As U.S. corporations and private equity firms cast ever-widening geographic nets to find acquisition targets, Europe is proving to be a fertile spawning pool. The continent is teeming with middle-market companies that yearn to grow outside their home markets, and they're looking for investors from across the pond to help them.
A prime example is found in Reima Oy, a children's wear brand founded in 1944 in Vantaa, Finland. The company had long been known in Northern Europe for making high-quality outdoor clothing, which it sells under brands including Reima, Lassie and Tutta. But the company wanted to increase its presence in Russia and expand into further-flung cold-weather regions, including Beijing, which boasts a population well over 15 million. The company also lacked an e-commerce strategy, and the brands were in need of design updates.
Enter the Riverside Co. In 2011, the PE firm, which is headquartered in Cleveland and New York, bought Reima from its management team and from the Finnish PE firm Vaaka Partners. Since becoming a portfolio company of Riverside, Reima's sales have increased by 40 percent. Other milestones include four store openings in China, with many more planned soon. And the company now offers e-commerce services in Denmark, Finland, Germany, Norway, Russia and Sweden. Expansion into the U.S. and Canada is expected in 2014 or 2015.
Reima serves as just one of hundreds, if not thousands, of solid middle-market European companies poised for the next stage of growth, explains Thomas Blomqvist (pictured), a Riverside partner based in Stockholm.
"Europe has a culture of producing good products, but many middle-market companies have a problem gaining meaningful traction outside of their home markets," says Blomqvist. "They lack the bandwidth and the financial muscle to gain international traction. Globally-operating U.S. investors can take a European company to Asia, where the growth is."
The strategy is especially important in industries, such as branded consumer goods, which see a lot of potential in the growing middle classes of countries, such as China and also Russia, says Blomqvist.
Just as the consumer goods business is expanding internationally into new markets, so is the pharmaceuticals industry. The opportunities for M&A are many, especially in the rapidly consolidating sector of manufacturing drugs.
"The big pharma companies have been more cost-conscious, and they're getting a lot of pressure from various governments about manufacturing deficiencies and regulatory compliance at their facilities," says Paul Levy, founder of New York PE firm JLL Partners Inc. "These companies are focused on research and development rather than on manufacturing." So drug makers look to outsource the manufacturing.
A significant case in point: In a deal valued at $2.6 billion, JLL recently agreed to buy a majority stake in the pharmaceuticals business of Heerlen, Netherlands-based Royal DSM NV, creating a new company. The unit will be rolled into Patheon Inc., a Canadian specialty-pharmaceuticals manufacturer recently taken private by JLL.
The new entity is projected to have 2014 sales of about $2 billion and manufacturing facilities in 11 countries: Australia, Austria, Canada, France, Germany, Italy, Japan, Mexico, Netherlands, U.K. and U.S.
Proximity to customers helps. "Our Italian facilities will more likely be servicing customers in Europe rather than in America," explains Levy.
More M&A in drug manufacturing is likely. "We'll be the largest participant in the industry, but even with DSM, our market share is no more than 10 percent," reports Levy. "This is a highly-fragmented industry."
As the second-smallest but third-most-populated continent, Europe is likely to play a role.
Another sector benefitting from U.S.-European transactions is technology, media and telecommunications. For example, Microsoft Corp. (Nasdaq: MSFT) recently announced that it would buy Espoo, Finland-based Nokia Corp.'s devices and services business. The transaction is expected to close in 2014.
It's not the first time the Redmond, Wash.-based software giant has turned to Europe for targets. Another well-known example is Microsoft's 2011 acquisition of Internet communications provider Skype Global SA, based in Luxembourg, from an investor group led by PE firm Silver Lake of Menlo Park, Calif., for $8.5 billion in cash.
"We've found great technical talent in Europe," says Marc Brown, Microsoft's global head of M&A and strategic investments. Brown was one of roughly 200 dealmakers from all over the world who gathered recently at the Association for Corporate Growth's inaugural EuroGrowth 2013 conference, held at the Sheraton Park Lane Hotel Piccadilly in London.
For San Francisco-based PE firm Francisco Partners, opportunities have come from taking private several public tech companies in Europe, reports Matt Spetzler, a principal with the firm who works out of the London office.
One example is Kewill, a provider of transportation and logistics software based in Manchester, U.K., that Francisco took private in 2012. Under Francisco's ownership, Kewill recently completed the acquisition of the assets and subsidiaries of Hyderabad, India-headquartered Four Soft Ltd. The assets of Four Soft, including more than 500 employees, have transferred to Kewill, creating a business with revenues of $110 million and 7,500 customers across more than 100 countries, according to the company.
Unlike tech entrepreneurs in the U.S., the founders of tech companies in Europe don't necessarily have their sights set on going public, says Neville Davis (pictured), an executive who has led many technology companies in the U.K. and currently serves on the boards of IT companies Fourth, SecureData and Trustmarque.
European tech companies view M&A as an attractive exit. For example, Davis recently sold Glasgow, Scotland-based Amor Group, an IT services company backed by London-based Growth Capital Partners and for which he served as chairman, to Lockheed Martin Corp. (NYSE: LMT), headquartered in Bethesda, Md.
American companies are far from the only desirable acquirers. European dealmakers caution against U.S.-centric approaches. For example, investors should keep in mind that sellers on the continent wield more power than their counterparts across the ocean, explains Brent Gledhill, global head of investment banking at William Blair & Co. LLC. In Europe, the prevalence of vendor due diligence (also known as sell-side due diligence) enables sellers to negotiate more with multiple buyers, he says.
Europeans are also quick to point out that the private equity industry on the continent boasts a long history, with London-based 3i Group plc tracing its roots back to 1945.
Despite the history, however, PE still faces some of the same misconceptions it does in the U.S. Business owners in Italy, Germany and France may prefer selling to a large local company than to an investor that is considered a buyout firm, especially a foreign one.
"There are a lot of German industrial companies that have been in families for three and four generations," explains one dealmaker. "A German owner would rather sell to say, Lufthansa, than to a PE firm, which may be seen as a vulture."
The public perception of private equity is improving "There have been some efforts to educate the business community in Germany about private equity," says Thomas Kohl, owner of Transatlantic Law International Ltd., a law firm based in Heidelberg and Frankfurt. "Ten years ago, they couldn't even spell private equity." The reputation in France is improving too, reports Ashley Rountree, a Paris-based managing director of Boston-headquartered investment bank C. W. Downer & Co.
ACG is working on initiatives to improve the image of PE in Europe and foster networking among dealmakers throughout the region. The New York chapter recently named investment banker Tanya Marvin-Horowitz of Capital A Partners vice president of international relations. At EuroGrowth, middle-market dealmakers from both sides of the Atlantic seemed eager to work together, which bodes well for future cross-border transactions.