Europe Develops Mania for Corporate Mergers
It wasn’t long ago that “Europeans thought mergers were brash, American and in bad taste, like stretch limousines or hamburgers,” John M. Hennessy, vice chairman of CS First Boston, recalled at a London conference on mergers and acquisitions late last year.
“The American raiders and greenmailers of the late 1970s and early 1980s were as shocking to the Europeans as streakers at a cricket match,” Hennessy said. But, he added, times are changing.
In retrospect, the First Boston executive’s remarks look like a stage cue for Sir James Goldsmith, the flamboyant Anglo-French takeover specialist whose Yankee-like $21.5-billion bid for Britain’s BAT Industries last week put Europe squarely in mergerdom’s major leagues.
The BAT bid, which still faces many financial, legal and political hurdles, was by far Britain’s biggest takeover offer ever--four times larger than conglomerate Hanson PLC’s well-publicized bid for Consolidated Gold Fields. Worldwide, it is outranked only by last year’s record $25-billion purchase of RJR Nabisco Inc. by Kohlberg Kravis Roberts & Co., a New York leveraged buyout firm.
But while it is a landmark in its own right, Goldsmith’s highly leveraged grab for the British insurance, retailing and tobacco conglomerate is only part of a broader overseas merger and acquisition boom that has already transformed Britain’s business climate and that is now having a growing impact on continental Europe and even Asia as well.
Reshaping the Landscape
“Since the mid-1980s, large tracts of the (European) industrial landscape have been reshaped by mergers and acquisitions, primarily within countries, but increasingly across European borders,” wrote Guy de Jonquieres, international business editor, in a recent review for London’s Financial Times.
De Jonquieres and other experts caution that because of the difficulty of collecting worldwide statistics and the fact that few organizations until recently even tried very hard to gather them, available figures are more a guide than a definitive yardstick.
These figures show that the freewheeling Britain of Prime Minister Margaret Thatcher is still the capital of Europe’s merger trend by a wide margin. However, flush with cash and credit and facing the challenge of an open, unified European market in 1992, companies in France, West Germany, Spain and Italy are also increasingly busy at the corporate mating game.
The BAT deal involves the takeover of one British firm by another, but growth is fastest, according to the experts, in cross-border activity. Based on large transactions valued at $100 million or more, the international mergers and acquisitions market has nearly trebled in just the last two years, according to Hennessy.
The United States has long been the favored shopping ground for European firms on the prowl, but lately there are signs of a continental shift, particularly among smaller deal-makers.
British firms made more acquisitions in mainland Europe than in the United States for the first time in the first half of 1989, according to Acquisitions Monthly, a British publication. Said editor Philip Healey: “With several European countries now reviewing both their takeover policies and corporate defense mechanisms, the public sectors in countries such as France and Holland may yet become more active, paving the way to larger deals on the Continent.”
And Klynveld Peat Marwick Goerdeler (KPMG), a big international accounting and management consulting firm, said in the latest edition of its quarterly “Deal Watch” report: “While EC companies continue to look to North America for their largest acquisitions, they have reduced greatly the number of their middle-market purchases (worth $100 million or less) in North America, concentrating instead on buying other European companies.”
While the mega-deals valued at $1 billion and up get most of the publicity, most global acquisitions are in the smaller, middle-market category. Only about one such deal in five is worth more than $100 million, and six out of 10 are worth less than $25 million, according to KPMG.
Another trend: growing Japanese involvement in the European merger and acquisitions market.
“Although Japanese firms have plowed plenty of money into Europe to grow their own businesses from scratch, they have largely steered clear of the acquisitions game--until now,” wrote Britain’s respected Economist magazine earlier this month.
The Bank of Yokohama has bid $148 million for Guinness Mahon, a small British merchant bank; soap maker Kao has put up $133 million for a 75% stake in a West German producer of hair care products, and just last Thursday, it was announced that Honda would buy 20% of Britain’s Rover Group for an undisclosed sum.
Some of the newly industrialized Pacific Rim countries are also entering the acquisition scene but, like Japan, they shy away from Goldsmith-style corporate raids.
“The main reasons for this restraint are both cultural and pragmatic,” according to a special Deal Watch report. “Japanese firms place great store in maintaining good relationships with existing management. With trade issues assuming ever greater political importance, the Japanese are careful not to come across as ‘bullies’ in their trade partners’ back yards. History also shows that friendly takeovers are the ones most likely to succeed in the long term.”
There remain significant differences in government policy toward mergers and acquisitions in different European nations.
British firms are by far the most active within Europe, both as transnational buyers and sellers, playing a role in about two-thirds of all such deals involving a European Community partner. French firms, in second place, are involved in about 15%.
While much smaller, Spain has taken one of the continent’s most positive stances toward foreign direct investment and has attracted $20 billion worth in the last three years as a result. Commented First Boston’s Hennessy: “Raiders and merger kings, much denounced even in today’s U.S.A., are admired there as the rightful heirs of the vanished conquistadors.”
In West Germany, where the heavy involvement of banks and insurance companies in corporate ownership structure has long discouraged mergers and acquisitions, a recent change in tax law has injected new life. As of Jan. 1, 1990, the capital gains tax on the sale of companies jumps from 28% to 53%, and smaller, privately held firms, particularly, are eager to beat the deadline.
According to Klaus Peter Sauer, managing partner of KPMG’s Frankfurt affiliate, the number of domestic merger and acquisition deals within West Germany is expected to hit about 4,200 this year, up from 1,543 in 1987. He predicts that foreign firms will scoop up another 600 West German companies, more than double the 1987 pace.
At the other end of the spectrum from open-door Britain are some of Europe’s smaller nations.
Switzerland’s companies, according to Hennessy, “are almost as impregnable as its mountains.” And firms in both Belgium and the Netherlands can, if threatened by a hostile takeover, issue extra shares to friendly associates or impose limits on the voting powers of some share holdings.
Even the freest of the free-wheelers have some concerns about Europe’s merger mania.
“The wave of mergers and acquisitions sweeping across large sections of European industry is all to the good as long as it produces more efficient and dynamic business groupings,” the Financial Times said this spring in an editorial. “However, the increasingly feverish psychological climate in which many deals are being made gives rise to two distinct concerns to which shareholders and policy-makers need to be alert.
“One is that, in the stampede to prepare for the single market, companies will overreach themselves, allowing opportunism or the pursuit of size for its own sake to prevail over sound business logic,” the newspaper said. “The other is that mergers will result in excessive concentration and cartelization.”
The European Commission in Brussels would like to have more power to rule on cross-border mergers involving EC firms. “We want to go toward a more interventionist system,” a spokesman said.
But some governments, notably that of Britain, are not enthusiastic for political as well as practical reasons. And money men like Hennessy fear that, left to the bureaucrats, 1992 will become a “Frankenstein that will regulate, not liberate, the European economy.” The First Boston executive characterized cross-border takeovers as “one of the litmus tests” of how serious Europeans are about opening their markets.
The BAT bid by Goldsmith and his partners--financier Jacob Rothschild and Australian entrepreneur Kerry Packer--will be a test even for Britain. “An important element is how the government is going to react,” said Acquisitions Monthly editor Healey. “Is it good for the UK industry? What benefits will come out of it besides making three rich men richer?”
Britain’s Office of Fair Trading and possibly its Monopolies and Mergers Commission are expected to study the BAT deal on public interest grounds. A key question will no doubt be the impact on British employment of Goldsmith’s announced plan to sell off everything but BAT’s core tobacco interests.
For all its commitment to free markets, the Thatcher government last spring blocked the acquisition of brewer Scottish & Newcastle PLC by Australia’s Elders IXL.
Also, industrialists and money men are concerned about the structure of Goldsmith’s offer, which many see as heralding the advent of the same “junk financing” that has come under a cloud in the United States.
Speaking to Scottish bankers earlier this year, Bank of England Governor Robin Leigh-Pemberton said the authorities would be keeping an eye on all highly leveraged deals. “I would be concerned if the development of the leveraged buyout market here were to result in a profusion of unsuccessful financial arrangements,” he commented.
Whatever happens to the BAT bid, however, it is unlikely to slow down the broader overseas mergers and acquisitions boom.