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May 03, 2006 at 08:00 PM
Western European stock markets are undergoing a mergers-and-acquisition frenzy, the likes of which hasn’t been seen since the 1998-2000 dot-com boom.
But unlike that frantic period, M&A deals across the continent have ensnared companies of different sizes in many industries. While deregulated industries like banks and utilities have undergone a massive spike in consolidation, M&A transactions have also involved telecom, retail, pharmaceuticals, commodities, and, most recently, infrastructure companies, including stock exchanges, ports and airports.
According to Clive McDonnell, Standard & Poor’s chief European strategist, there were 1,850 M&A deals announced in Europe in the first quarter of 2006, similar to the year-ago period. However, the value of those transactions surged to 380 billion euros from 138 billion euros.
Some of the biggest European mergers include a hostile 22-billion euro bid by Spanish gas distributor Gas Natural for Endesa SA (ELE), the Spanish utility, as well as a concurrent 29.1-billion euro bid for Endesa by Germany’s E.ON AG (EON). In addition, Bayer AG (BAY), Germany’s biggest drugmaker, outbid Merck KGaA for Schering AG (SHR) by offering 16.3 billion euros. There is also the successful takeover of Lucent Technologies (LU) by French telecom giant Alcatel S.A. (ALA) in an 11.1-billion euro deal.
This year may set a record for M&A activity on a global basis, and perhaps in Europe alone, said Howard Horowitz, director of research at Water Island Capital LLC, the investment adviser for the $173-million Arbitrage Fund/R (ARBFX), which specializes in merger arbitrage. Fueling this frenetic buying are two huge pools of cash, he explains. “First, we have the strategic buyers — companies seeking to acquire competitors, either of equal size or in some cases even larger rivals. Since many European companies have delivered strong profit growth recently and cleaned up their balance sheets, they have the resources to purchase new assets, especially after a fallow five-year period of no M&A activity. There is a lot of pent-up demand.” The other major source of cash, he points out, is from private equity funds, which are teaming up to make big multi-billion-dollar transactions.
Philippe Brugere-Trelat, manager of the $2.1-billion Mutual European Fund/A (TEMIX), points out that the M&A boom is also related to European economic integration, exemplified by the growing importance of the European Union (EU) as a powerful, global economic force. “Integration may be stalled at the political level, but certainly not at the industrial and corporate levels,” he said. “In order to remain competitive in an increasingly global economy, European companies have engaged in restructuring to improve margins and profits, making their assets more valuable and creating strong balance sheets. Indeed, cash on corporate balance sheets in Europe is at historic highs and debt levels are very low.”
Low long-term interest rates in Europe are also cited as a driver for M&A activity. Though higher energy and commodity prices and some signs of inflation may compel the European Central Bank (ECB) to tighten later this year, long-term rates in Europe have been stable and at historic lows. “If long-term rates were to dramatically rise, we would probably see more stock-for-stock merger transactions in Europe, thus taking away some of the edge that private equity shops currently have,” Horowitz said. “Or, we could witness some slowdown in M&A deals overall.” Indeed, the ECB raised rates by a quarter point in early March, following a similar rise last December. Long-term rates in the Eurozone are presently at 2.50%, versus 4.75% in the U.S.
