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Europe: Deals Are Back In Season


After three years of pruning costs, reducing debt, and cleaning up their balance sheets, CEOs across Europe are ready to start cutting deals again. Take Henri Lachmann, chief executive of French electrical equipment maker Schneider Electric. He plans to boost sales by 8% to 10% this year, to $12 billion, through a "rigorous and targeted acquisition strategy" in China, Brazil, India, and Europe. While Lachmann won't name specific targets, Schneider Electric's solid 2003 earnings and $6.3 billion in cash and capital give it ample resources for a shopping spree.

Much of Europe Inc. finds itself in a similar position. "Companies have sorted themselves out, and now they're ready to get out and grow again," says Adrian Knight, corporate finance specialist in the London office of law firm Shearman & Sterling.

A host of factors are turning the gears of the dealmaking machine. Among them: Interest rates are low, equity prices are rebounding, and the stronger euro makes non-euro-zone investments more attractive. Low rates have allowed companies to refinance debt and free up capital to fund expansion. The turnaround in regional bourses, many of which are back to levels not seen since 1999, encourages dealmaking because acquirers are better able to use their stock as an acquisition currency. Targets, meanwhile, are more inclined to sell because they get more money. "Better market conditions mean the deals companies wanted to do but couldn't for three years can now get done," says Ed Mountfield, head of research at Zephyr, an M&A database in Manchester, England.

Among the companies with deals in the works: French health-care company Sanofi-Synth?labo (SNY), Spanish bank Banco Bilbao Vizcaya Argentaria, and Belgian beermaker Interbrew. Analysts say Sanofi's $66 billion hostile bid for Franco-German rival Aventis (AVE), announced on Jan. 26, could be a sign of things to come. "2004 will mark the return of the big deal," predicts Eric Turjeman, director of equities at SG Asset Management in Paris.

INVESTOR SKEPTICISM. Of course, no one thinks Europe is about to do a rerun of the bigger-is-better days of the late 1990s. Dealmakers are more sober. And there's still little shareholder appetite for large-scale, transforming acquisitions such as French utility Vivendi's ill-fated takeover of Canadian conglomerate Seagram and French television company Canal+ in 2000. Only last month, investor skepticism killed any plans British mobile-phone giant Vodafone Group PLC (VOD) might have had to stick it out in a bidding war for AT&T Wireless Services Inc. (AWE) in the U.S. And when London bank Lloyds TSB Group PLC (LYG) hinted on Mar. 8 that it might use its spare capital to make acquisitions rather than buy back shares, its stock temporarily dipped. "It's not sufficient for CEOs simply to have strategic vision," says Paulo Pereira, head of European M&A at Morgan Stanley (MWD) in London. "Investors want clearly identified synergies that can be achieved in a timely way."

It must be noted that the coming merger surge exists only in bankers' dreams. In fact, the number of European deals this quarter is expected to be lower than in the last quarter of 2003 and lower than the first quarter a year ago -- although their value will likely be higher. Still, Pereira and other investment bankers see more interest in M&A than at any time since the market peaked in 2000. A February survey by Merrill Lynch & Co. (MER), for example, showed that 86% of investors think the number of M&A transactions in Europe will rise steeply this year. And the quarterly CEO Confidence Index produced by Goldman, Sachs & Co. (GS) found European managers far more inclined to countenance mergers now than they were just three months ago. Says Yoel Zaoui, head of European M&A at Goldman, Sachs International in London: "The level of dialogue with companies is more intense."

One locus of real action is corporate restructuring, with companies still under pressure to spin off noncore businesses and unravel cross-shareholdings to boost profits and shareholder value. Swiss Life Group, the big Zurich insurer, is trying to offload Banca del Gottardo, its private banking subsidiary. And on Mar. 4, Norway's biggest consumer-goods company, Orkla, sold its 40% stake in Denmark's Carlsberg Breweries to parent company Carlsberg for $2.5 billion.

BUY OR BE BOUGHT. One thing that sets this round of M&A apart from previous cycles is the defensive nature of some transactions. For instance, a buy-or-be-bought mentality may trigger a number of consolidations in the financial industry, especially in Germany. But other companies are also eager to bulk up. Experts point to Sanofi's bid for Aventis to illustrate how Europe Inc. is moving to preemptively ward off unwelcome suitors. In Sanofi's case, the acquisition was promoted by a shareholders' pact, expiring at the end of this year, that has prevented its two main shareholders -- Total Fina Elf (TOT) and L'Or?al (LORLY) -- from selling their stakes. "What is happening to Aventis today could well have happened to Sanofi," says Sanofi Chairman Jean-Fran?ois Dehecq.

Whatever the rationale behind the deals, they are driving up stock prices of companies that look vulnerable. The price of Deutsche Bank's (DB) shares has climbed 8% this year amid speculation that Germany's largest bank will soon merge with a bigger foreign partner. While shareholders may still feel burned by the misguided megamergers of the late 1990s, bankers and many of the executives they advise are ready to start the next round. By David Fairlamb in Frankfurt, with Carol Matlack in Paris


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