Suddenly, Europe is awash in mergers and acquisitions. The scale is American, and so is the style: Hostile deals, huge debt, fat fees for bankers. And this is just the start
Milanese investment banker Ruggiero Magnoni has a daily schedule that seems impossible to cram into 24 hours. On one morning in late March, the head of European mergers and acquisitions for Lehman Brothers Inc. is in Munich, closing a deal that will bring Italy's Silvio Berlusconi and Saudi investor Prince Alwaleed bin Talal into the tightly held German media empire of Leo Kirch. Next, Magnoni jets to Milan to strategize on Olivetti's $58.5 billion hostile bid for giant phone company Telecom Italia. Finally, he rushes to London to line up the $24.5 billion financing Olivetti needs. Between meetings, Magnoni, 48, finalizes contracts for the team of London-based bankers Lehman has just snatched away from rival Deutsche Bank.
As Magnoni's schedule shows, merger frenzy is hitting Europe big-time. On Mar. 19, French conglomerateur Francois Pinault launched a bidding war for Italy's Gucci in a direct challenge to luxury-goods baron Bernard Arnault. A few days later, four of the biggest Italian banks announced they would merge into two, creating Italy's first megabanks and leaving former heavyweight Mediobanca in the cold. Meanwhile, the fight in France as Banque Nationale de Paris (BNP) tries to gain control of two rivals rages on. "This is only the beginning," says Magnoni of the dealmaking. "It's going to go on for the next five years."
Europe is seeing a burst of mergers and acquisitions that seems likely to put it on a par with the U.S. in the $1 trillion-per-year league. But just as formidable as the pace and size of deal mania in Europe is its new, cutthroat style. In place of quiet agreements among members of a clubby business elite are ferocious, drawn-out battles over corporate control that leave egos tattered. Newspaper readers are following the sagas like soap operas.CHEAP MONEY. Until recently, hostile deals were considered declasse on the Continent. Now, three hostile bids--Gucci, Telecom Italia, and BNP--are playing out at once. And Europe is likely to see more raiding and feuding over the next few years. For one thing, corporate founding families and proud CEOs hate giving up control. At the same time, with the Continent awash in cheap money, other bosses see a once-in-a-lifetime opportunity to build empires. Until it becomes clear who the winners and losers are, bankers say, much of the reshuffling will be done through uninvited moves.
All the instability makes Europe a dealmaker's heaven. For years, investment bankers have been making the rounds of chief executives, telling them they need to strip down to core businesses, then bulk them up to survive the competition unleashed by globalization and the launch of the single currency. Now, that careful cultivation of clients is paying off, and Europe has a shot at becoming the world's deal capital. The reason: "Europe is 10 years behind the U.S." in consolidation, says Paul Gibbs, merger specialist at J.P. Morgan & Co. in London.
Indeed, in France, panicked managers are rushing to restructure before a hostile raider and his clever banker do it for them. During the past eight weeks, the action has taken a quantum leap, with a flurry of deals worth more than $50 billion. And advising on issues such as assets sales or a stock-market listing has given U.S. investment banks entree with top management. "The dialogue has grown over the past five years to be more intimate and to include not only financing issues but strategy," says Sylvain Hefes, head of European investment banking at Goldman, Sachs & Co. in Paris.BITTER PILL. That's one reason European companies are increasingly using techniques familiar in the U.S. from the 1980s, both to execute takeovers and to protect themselves. For example, last June, when Milan-based Prada snapped up 9.5% of Gucci's shares, Gucci CEO Domenico De Sole realized he had to defend himself. Over the summer, he had U.S. law firm Skadden, Arps, Slate, Meagher & Flom work out a "poison pill"--an employee stock ownership plan that could be triggered to dilute a raider's stake. That helped in mid-February, after Arnault bought out Prada's shares and signaled he would try to control Gucci with just a 34% stake.
The Americans have brought another innovation to European dealmaking: debt. Olivetti's bid for Telecom Italia will include $24.5 billion in bank borrowing--making it one of the largest leveraged buyouts ever. Even Pinault's proposed $2.9 billion offer for 40% of Gucci is to be debt-financed. Such monster borrowings are possible because European investors are hungry for higher yields than the 4% or so they can earn from government bonds. That alone makes previously unthinkable deals possible.
Smelling blood, American buyout firms such as Kohlberg Kravis Roberts, Clayton Dubilier & Rice, and Hicks Muse Tate & Furst are all either opening offices in London or beefing up existing operations. So far, they have stuck to modest-size deals. But buyout specialists say they are hunting for bigger targets in basic manufacturing, financial services, retail, and media. Alan Jones, head of leveraged finance at Morgan Stanley in London, reckons that $30 billion in buyout money alone is aimed at Europe. If that money is put to use at a conservative 3-to-1 debt-to-equity ratio, it could fuel $120 billion in buyouts.
Leveraged buyouts and other complex deals can earn bankers far fatter fees than plain-vanilla mergers. If successful, Olivetti's bid for Telecom Italia could produce a stratospheric payday. The four banks representing Olivetti may take in as much as $425 million for arranging the $24 billion financing. Various other fees could bring the total well over $500 million.TALENT RAIDS. No wonder banks are beefing up their merger teams. Lehman Brothers has been particularly aggressive--for example, in poaching talent from Deutsche Bank. Donaldson, Lufkin & Jenrette recently grabbed the heads of Salomon Smith Barney's financial services team. Even a perennial market leader such as Goldman Sachs is in the market for scarce European talent. Good people don't come cheaply. One executive says total compensation of $2.5 million to $5 million per year is the going rate for a seasoned merger specialist.
What industries will see the next big deals? Telecom is a good bet. The industry has seen a wave of mergers this year but is still organized largely on a national basis. Cross-border consolidation could produce enormous combinations similar to the Baby Bell mergers in the U.S. Financial services is another hot area. So far, bank deals have been largely in-country because the cost savings are easier to sell to the market. Once this round of deals is complete, says Terence C. Eccles, bank merger specialist at J.P. Morgan, CEOs may turn to even bigger cross-border deals.
With much of Europe using the same currency, such international linkups seem inevitable. "This is the shadow of the euro," say Felix G. Rohatyn, former Lazard Freres & Co. partner and current U.S. ambassador to France, of the merger wave. "It has inspired a more active and muscular capitalism." The new currency and the competition it has spawned have lit a fire under the Continent's companies and their bankers that is likely to burn for many more years.By Stanley Reed in London, John Rossant in Rome, and Gail Edmondson in Paris, with Thane Peterson in FrankfurtReturn to top