A Vintage YearFor European M&A: Deregulation and the Imminence Of Unification Drove the Deal Flow

Dealmakers in Europe went into overdrive in 1998, impelled by global competition, deregulation, and the imminent arrival of the euro. For the fourth year running, the volume of announced and completed cross-border transactions reached a new record, rising by 37% to $261 billion. (Deals completed in 1998 totaled $233.3 billion). Once again, three-quarters of this total ($195 billion) came from a bumper crop of 45 deals valued at $1 billion or more. Heading the list were two jumbo mergers between European drug makers announced in 1998 the $35 billion linkup between Zeneca of the U.K. and Swedish Astra, and the $23 billion marriage of Germany’s Hoechst with Rhne-Poulenc of France. But even these blockbusters were easily outweighed by two mammoth transatlantic transactions: British Petroleum’s $48.2 billion takeover of Amoco and Daimler-Benz’s $40.5 billion acquisition of Chrysler. North American buyers were the most active in Europe, generating $62 billion worth of deals. In the biggest-ever international acquisition by a U.S. company, Texas Utilities shelled out $10.9 billion for the U.K.’s Energy Group a remnant of the once-feared raider Hanson, which broke itself up two years ago. And Canadian drinks and entertainment conglomerate Seagram, after a brief flirtation with U.K. music group EMI, switched its attentions to PolyGram, the record and film-making arm of Dutch electronics giant Philips Electronics, which it carried off after a two-week whirlwind courtship for $10.2 billion in cash and stock. Among other major overseas deals were Owens-Illinois’ $3.6 billion purchase of the packaging operations of U.K. conglomerate BTR; AT&T’s $3 billion international joint venture with British Telecom; Enron’s foray into the water business with its $2.2 billion acquisition of the U.K.’s Wessex Water; and Coca-Cola’s $1.9 billion payment for most of Cadbury-Schweppes’ soft drinks brands outside of the U.S. U.S. financial players, led by Kohlberg Kravis Roberts, were also beating the bushes in Europe for potential deals. KKR masterminded the successful $1.4 billion buyout of Willis Corroon, one of the U.K.’s (and Europe’s) two remaining global insurance brokers; the other, Sedgwick Group, was swallowed by the U.S. and world market leader Marsh & McLennan. But when the global market turmoil of early autumn caused KKR to pull out of its agreed purchase of Herberts the paints division of Germany’s Hoechst, being divested as part of the latter’s exit from chemicals trade buyer Du Pont quickly stepped in with a $1.9 billion offer. Within Europe, the biggest cross-border buyers were British firms, with a total of $53 billion. Apart from the Zeneca/Astra megamerger, the top U.K. deals were Kingfisher’s $4.1 billion takeover of Castorama Dubois Investissements SCA, a French hardware retailer, and Bass’s $3 billion purchase of the Saison Holdings unit of Seibu Saison Group of Japan which included the Inter-Continental Hotels chain. Also bent on European expansion were companies based in Germany ($45 billion), notably Hoechst in pharmaceuticals and Bavarian conglomerate Viag, with its $8.7 billion merger with Swiss aluminum and chemicals group Alusuisse Lonza. French buyers accounted for $32 billion of deals, led by oil group Total’s $13 billion swoop on PetroFina of Belgium. And Benelux firms racked up $24 billion worth of transactions, including the $12.3 billion contested takeover by Fortis of Belgium’s Gnrale de Banque (see below). As always, the U.K. was by far the most popular stomping ground for international acquirers, playing host to nearly $100 billion worth of transactions. One of the most active sectors of European cross-border m&a activity last year was pharmaceuticals. The year began with the aborted megamerger of the U.K.’s Glaxo Wellcome and SmithKline Beecham valued at a whopping $70 billion which came undone over the share-out of top jobs. Despite this setback, the sector closed with a trio of gargantuan deals: the mergers of Zeneca/Astra, Hoechst/Rhne-Poulenc, and the $10.4 billion linkup of Sanofi and Synthlabo, the second- and third-ranked French drug concerns. The accelerating consolidation of this still fragmented industry in which no single player has much over 5% of the global market is being driven mainly by the need to fund huge R&D spending. The cost of bringing a new drug to market has escalated to around $500 million, and only a few become blockbusters with annual sales of more than that. Notably absent from this year’s roster were U.S. takeovers of European drug companies. With an eye on the troubled 1995 merger of Upjohn and Swedish Pharmacia, whose integration process was beset by culture clashes, European firms preferred to pair off among themselves. U.S. drug makers for their part may be giving a lower priority these days to Europe’s slower-growing and price-controlled markets. The convulsions in European finance in the run-up to monetary union reached a climax in Belgium last June, when the venerable Gnrale de Banque, the country’s largest bank, became the object of the biggest-ever takeover battle for a European bank. Despite visible reluctance on the part of GB’s management, everything seemed neatly tied up in mid-May when Fortis, a 50/50 Belgian/Dutch financial hybrid, unveiled a $10.8 billion all-paper offer which was duly accepted by the bank’s biggest shareholder, Socit Gnrale de Belgique. At the end of May, however, Dutch banking giant ABN Amro horned in with a cash-and-paper counteroffer, topping Fortis’ bid by nearly 15%. The denouement came at a dramatic all-night meeting of GB’s 28-strong board on June 5th, at which the chairman and five management directors, who backed ABN Amro, were outvoted by the SGB and other outside directors. The board triggered a poison pill in the form of a special share issue which in effect threw the match to Fortis in exchange for the latter raising its bid to $12.3 billion. On a smaller scale, a dogfight broke out in the Nordic banking sector last autumn when the planned three-way merger of Norway’s Christiania Bank, state-owned Postbanken, and Fokus Bank was disrupted by a $680 million hostile bid for Fokus from Svenska Handelsbanken of Sweden. Two weeks later, however, Den Danske Bank of Denmark stepped in as a white knight, eventually winning Fokus’s hand in return for $770 million in cash plus a promise to leave the existing management in place and maintain the bank’s headquarters in provincial Trondheim. Rather than outright takeovers, some financial services firms preferred to cuddle up to each other in international alliances cemented by small equity swaps. In the biggest such exchange, Italian insurer Assicurazioni Generali took a 5% shareholding in Germany’s Commerzbank, which in turn took 2.5% of Generali, valued at $720 million on each side. At the national level, Italy’s Banca Nazionale del Lavoro paired off with Banco di Napoli, Istituto Bancario San Paolo di Torino with Instituto Mobiliare Italiano (IMI), and Credito Italiano with Unicredito. Belgium’s Kredietbank absorbed the banking and insurance operations of Almanij, including its newly acquired subsidiaries, CERA Bank and ABB Verzekeringen, for $7.7 billion. Spain’s Banco de Santander swallowed the remaining 49.1% of Banesto for $3.8 billion. And Portugal’s Banco Pinto & Sotto Mayor bought the remaining 50% of Banco Totta & Aores for $850 million. On the insurance side, the U.K.’s General Accident teamed up with Commercial Union in an $11.2 billion transaction; Friends Provident with London & Manchester ($1.2 billion); Irish Life with Irish Permanent ($1.4 billion); and France’s Groupama took control of state-owned Socit Centrale du Group de Assurances Nationales (GAN) for $2.8 billion. In the utilities sector, the prospective opening up of European Union electricity markets in February 1999 encouraged continuing cosolidation. While U.S. firms such as Texas Utilities and Enron were still closing big deals in the U.K., by year-end British utilities were striking back, with Scottish Power shelling out $12 billion for PacifiCorp, and National Grid $4.6 billion for New England Electric System. Meanwhile, London Electricity, acquired two years ago by U.S. Entergy Group for $2.1 billion, was resold at auction to Electricit de France for $3.2 billion. A significant development in 1998 was the ability of some European companies to persuade foreign shareholders to accept their stock as consideration, rather than cash payments, as has generally been the practice in past cross-border deals. This was a key feature of the huge Astra/Zeneca, Hoechst/Rhne-Poulenc, Total/PetroFina, and Viag/Alusuisse mergers, none of which could have been completed otherwise. Some U.S. acquirers also managed to qualify their European takeovers as a “pooling of interests” under U.S. tax law, thereby avoiding the need to capitalize and then amortize goodwill against future profits. A notable example was Omnicom’s $530 million purchase of Abbott Mead Vickers, the U.K.’s largest ad agency, which would have involved a write-off of $580 million in goodwill had it been treated as a simple acquisition. As in the United States, m&a activity in Europe showed a jagged profile over the course of the year, coming to a virtual halt in the early autumn amid turmoil on financial markets and deteriorating economic prospects. A number of high-profile deals also collapsed at this time. In addition to KKR’s bid for Herberts, these included the $670 million purchase by CHS Electronics (U.S.) of the Vobis Microcomputer unit of Germany’s Metro; W.R. Grace’s $455 million acquisition of detergent maker Crosfield from the U.K.’s ICI; and the $225 million takeover by Dutch-based EVC International of the petrochemicals division of Norway’s Norsk Hydro. Another big chemicals merger, between Swiss Clariant and Ciba Specialty Chemicals, was called off in December owing to unforeseen “commercial, financial, legal and regulatory risks and constraintswhich would affect the future merged company.” The final surge at year-end reflected in part the reactivation of some deals that had been delayed in the autumn mists. Barring a return of financial uncertainties, European m&a activity should maintain ample momentum in the new year. Further consolidation is anticipated in the automobile and petroleum industries, as well as in pharmaceuticals, financial services, retailing, telecommunications, and utilities. And the overdue rationalization of Europe’s fragmented defense industry is also expected to come to a head in the near future. n Garrick Holmes, former editor of M&A Europe, is a free-lance writer based in France. Cross-Border Deals In Europe*1990 to 1998 No. of Value Deals ($ bil)**1990 1,110 $74.61990 781 $53.4 1991 1,139 26.6 1992 1,102 45.8 1993 933 34.4 1994 1,210 40.8 1995 1,382 53.5 1996 1,279 51.6 1997 1,317 92.0 1998 1,454 149.8*Excludes U.S. buyers**U.S. dollarsSource: SDC Merger & Corporate Transactions Database <\TBL>Cross-Border Deals in Europe: The Big Buyers of 1998*By Number of DealsAcquiring No. of ValueCountry Deals ($ bil)**United Kingdom 228 $16.8Germany 173 22.1Netherlands 156 10.3France 133 23.5Switzerland 84 31.3Sweden 64 6.7Belgium 61 1.1Denmark 43 0.4Italy 42 8.5Finland 41 10.1Ireland 37 2.0Norway 23 0.4Austria 22 1.2 <\TBL> By Dollar ValueAcquiring Value No. ofCountry ($ bil)** DealsSwitzerland $31.3 84France 23.5 133Germany 22.1 173United Kingdom 16.8 228Netherlands 10.3 156Finland 10.1 41Italy 8.5 42Sweden 6.7 64Ireland 2.0 37Austia 1.2 22Belgium 1.2 61Spain 1.0 13*Includes only European buyers**U.S. dollarsSource: SDC Merger & Corporate Transactions Database <\TBL>Most Active Industries for Cross-Border Deals in Europe 1998 By Number of Deals No. of % of Value Industry* Deals Total Deals ($ bil)**Business Services 294 13.7% $6.8Metal & Metal Products 99 4.6 2.8Durable Goods Wholesaling 93 4.3 1.9Chemicals 89 4.1 8.7Food 87 4.0 7.7Machinery 82 3.8 2.6Transportation & Shipping (except air) 77 3.6 4.9Computer Software 74 3.4 1.4Electronic & Electrical Equipment 72 3.3 13.7Nondurable Goods Wholesaling 71 3.3 3.6Insurance 69 3.2 41.5Investment & Commodity Firms 68 3.2 4.3Real Estate; Mortgage Bankers & Brokers 66 3.1 4.9Transportation Equipment 65 3.0 5.3Printing & Publishing 62 2.9 2.3 <\TBL> By Dollar Value Value % of No. of Industry* ($ bil)** Total Value DealsCommercial Banks $30.2 12.9% 54Electric, Gas, & Water Utilities 21.5 9.2 29Electronic & Electrical Equipment 13.7 5.9 72Telecommunications 9.3 4.0 60Chemicals 8.7 3.7 89Food 7.7 3.3 87Agriculture, Forestry & Fishing 7.5 3.2 7Hotels & Casinos 7.3 3.1 25Business Services 6.8 2.9 294Miscellaneous Retailing 5.7 2.4 22Transportation Equipment 5.3 2.3 65Transportation & Shipping (except air) 4.9 2.1 77Real Estate; Mortgage Bankers & Brokers 4.9 2.1 66Investment & Commodity Firms 4.3 1.8 68Measuring, Medical & Photographic Equipment 3.8 1.6 56*Industries are determined by target companies **U.S. dollarsSource: SDC Merger & Corporate Transactions Database <\TBL>Cross-Border Deals in Europe: Top Target Countries in 1998By Number of DealsTarget No. of ValueCountry Deals ($ bil)*United Kingdom 588 $99.7Germany 331 19.5France 258 30.0Spain 170 5.4Netherlands 125 19.6Italy 103 5.0Belgium 73 15.4Sweden 70 13.1Switzerland 65 5.8Denmark 37 6.9Austria 35 1.2Finland 34 4.7Ireland 33 0.7Poland 32 0.9Czech Republic 32 0.2 <\TBL>By Dollar ValueTarget Value No. ofCountry ($ bil)* DealsUnited Kingdom $99.7 588France 30.0 258Netherlands 19.6 125Germany 19.5 331Belgium 15.4 73Sweden 13.1 70Denmark 6.9 37Switzerland 5.8 65Spain 5.4 170Italy 5.0 103Finland 4.7 34Norway 1.4 26Austria 1.2 35Romania 1.1 15Poland 0.9 32*U.S. dollarsSource: SDC Merger & Corporate Transactions Database <\TBL>M&A in Major Overseas Markets 1998 No. of ValueCountry Deals ($ bil)*Argentina 167 $12.7Australia 572 26.0Austria 44 1.5Belgium 118 44.0Bermuda 10 14.1Brazil 225 40.8Canada 601 36.2Chile 43 2.4China 80 4.9Colombia 28 3.8Denmark 48 9.1Finland 83 5.5France 478 70.4Germany 640 44.8Hong Kong 103 5.6Ireland 53 1.9Israel 36 3.8Italy 185 34.7Japan 123 7.0Malaysia 156 5.4Mexico 93 6.8Netherlands 236 26.0New Zealand 82 3.4Norway 42 2.4Poland 44 1.1Portugal 53 2.0Singapore 62 6.5South Africa 206 21.4South Korea 49 6.9Spain 436 22.1Sweden 128 16.5Switzerland 107 29.5Thailand 66 4.2United Kingdom 1,858 180.6Venezuela 35 3.4Total 7,290 $707.4*U.S. dollarsSource: SDC Merger & Corporate Transactions Database <\TBL>Deals Done Outside Of the U.S.*1989 to 1998 No. of ValueYear Deals ($ bil)**1989 2,745 $196.71990 3,174 227.31991 5,716 203.51992 5,416 177.61993 4,817 148.41994 5,709 180.21995 6,369 303.61996 6,425 415.71997 6,931 522.21998 7,770 727.3*Includes intra-national deals done by foreign companies.**U.S. dollarsSource: SDC Merger & Corporate Transactions Database<\TBL>