Bloomberg News

Europe’s Crisis May Hold Seeds of Dealmaking as Valuations Drop

December 28, 2011

Dec. 16 (Bloomberg) -- U.S. and Asian companies seeking acquisitions in Europe may accelerate dealmaking next year after a slowdown in the second half, beckoned by a slumping euro and share prices depressed by the sovereign debt crisis.

Led by Johnson & Johnson’s $21.3 billion bid for Switzerland’s Synthes Inc., announced takeovers in Europe by overseas companies rose by about 58 percent to $252 billion this year, data compiled by Bloomberg show. While acquisitions have declined since July, companies including General Electric Co., China’s HNA Group Co., and Japan’s Fast Retailing Co. have signaled an appetite for further takeovers in the region.

“There are well-positioned acquirers globally looking for bargains,” even if economic pressure has slowed recent European dealmaking, said Gregg Lemkau, head of mergers and acquisitions for Europe, the Middle East, Africa and Asia-Pacific at Goldman Sachs Group Inc. “One of the drivers in Europe has been historically low valuations and a relatively soft currency.”

Europe may offer the best bargains in more than 15 years. The MSCI Europe Index, a measure of 450 stocks, trades for 10.4 times reported earnings, showing equities in the region are cheaper than they’ve been 98 percent of the time since 1995, according to Bloomberg data.

The euro, meanwhile, has fallen by about 13 percent against the dollar since the sovereign debt crisis began two years ago, making conditions even more favorable for U.S. buyers. Potential Japanese acquirers have the advantage of a yen that has gained about 10 percent in the past six months against a benchmark basket of currencies including the euro.

Acquiring Technology

While few companies are clamoring for access to the European market itself, “in many cases, what overseas buyers are really acquiring in Europe is technology, or access to emerging markets,” said Giuseppe Monarchi, head of European M&A at Credit Suisse Group AG.

J&J’s planned purchase of Synthes will give the U.S. health-care products maker devices used to treat bone fractures and trauma, while Hewlett-Packard Co.’s $10.3 billion takeover of the U.K.’s Autonomy Corp. in November handed it data-sifting enterprise search technology helpful to cloud computing. In buying Luxembourg-based Skype Technologies SA for $8.5 billion in October, Microsoft Corp. absorbed the world’s biggest provider of Internet telephone service.

Emerging Markets

European companies have also tended to be more aggressive than their U.S. counterparts in expanding in markets like Africa and the Middle East, spending about $90 billion on deals in those regions since 2000, Bloomberg data show. That compares with about $50 billion of such takeovers by U.S. companies.

So far, access to those markets and technologies mean many European targets are still worth having. However, a protracted slowdown and a failure by European policy makers to resolve their fiscal challenges may damp the outlook for dealmaking.

A degree of reluctance to do deals will “likely persist until there’s some resolution to the debt crisis,” said Goldman Sachs’s Lemkau. “The interest is still there, but the volatility and uncertainty in the markets makes the likelihood of most acquirers taking action low.”

Moody’s Investors Service said Dec. 12 it will review the ratings of all European Union countries after a summit last week in Brussels failed to produce “decisive policy measures” to end the region’s debt crisis. Standard & Poor’s placed the ratings of 15 euro nations on review for possible downgrade on Dec. 5.

Slowing Pace

Dealmaking in Europe declined in the second half to the slowest pace since 2008, with foreign buyers announcing $86 billion of acquisitions, 48 percent less than in the first half, Bloomberg data show.

Still, many companies have recently expressed an interest in Europe. General Electric, based in Fairfield, Connecticut, said in November it’s targeting European deals as it seeks to compete with German rival Siemens AG. Fast Retailing, owner of the Uniqlo fashion brand, is seeking European targets to offset stagnant sales at home, Chief Executive Officer Tadashi Yanai said last month. HNA, meanwhile, has said it has a $6 billion war chest for acquisitions in Europe and the U.S.

“The U.S. went into recession earlier than Europe and came out of it faster,” said David Silver, head of European investment banking at Milwaukee-based Robert W. Baird, which typically focuses on deals valued at as much as $1 billion. “American companies are armed with stronger balance sheets and want to deploy capital.”

Cash Stashes

A study of 258 U.S. corporations by JPMorgan Chase & Co., published in September, found they held $368 billion abroad, roughly half of their total cash, cash equivalents or investments. Microsoft and Hewlett-Packard both cited a need to find a healthy return on their cash held overseas when announcing their takeovers of Skype and Autonomy, respectively, earlier this year.

U.S. companies may face competition from Asian acquirers, who have announced about $72 billion of takeovers in Europe so far this year, up 42 percent from the same period a year ago, according to Bloomberg data. Japanese acquirers led dealmaking, more than doubling their purchases to $34 billion.

“Japanese companies are getting serious about acquisitions abroad,” said Hernan Cristerna, head of M&A for Europe, the Middle East and Africa at JPMorgan in London.

Takeda Pharmaceutical Co.’s $13.7 billion takeover of Nycomed ASA, a Norwegian supplier of pharmaceuticals, was the biggest acquisition by an Asian buyer in Europe. More recently, Suntory Holdings Ltd. entered talks to buy bottled-water assets from France’s Danone SA, people familiar with the matter said in October.

On the whole, a bleak economic outlook hasn’t changed the fundamental attractiveness of at least some European companies, dealmakers say.

“International companies are stepping up their focus on Europe,” said Jean-Baptiste Charlet, head of global industries for Europe, the Middle East and Africa at Morgan Stanley. “The euro crisis still scares them, but there’s a lot of technology to be gleaned and the companies here are very well-developed internationally.”

--Editors: Chris V. Nicholson, Katherine Snyder

To contact the reporters on this story: Matthew Campbell in Paris at mcampbell39@bloomberg.net; Jacqueline Simmons in Paris at jackiem@bloomberg.net

To contact the editors responsible for this story: Katherine Snyder at ksnyder@bloomberg.net; Chris V. Nicholson at cnicholson22@bloomberg.net


We Almost Lost the Nasdaq
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus