Cross-Border Takeovers Face Growing Opposition in Europe

From Paris to Berlin, and from Warsaw to Rome, governments are showing increasing hostility toward foreign companies wishing to take over prized national assets.

The obstacles faced by bidders from abroad include discriminatory laws and downright opposition against individual mergers.

The trend has caused concern not just in the boardrooms of acquisitive European companies, but also in the European Commission. Officials at the Brussels body had already noted with alarm an increasing hostility among Europeans toward foreign workers.

But the recent increase in protectionist measures against foreign takeovers has added to fears that the European Union’s biggest achievement to date -- the creation of a borderless market for goods, services and capital -- is facing a graver threat than ever before.

The latest challenge to the model stems from London-based Mittal Steel’s $22.4-billion bid for its Luxembourger competitor Arcelor.

Luxembourg and France, home to thousands of Arcelor workers, appear to be working on a concerted campaign against the deal. Luxembourg’s prime minister, Jean-Claude Juncker, traveled to Paris on Wednesday to meet French President Jacques Chirac and Prime Minister Dominique de Villepin.

“This hostile bid by Mittal Steel calls for a reaction that is at least as hostile,” Juncker said. Although the two countries agreed on an approach, he gave no details what action they might take.

Arcelor has 6,000 employees in Luxembourg, which owns 5.6% of Arcelor’s shares. About 27,000 employees work in France, which holds no Arcelor shares, limiting its ability to block the deal.

In another example, the Warsaw government has sought to derail the merger of two Polish banks. The combination comes as part of Italian bank UniCredit’s takeover of German lender HVB -- a rare example of a cross-border banking takeover.

Brussels fears a pattern is emerging. Last year, the commission spent months wrestling with Italy’s central bank over its opposition to two foreign takeovers of banks.

On another front, the commission is waiting for a court hearing on its legal challenge of Germany’s “Volkswagen law,” which Brussels says presents an illegal obstacle to foreign takeovers. The 1960 law protects Volkswagen from hostile takeovers by preventing any shareholder from acquiring more than 20% of voting rights.

The commission also is scrutinizing a French decree that gives the government the right to veto or impose conditions on foreign takeovers in as many as 11 sensitive industries, including casinos and certain defense and security-related sectors. Paris says the decree was carefully drafted to avoid a clash with EU principles, but the commission still insisted on a close study.

“The increase of protectionism is something of high concern to us,” said a spokesman for Charlie McCreevy, EU’s internal market and services commissioner. “Protectionism cannot be the answer to the problems Europe is facing.”

The commission’s efforts to uphold the free movement of capital and services in the EU is somewhat hobbled by its limited arsenal. Ultimately, Brussels’ only weapon is a legal challenge against the offending government in the European Court of Justice. But such infringement procedures take a long time, perhaps too long to influence a fast-moving takeover battle.

One particular concern for Brussels is the dearth of mergers and takeovers in the financial services sector. According to a commission analysis published in November, only 20% of deals in the financial sector involved companies from different EU member states. In other sectors, by contrast, cross-border deals accounted for about 45% of transactions.

Political and regulatory hostility to such deals is not solely to blame.

Katinka Barysch, chief economist of the London-based Center for European Reform, argues that protectionism in general has been on the rise since the EU took in 10 new member states -- mainly in poorer central and southern Europe -- in 2004.

Barysch even questions whether, in the current political climate, EU member states would be ready to reaffirm their support for the “four freedoms” -- of capital, goods, services and people -- enshrined in the European Union treaty.

“If we were to write a new treaty today,” she said, “would we be able to get those clauses accepted? I am not sure.”