While Corporate Europe Fiddles…
What are your thoughts about European business right now? — Oliver Stoldt, Interlaken, Switzerland
That it might be missing something. That is, we don't get why European consumers are flying over to the U.S. by the 737-load to buy up the contents of American shopping malls, but European companies aren't engaged in the business equivalent. The euro is strong, making exports very difficult, while the dollar is weak and the U.S. stock market is stalled. You'd think there would be a buying binge going on. Yes, just last week, Belgian brewer InBev made a $46 billion bid for Anheuser-Busch (BUD), and there have been smaller deals, too, such as Finmeccanica's acquisition of DRS Technologies (DRS) and Schneider Electric's purchase of Pelco. But the relative paucity of European acquisitions in the U.S. is downright perplexing. Typically, business abhors leaving value on the table.
What's going on? Without doubt, one factor is the lack of available credit, as most European banks don't look that different from their American counterparts. But last week, during meetings with executives in Britain, Switzerland, Spain, and Italy, we repeatedly heard two other explanations. First, that the U.S. has too much political and economic uncertainty for most investors. And second, that the U.S. just isn't "where it's at." By contrast, the BRICs decidedly are. "Russia scares many of us," as one executive put it, "but you have to be in India and China." In Spain, Brazil was also on everyone's lips.
Excitement about the BRIC nations is not misplaced, of course. Even if you discount the ubiquitous hype about the march of China and India toward world economic hegemony and Latin America's recent economic strength, the pure numbers are enough to raise any investor's pulse, not to mention make him reach for his wallet. We're not just talking about the usual GDP stats, which show China's growth rate at an astonishing 11% in 2007 and India's close behind, at about 9%. We're talking about the kind of figures that appeared, for instance, in a recent McKinsey presentation, which said that China will build 24 new airports by 2010 and bring 400 gigawatts of electrical capacity online in the next five years, equivalent to the amount used by New York City...times 30. At the same time, according to other sources, India's financial-services and technology industries are adding tens of thousands of jobs a week, and even with the country's ingrained problems of poverty and bureaucracy, its middle class could number in the hundreds of millions by 2030.
No wonder Europe is looking east and south—and its companies are so captivated by what they see there.
It's what they're not seeing in the U.S. that has us confused. Because, in our opinion, one of the fundamental tenets of management is that you have to eat while you dream, meaning, you have to make money in the short term while you invest for the long. Any dope can do one or the other. To keep the cash flowing, simply squeeze everyone and everything you've got. The same goes for strategy. Just tell everyone to buzz off—you're busy envisioning the future. The challenge of leadership is balancing today's needs with tomorrow's opportunities.
To get back to your question, then, it seems to us that too many European businesses might have too tight a focus on the dreaming part. Growth is great. But as you enter such markets, don't start skipping meals. Some BRIC acquisitions might be profitable right away, but many won't be: It often takes years for startups in China and India to make money.
Meanwhile, the U.S. still has the largest market in the world, and its economy, while struggling right now, is by no means out of the game. Oil prices and tough financial conditions are hitting some sectors hard, but many companies are still reporting strong earnings and cash flow gains. With U.S. equity prices down, Europeans, armed with their currency advantage, could make American acquisitions today and reap the benefits a lot sooner than they would "elsewhere."
Again, we don't mean to suggest that the European investment focus on the BRICs is wrong or that acquisition activity in the U.S. is nonexistent. We're only observing that, roughly 500 years after the first European conquerors came to these shores, the time has never been better for Europe to "invade" again. This time, they have a better shot at winning.