a rarity in most European countries--easier to mount. Boards would have been forced to submit unwelcome bids to a shareholder vote before devising poison pills.
But German companies, notably chemical company BASF and carmaker Volkswagen (VLKAY ), worried about an upsurge in hostile Vodafone-style bids. Unions, fearing easier takeovers would lead to job losses, joined with management to kill the proposed code. Now, the German unions have begun lobbying for even more restrictions on takeovers. Germany "is falling back onto its old corporatist reflexes," complains Frits Bolkestein, the European official responsible for the takeover code. On July 11, the German government approved the draft of a new national takeover law that will allow management to put poison pills and other defensive measures in place even if no bid is on the table.
TWICE BITTEN. Elsewhere, attacks on shareholder rights are increasing. After French courts frustrated his efforts to take over Société du Louvre, the company that makes Taittinger champagne and Baccarat crystal, American corporate raider Asher Edelman launched a raid on Switzerland's Baumgartner Papiers. But a Swiss court earlier this month backed rules that limit Edelman's voting rights to 3%, even though he controls 28% of Baumgartner's shares. "It rings the death knell for the rights of minority shareholders," says Edelman, who is going forward with his planned tender offer for Baumgartner on July 18.
Governments that have golden shares in companies still enjoy voting power out of all proportion to the shares they hold. Even the free-market British government is using this device to block foreigners from taking over the privatized British Airport Authority. In fact, the British government doesn't own any BAA shares. But it has a "golden share arrangement" that in essence gives it the right to veto takeovers.
European governments have been especially protective of their national banks. So there have been few major cross-border mergers of financial institutions. Not that some European banks haven't tried to do deals. Last year, Bank of Italy Governor Antonio Fazio undermined the efforts of Spain's Banco Bilbao Vizcaya Argentaria to merge with UniCredito Italiano.
Meanwhile, the failure of the takeover code signals investors they can get better returns elsewhere. "It adds to the weakness of Europe and encourages people to invest more in the U.S. than in the euro zone," says Peter Montagnon, head of investment affairs at the Association of British Insurers, whose members control more than $1.7 trillion in investments. This was to be the year that European economies overtook the U.S. It's turning into something quite different.
By William Echikson in Brussels, with David Fairlamb in Frankfurt and Stephen Baker in Paris