Europe’s Still Shopping, but Is It Buying Trouble?
Europeans are on an extended U.S. shopping spree, buying up American companies at a record pace. And Southern California firms have been among their favorite targets in recent months--a trend punctuated by BP Amoco of Britain’s $26.8-billion deal for Atlantic Richfield Co. last week.
But as the totals get ever larger, some analysts say European firms may be paying too much for the companies in their haste to snap up a piece of the thriving U.S. economy.
Rich purchase prices--such as the 20% premium over Arco’s recent stock price that was offered by BP, or the nearly 80% premium shelled out by French telecom giant Alcatel for Calabasas-based Xylan--obviously delight shareholders and provide sweet deals for the targets’ management teams in the short term.
But those premiums also carry long-term risk for the acquired companies and their employees: If they don’t deliver hefty enough profits to the foreign parent firms, the American targets could find themselves gutted, broken up or sold again within a few years, experts warn.
“Europeans are taking huge risks, and in some cases paying significant premiums, because they are betting that being a global player will put them beyond the competition,” said Constantine Psaltis, a merger consultant with Mitchell Madison Group in London.
Yet “that’s something that hasn’t been proven,” he said. “Nobody really knows what the value of being a global player is” in many industries.
European companies announced about $100 billion worth of takeovers of American companies in the first quarter, compared with $12 billion in the first quarter of 1998, according to Securities Data.
This year’s total represents about 28% of all merger activity involving U.S. companies so far, according to Mergerstat, a division of Los Angeles-based investment bank Houlihan Lokey.
Prices paid for many U.S. companies are rising as quickly as the U.S. stock market. But that could provoke some unpleasant memories for European buyers, analysts warn: Europeans were some of the last major investors in U.S. stocks before the market crash of October 1987.
Europeans were net buyers of $10 billion of U.S. stocks in the first three quarters of 1987, after buying $9.6 billion in all of 1986 and just $2.1 billion in 1985, according to the Securities Industry Assn. in New York.
In the fourth quarter of 1987, amid the market crash, European investors turned and fled. They sold a net $8.1 billion of U.S. stocks in the quarter, the SIA says.
Could the current European takeover wave be signaling another peak for the equity values of U.S. companies?
“I don’t think so. American companies are paying the same sorts of prices to buy American companies,” said J. Fred Weston, a finance professor at UCLA’s Anderson School who specializes in mergers.
He said studies show Europeans pay premiums about 10 percentage points higher than American companies (over the target’s stock price) to buy U.S. firms, on average, but notes that tax advantages sometimes allow the Europeans to write off those premiums.
Although only time will tell whether recent deals are overpriced--or bargains--today’s merger valuations are based in part on the added earnings the buyers project they can wring out by combining with their targets.
Those projections can “look good on paper but often don’t materialize due to organizational complexity,” Psaltis said.
Indeed, a Mitchell Madison study of European takeovers of U.S. banks from 1985 to 1990 found that in a large majority of those deals, the combined companies “significantly underperformed” the banking sector as a whole.
Ross DeVol, director of economic research at Santa Monica’s Milken Institute think tank, believes European firms are indeed paying too much for some U.S. acquisitions because, in his opinion, the U.S. stock market as a whole is overvalued--especially the technology sector.
“They have to be very careful in the tech sector that they don’t overpay,” given the short life cycles of many tech businesses, DeVol said.
At the same time, he noted that European companies that have U.S.-traded shares are following the U.S. trend, which is to pay in stock, rather than in cash, for their targets.
“They hedge their risk that way,” DeVol said--meaning stock deals don’t drain a company’s financial resources the way a cash or debt-financed deal can.
Britain’s Vodafone, for example, agreed to pay part of its $65-billon purchase price for San Francisco-based AirTouch Communications in stock.
But that option isn’t open to European companies whose shares don’t trade here--such as France’s Vivendi, which agreed to pay $6.2 billion in cash for Palm Desert-based water treatment giant U.S. Filter.
If the deal prices are high, European companies may believe they have no choice, analysts say.
“To be global players, companies must have a presence in the United States--that’s what they are buying,” said Mark Clemente, an author and merger advisor with Clemente, Greenspan & Co. in New Jersey.
The wave of deals for California companies also reflects the Europeans’ global ambitions, Clemente said. “Buying in California also puts them within striking distance of the Pacific Rim.”
The BP Amoco deal to acquire Arco, the third-largest company headquartered in Southern California, would be the biggest purchase in the region so far by a European company. But there have been a slew of high-priced deals this year.
They include Vivendi’s planned takeover of U.S. Filter; Securitas of Sweden’s purchase of security services firm Pinkerton’s of Westlake Village for $384 million in cash; and Alcatel’s purchase of computer networker Xylan for $1.8 billion in cash.
With a growing economy, proximity to Asia and a diverse mix of companies, Southern California is becoming a virtual supermarket for partner-shopping Europeans. Local companies that specialize in media, technology and natural resources will increasingly become targets, investment bankers say.
“We’re just getting started here,” said Todd Jadwin, a managing director with NationsBanc Montgomery Securities in Los Angeles who said he is so busy working on merger deals he has little time to interview candidates for jobs he needs to fill.
“Southern California is such a huge economy that we are a focus point for all this,” Jadwin said.
In the first three months of this year, announced acquisitions of Los Angeles-area companies by foreign firms--most of them European--totaled $2.2 billion, a dramatic increase from the $266 million in the same period last year, according to Securities Data. (The figure does not include the Arco deal, which was announced Thursday.)
Unlike with many mergers between U.S. companies--and unlike the BP Amoco-Arco deal--most cross-border acquisitions by Europeans don’t immediately result in severe layoffs at the target firms.
European companies tend to look for firms that have little overlap with their current operations and can grow, investment bankers say.
Xylan, for example is hiring, executives there said--even as Alcatel plans to cut 12,000 jobs in other operations worldwide in the next two years.
‘It’s not the French wanting to come over here and manage us,” said Xylan founder, President and Chief Executive Steve Kim, who said he has spent little time in Paris because he is so focused on expanding his business.
Although Alcatel paid a nearly 80% premium for the firm, Kim said it was more than worth it for the French. “For them it’s not just pure financials,” he said. “They are buying our technology and to get into this market, compete and to be a global player.”
At U.S. Filter, Chief Executive Richard J. Heckmann said he expects few layoffs with Vivendi’s purchase--and more hiring.
But how benevolent the European parent firms will be in the long run remains to be seen. Given the prices that are being paid in the takeovers, the pressure on the American companies could become intense if the businesses should stumble--or if a worldwide recession forces European companies to pull back from their global expansion plans, analysts say.
“Such deals raise the stakes for post-merger performance,” said Clemente, the merger analyst. “A bad deal is a bad deal--European buyer or not.”
Of course, the same or worse fates could await companies without such long-distance parents. But the extended abandonment of U.S. stocks by European investors after the 1987 market crash is a worrisome memory on Wall Street.
After their buying spree in 1986 and 1987, Europeans were net liquidators of $16.2 billion in U.S. stocks from 1988 to 1992, Securities Industry Assn. data show. Not until 1993 did they begin to buy U.S. shares in earnest again.
By contrast, Asian, Latin American and Canadian investors all were net buyers of U.S. stocks during that period.
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Times staff writer Debora Vrana can be reached by e-mail at debora.vrana@latimes.com.
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European Invasion
Announced takeovers involving European buyers and U.S. targets totaled $100 billion in the first quarter, which is already half the value of such deals in all of 1998. The buying spree--at handsome prices--has included many California companies as European companies hunt for businesses with a competitive edge and a Pacific Rim advantage.
Deals Soar Nationwide . . .
Annual totals and the first-quarter total, European buyers of U.S. companies:
First quarter 1999: $98.9
. . . And in the Southland
The dollar volume of announced mergers and acquisitions involving Los Angeles-area target companies and foreign buyers has risen to the highest level in years this quarter. Quarterly totals since 1996, in billions
1st quarter 1999: $2.2
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California Targets
Some of the largest announced deals involving California companies and foreign buyers in the last 15 months:
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Target City Buyer Country Size, in billions AirTouch San Francisco Vodafone Britain $65 Arco Los Angeles BP Amoco Britain $26.8 Transamerica San Franciso Aegon NV Netherlands $9.7 U.S. Filter Palm Desert Vivendi France $6.2 Xylan Calabasas Alcatel France $1.8 Petersen Los Angeles Emap Britain $1.4 Pinkerton’s Westlake Securitas Sweden $0.4 Assured Access Milpitas Alcatel France $0.4 Diamond Lane Petaluma Nokia Finland $0.1 Dep Compton Henkel Germany $0.1
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Source: Securities Data Corp.
