Europe Unites at a Fast Clip
Firms merge in megadeals as 1999 deadline nears for euro. Governments meet budget goals.
It's not the United States of Europe yet - and won't be for a long time, if ever.
But the remarkable wave of corporate mergers rolling over Europe this week is a clear sign that the Continent is moving toward a single market. Just the last few days have seen the announcement of several megadeals worth a total of nearly $100 billion, which, as one analyst points out, "is greater than the gross domestic product of Portugal."
This merger wave is seen as a sign that corporate Europe is counting on the coming of the common currency, the euro. "I can't think of a single significant company in [continental] Europe or the UK not expecting the euro to start," says J. Paul Horne, chief international economist at Smith Barney in Paris.
This week, the European Commission announced that no less than 13 European Union members appear likely to qualify for the currency union as of Jan. 1, 1999. The return to office of Italian Prime Minister Romano Prodi is an indication of Italy's commitment to be in the starting lineup. Mr. Prodi had resigned last week after his Communist coalition partners balked at an austerity budget intended to help Italy qualify, but opposition dissolved amid public support for Prodi.
The merger wave is also a sign that European businesses are seeing cross-border trade barriers falling, however slowly, as market-opening mandates from Brussels are gradually put into practice. And so, to get big enough to take advantage of new opportunities and fight off ever-tougher competition, companies have been buying up domestic rivals and cross-border counterparts.
The five big deals announced Monday were:
* The Swedish bank Nordbanken's merger with Merita of Finland;
* The Anglo-Dutch publisher Reed Elsevier's merger with its longtime Dutch rival Wolters Kluwer;
* BAT Industries PLC's announced plan to sell its insurance and asset management businesses, including the Farmers Group, to Zurich Insurance Co.;
* The Italian insurer Assicurazioni Generali's $9 billion bid for Assurances Generales de France;
* A hostile bid by French cementmaker Lafarge for the British construction materials firm Redland.
It's all part of a broad restructuring widely seen as essential if European firms, long trapped within their small, fragmented national markets, are to become truly world-class companies, able to stand up against American and Asian firms.
The beneficiaries of this restructuring are supposed to be the companies (at least the takers-over if not the taken-over) and their shareholders. But this restructuring is likely to have a down side in terms of job losses, eventually if not immediately. The financial services sector in particular is considered seriously overstaffed.
The free-market gospel preaches, however, that both the corporate downsizing and the reduction of the state role in the economy are necessary for continued prosperity, including job growth, down the line.
A near-term example of this is the plan by Bayrische Vereinsbank of Munich, which is merging with Bayrische Hypotheken- und Wechsel-Bank, also of Munich, to open 20 new branches in the populous German state of North Rhine-Westphalia next year.
Certainly market conditions are right for corporations who want to go shopping. Interest rates are low, and the nearly two-year-long bull market for stocks has made firms flush with wealth, at least on paper.
The bull market also means that acquisition targets may be overpriced - but not as highly as they are likely to be later on if the market rally continues.
Thus would-be acquirers have an incentive to move quickly. "They're looking to get in while prices are relatively contained," says Mr. Horne. He adds, "Instead of building capacity, they're buying market share." It's easier for a company to expand, especially to cross a frontier, by buying an existing firm than starting from scratch, he notes.
It's also "politically more acceptable" for a bank, for instance, to expand in new markets if it can acquire merger partners and then present itself as part of "a federation of European banks," says London analyst Sebastian Scotney.
Many of those arguing that businesses have to merge to stay in the game are, of course, investment bankers and management consultants who are drumming up business. As Jonathan Lawlor of HBSC James Capel & Co. in London puts it, they "have an interest in change rather than the status quo."
But the advocates for change have plenty of evidence to present. Barclays Bank, for instance, recently decided to unload its investment banking operation BZW on the grounds that it needed more support than Barclays could give. "Get big or get out" seems to be the message.
And in Munich, Germany, a bank analyst observes, "To be in the banking business nowadays, you need a very expensive data-processing operation to meet customer-service expectations."
"Part of the economic case for mergers is that you have combine two revenue streams and one cost base," Mr. Lawlor says.
Not all the mergers currently in the works can be expected to be successful, however, even if the cartel office in Brussels approves them. On one hand, they tend to involve firms buying businesses they already know. On the other, language and cultural differences, including differences in corporate culture, do not disappear overnight, and there have been some high-profile failed mergers of late.
Academic research has shown that corporate takeovers have had roughly a 50 percent success rate - and that in the unified national market of the United States. The challenges for cross-border deals in Europe will presumably be greater - but the investment community dismisses these concerns as academic.