A Breakneck Pace Of M&A in Europe Consolidations, Restructurings Drive Huge Deals as Unification Moves Near

It was another vintage year for m&a in Europe during 1997. As the year progressed, merger mania reached a fever pitch, with five major deals totaling $44 billion launched on a single “Mad Monday” in October. By year-end 1997, the total value of announced and completed cross-border transactions soared to an unprecedented $194 billion, up from the previous record of $116 billion in 1996. Almost three-quarters of the headline total came from a record crop of 40 megadeals, each worth at least $1 billion, which weighed in at $143 billion. This compares with the previous year’s harvest of 26 megadeals worth $72 billion. Heading the list of megadeals were a pair involving Swiss acquirers Zurich Insurance’s $18.7 billion merger with the financial services arm of U.K.-based B.A.T Industries and drug maker Roche’s $11 billion purchase of Boehringer Mannheim of Germany, specialist in diagnostics products. Swiss firms also coupled up at home, especially in the financial services sector, where two of the country’s big-three banks, Swiss Bank Corp. and Union Bank Corp., paired off in a $29 billion megamerger, while the third, Credit Suisse Group, swallowed Winterthur Schweizerische Vericherungs insurance group for $9.7 billion. Altogether, a score of major domestic mergers were concluded across Europe with a combined value of more than $100 billion. Outside of Switzerland, the biggest intra-national transaction was the $16 billion marriage of Guinness and Grand Metropolitan in the U.K. to create the world’s largest beverage group (under the name of Diageo PLC). The plan was resisted for months by French luxury goods group LVMH Moet-Hennessy Louis Vuitton, Guinness’s strategic partner and 14% owner, whose boss, Bernard Arnault, favored a different combination. To press his case, LVMH bought heavily into Grand Met and by July had built an 11% stake at a cost of $2.6 billion. But the tug-of-war ended in October when LVMH dropped its opposition in return for an $800 million payoff. Once again, American buyers set the pace in Europe, accounting for purchases totaling $42 billion. In the biggest eastward transaction across the Atlantic, U.K. fund manager Mercury Asset Management which three years ago resisted a bid by Morgan Stanley for its then parent, merchant banker S.G. Warburg succumbed to a $5.3 billion offer from Merrill Lynch. Other notable in-bound deals included Ameritech’s $3.2 billion purchase of a controlling interest in Danish telephone company Tele Danmark and Du Pont’s $3 billion acquisition of the heavy chemicals operations of British-based Imperial Chemical Industries. Within Europe, the heftiest cross-border m&a bills were run up by Swiss companies at $36 billion, followed at a distance by buyers from the U.K., France, the Netherlands, Italy, and Germany. On the sell side, the U.K. continued to be the prime magnet for cross-border acquirers, hosting $64 billion of in-bound transactions, or a third of the total. Other popular hunting grounds were Germany, France, and the Netherlands. As to industry pattern, by far the most active sector of European m&a in 1997 was financial services which racked up nearly $58 billion in deals. There were two main driving forces behind this consolidation: * The approach of a monetary union, due to start in 1999, posing the imminent threat of tougher competition and the need to achieve critical mass in the euro-zone of the future and * The growing fashion for yoking banks with insurance companies known as bancassurance among the French and allfinanz in German to exploit opportunities for profitable cross-selling of each other’s products. Some of the biggest of these concentrations were at the national level, such as the aforementioned deals in Switzerland. In Germany, the $8.7 billion merger of two Munich-based rivals, Bayerische Vereinsbank and Bayerische Hypotheken-und Wechselbank, created one of Europe’s top three banks. In Italy, Banco Ambrosiano Veneto swallowed savings bank Cassa di Risparmio delle Provincie Lombarde (Cariplo) for $4 billion, creating one of that country’s two largest banking organizations. Also joining forces were banks in smaller European markets, such as Bank Austria with Creditanstalt-Bankverein in Austria and two Swedish hookups, Svenska Handelsbanken with Stadshypotek and Sparbanken Sverige with Freningsbanken. Two major national bank/insurance hybrids were Storebrand and Christiania Bank in Norway and Skandinaviska Enskilda Banken and Trygg-Hansa Gruppen in Sweden. The same patterns were repeated at the international level. After the Anglo-Swiss tie-up of B.A.T and Zurich Insurance, some of the largest trans-European combinations included the $6.4 billion merger of Swedish Nordbanken with Merita Bank of Finland (itself the product of a domestic merger) and the $4.5 billion takeover of Belgium’s Banque Bruxelles Lambert by Internationale Nederlanden Groep (ING) of the Netherlands. Another wave of financial deals involved British owners bailing out of investment banking and fund management. In addition to Merrill Lynch’s purchase of Mercury Asset Management, France’s Socit Gnrale pocketed most of Hambros Bank for $495 million; Deutsche Bank and Bankers Trust carved up NatWest Markets for $300 million; and Barclays Bank sold parts of BZW to Credit Suisse for $170 million. Another sector galvanized by the approach of the single currency was retail and wholesale distribution, which generated about $10 billion in deals. The most frequent protagonists were major French supermarket operators looking abroad for growth: Auchan in Italy, Intermarch in Germany, and Promods (balked in a hostile run at French rival Casino) in Italy, Spain, and Portugal. In drug wholesaling, Germany’s aggressive Gehe bagged Lloyds Chemists of the U.K. in a $1.1 billion contested takeover, outbidding Unichem of the U.K. which late found consolation in a $727 million union with Alliance Sant, a major player in France and Italy. Swiss-German giant Metro International took full ownership of the SHV Makro cash-and-carry stores in seven European countries through a $3 billion deal with its Dutch partner SHV. And at year-end, the U.S.’s formidable Wal-Mart established its first beachhead in Europe by acquiring Wertkauf, a German hypermarket chain. In the telecommunications sector, which also registered about $10 billion in deals, old and new operators were jockeying frantically for position in the run-up to full deregulation in January 1998: * In Germany, Swiss Telecom formed a regional joint venture with two local electric utilities, Badenwerk and EVS. But the U.K.’s Cable & Wireless pulled out of Vebacom, its JV with German utilities Veba and RWE. * Italy’s debt-ridden Olivetti (which earlier unloaded its money-losing PC division to a buyout group for $175 million) sold a half interest in its telecom operations, now its core business, to Germany’s Mannesmann in return for a $1.3 billion cash injection. * British Telecom recruited Telefnica de Espana (previously a member of the AT&T-Unisource team) and Telecom Portugal to join its Concert alliance with MCI of the U.S. But when the BT-MCI merger came apart, the Iberian partners were left at loose ends. * Italy’s Stet (since privatized as Telecom Italia), a latecomer to the international telecom game, was hastening to place its bets: $700 million for a 25% stake in Mobilkom Austria, $900 million for 49% of Telecom Serbia, and $1.2 billion for 70% of Retevision, soon to be Spain’s second-largest operator. The impact of impending deregulation was also evident in the electricity sector, which is due to be partially opened to cross-border competition in early 1999. This prospect attracted U.S. utilities such as Enron and Entergy, which formed separate $3 billion joint ventures with the Italian state power company Enel, and Southern Co., which joined with German partners to take control of the Berlin power company Bewag. Meanwhile, an important regional player was emerging through an alliance between Germany’s Preussen-Elektra and Hamburgische Elektricitts-Werke, Sweden’s Sydkraft, and Statkraft of Norway. A constant theme of European m&a in the 1990s has been the effort to refocus on core businesses, building these to critical mass through acquisitions while divesting non-core operations. A prime example in 1997 was Siemens, the German electrical giant, which sold its electrical wholesaling chain for $340 million to a Swedish-British investment company, its technical lighting operations to Lighting Corp. of America for $194 million, its dental equipment business in a $430 million buyout led by Schroder Ventures of the U.K., and its defense electronics business to British Aerospace and Daimler-Benz Aerospace. In the U.S., however, Siemens unpocketed $1.5 billion to buy the non-nuclear power station operations of Westinghouse Electric. Demergers were in vogue in the chemicals industry. Benckiser of Germany split itself into detergents and cosmetics businesses. Ciba Specialty Chemicals was split off by Swiss drug maker Novartis through a $225 million global stock offer that was 10 times oversubscribed. And Germany’s Hoechst demerged Behring Diagnostics by putting the unit into a $1.5 billion joint venture with Dade International of the U.S., while shelving plans to spin off its Hoechst Marion Roussel pharmaceuticals arm. French chemicals group Rhone-Poulenc stumped up a $4.8 billion buyout of the public shareholders of U.S. subsidiary Rhone-Poulenc Rorer in order to combine it with other operations and hammer out a life sciences company with sales of $10 billion. Rhone-Poulenc plans to take its $7 billion basic chemicals business public later this year. But the most dramatic makeover was at the British flagship chemicals group, Imperial Chemical Industries, which was exchanging its cyclical, low-profit commodity chemicals businesses for steadier growing, higher-margin specialty products. ICI splashed out $8 billion for the Quest International, National Starch & Chemical, Unichema International, and Crossfield Chemical industrial and specialty chemicals units of Unilever before selling its heavy chemicals business to Du Pont. Given the continuing pressures of deregulation, globalization, and technological change, compounded by the advent of the euro-currency, the restructuring of European industry should continue through 1998, along with a surge in m&a.