Merger and acquisition activity in Europe more than trebled in 1999 compared to the previous year, a...
Merger and acquisition activity in Europe more than trebled in 1999 compared to the previous year, and was 13 times its level of 1990. By comparison, the start of 2000 was something of a disappointment, with the pace of corporate activity apparently easing. Is the craze for consolidation already wearing off, or have we just seen the tip of the takeover iceberg? More importantly, what effect will M&A activity have on the performance of the market over the next few years?
Certainly a peak in merger and acquisition activity in 1999 would seem unsurprising, as the advent of the single currency was widely predicted to produce a sudden rush of consolidation.
Recent reports show that this did transpire - to an extent - with cross-border deals in Europe surging by 45% in 1999 compared to 1998. Surprisingly though, the UK accounted for 43% of all bids during the year, while many more deals involved UK companies as the target.
With so much sterling changing hands, the assumption that the single currency was the catalyst for the sudden scramble for consolidation in 1999 appears wide of the mark.
What sparked it off?
If it wasn't the euro, what was responsible for sparking off a tripling in corporate activity in Europe last year? Though there are various explanations, probably the most important influence was the improving health of the European economy. M&A activity has tended to be quite closely linked with the economic cycle in Europe, and 1999 saw the beginning of a strong pickup in European growth, thanks to very low inflation and interest rates. As well as offering very cheap financing for deals, low rates set the scene for a growing mood of business optimism last year.
This optimism in itself created an atmosphere more conducive to corporate activity, while it also filtered through to European stock prices. These picked up dramatically in the second half of the year, prompting a series of paper-based bids in the region.
These bids were particularly concentrated in the technology sector, and largely targeted at the US rather than fellow Euro-zone members. At the start of the year European tech stocks were generally trading at a discount to their US counterparts. As these discounts gradually turned to healthy premiums, European companies were able to use their valuable stock to make acquisitions in the US.
Higher valuations led to a great number of paper-based bids within individual European countries as well, with the dominant companies frequently outperforming competitors by a significant margin. With industry sectors within individual European countries still highly fragmented, it was unsurprising that domestic rather than cross-border deals formed the majority of the total for the year.
Changing political attitudes also ushered in a series of hostile bids - almost unheard of in Europe before 1999. These included domestic bids in previously protected areas, such as Olivetti's audacious reverse takeover bid for Telecom Italia, as well as a number of cross-border deals. Total's bid for Petrofina and Rhone Poulenc's merger with Hoechst were among the largest and most surprising, while the end of the year saw Germany's first ever takeover defence, by Mannesmann against Vodafone.
Compared with the last quarter of 1999, the first quarter of 2000 at first seems something of a let-down.
With deals valued at $468bn transacted in the final three months of last year, the first quarter of the new millennium, which produced only $351bn in M&A activity, suggests a dramatic slowdown this year. However, the immense Vodafone-Mannesmann merger accounted for $128bn of last year's total.
Take that single deal out of the equation and the picture changes to show that in fact corporate financiers are busier than ever. There are a number of reasons to expect yet more rapid growth in merger and acquisition activity, which Morgan Stanley Dean Witter believes will produce a record-breaking trillion dollars of transactions this year.
The potential for further consolidation is most obvious when the make-up of the European market is compared to the US. Consolidation in the US has led to an average market cap of nearly $15bn, while the average European company is valued at $7.4bn.
Equally, the first 50% of market share is spread among markedly fewer companies in the US than in Europe. More importantly, return on equity in Europe is significantly below that in the US, and it is likely that the need to improve ROE through cost cutting will force more and more European companies to merge.
The economic cycle should also help to step up the pace of consolidation, and with the Euro-zone just beginning to embark on what appears likely to be a period of strong growth, more corporate activity should be a by-product. We can expect that domestic mergers will continue to dominate for the time being, because these will tend to face less political resistance and fewer cultural obstacles.
Cross-border deals should pick up sharply as well, but this may take some time to gain momentum. There are still significant opportunities to increase market share through local acquisitions first.
Once domestic consolidation is further advanced, the benefits of the single currency, changing EU regulations and, possibly, more market-friendly political attitudes could well result in a rush of cross border deals which could collectively dwarf the level of activity we have so far seen. Companies will obviously be anxious to take advantage of reduced transaction costs and currency risks offered by the introduction of the euro.
Equally, Mario Monti, the EU Competition Commissioner, recently showed an eagerness to simplify and streamline the regulatory process for corporate acquisitions in Europe.
At the end of June this year Monti stressed the need for the EU Competition Commission to become a 'one stop shop for mergers and acquisitions'
Paul Bruns and Elaine Parkes
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