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A spate of mergers and acquisitions could redraw the business landscape,
especially in Europe, with its many sub-scale companies
May 3rd 2014
PFIZENECA? Pubnicom? Holfarge? Finding a suitable name for a fusion of
well-known brands is among the challenges of big takeovers. It is one that
investment bankers are once again pondering: after years in the doldrums, big
mergers and acquisitions (M&A) are making a comeback. Optimists hope this is a
sign of bosses daring to be bold because of improving economic prospects.
Sceptics wonder if the managers are in fact doing deals to conceal a worrying
lack of growth opportunities or just cutting costs by merging with companies in
kinder tax jurisdictions.
Whatever the reason, one hopes that Pfizer and AstraZeneca, two drugmakers,
Holcim and Lafarge, cement companies, and Publicis and Omnicom, advertising
firms, will settle on snazzier names if their proposed unions do indeed take
place. Among other big deals (see table), GE and Siemens are both bidding for
Alstom, a French industrial rival. There have been 15 transactions each worth
more than $10 billion so far this year, the most since the record M&A rush of
2007. Taking in smaller deals, mergers are up nearly 50% on last year (see
chart). And still they keep coming: on May 1st the Wall Street Journal reported
that AT&T had approached DirecTV about a possible bid worth more than $40
billion.
Yet even investment bankers, who are salivating at the prospect of the fees
they may earn, are not sure if this spike is the real deal. A year ago, many
interpreted the buy-outs of Dell and Heinz, purveyors of computers and ketchup
respectively, to be the start of a new wave of transactions. The rest of 2013
was merely average.
There are several reasons to believe that this time the takeover tide will keep
rising. Bosses accumulated a lot of pent-up dealmaking appetite during years
when the credit crunch and then the euro-zone miasma made big takeovers all but
impossible. Many of the combinations being proposed have been mulled for years,
in contrast to the shotgun weddings dreamed up by pushy bankers in previous M&A
waves.
American firms, the most active, are generating record amounts of cash but
struggling to do anything productive with it. Having run out of scope for
placating shareholders with share buy-backs, and having found that expanding
into China and India was no panacea for their dim domestic prospects, they now
hope that plausible-sounding mergers will do the trick.
Some American bidders have pots of cash in their foreign units that they cannot
repatriate without paying heavy taxes. Pfizer has $69 billion of cash overseas,
says Bloomberg, an information provider, by itself enough to make it one of
Europe s top 50 companies. Buying a rival in another country is one way to soak
up that money.
The current crop of deals looks bigger in part because surging stockmarkets
have inflated the share prices of both bidders and targets. As in the mid-2000s
episode of takeover exuberance, money from yield-starved investors is available
to those wanting to take out rivals. But so far they are making little use of
it. In 2006 two-thirds of acquiring companies paid for their targets with
largely borrowed cash. This time, many bidders, even ones with cash in the
bank, are offering to buy target companies inflated stock with their own
inflated stock. When Facebook mostly did this in its whopping $19 billion bid
for WhatsApp, a messaging system, it meant that Facebook shareholders hardly
questioned why it was paying so richly for a company with no revenues to speak
of.
Many of the big deals of the 2000s were grabs for cyclical commodities such as
oil and minerals, or moves into emerging markets. Today s are more reminiscent
of the industrial mergers of the late 1990s, when Pfizer bought Warner-Lambert
and Vodafone gobbled up both AirTouch and Mannesmann. Then, bosses believed
globalisation and the advent of the euro meant that size was critical. Now,
mergers are again being pursued in the hope of cost savings, pricing power and
economies of scale.
After years of weak growth, many European firms look sub-scale compared with
American, and increasingly Asian, rivals making them more likely to be prey
than predators. For example, Alstom s market value was around 7 billion ($10
billion) before the approach from GE (worth $268 billion). There are no
euro-zone firms in the world s top 25 by market capitalisation.
Each company has its own motives for dealmaking. Facebook feared the popularity
of a fast-growing upstart. Pfizer has several lucrative products coming to the
end of their patents, and has struggled to bring new ones to market. Health
care has been merger-happy recently because its large companies have paid off
the debt from their late-1990s takeover binge just as the pressure from makers
of generic pills is growing. GE, for its part, wants to build its industrial
unit to rebalance the group away from risky financial services. Siemens would
pay dearly to keep the American engineering mastodon off its European patch.
But one emerging theme is that a cross-border deal can be an opportunity to
shift to a low-tax country. A merged Pfizer-AstraZeneca could be domiciled in
Britain, with a 21% tax rate, much lower than America s 33% and with more
freedom to repatriate foreign profits. Publicis-Omnicom wants to be registered
for legal purposes in the Netherlands (which is flexible on corporate
governance) but pay tax in Britain, copying the structure adopted by the merged
Fiat and Chrysler.
The march of the mammoths
In many cross-border deals, antitrust authorities have to be placated in more
than a dozen countries; but they have not recently blocked a deal outright.
Governments, particularly in Europe, are torn between interventionist instincts
and letting free markets do their thing. For all its desire to hold back the
tide of foreign buyers and to have some sort of industrial policy, the French
government has few weapons and less cash. France s membership of the European
single market severely limits its ability to prop up national firms or
discriminate against foreign ones.
The American and German bids for Alstom come hot on the heels of foreign
purchases of other French firms. SFR, a big mobile-telecoms operator, is being
bought by Altice, a Luxembourg-based holding, and Lafarge will soon be run from
Holcim s Swiss base. DongFeng, a Chinese carmaker, has just bought a 14% stake
in Peugeot-Citro n (though so has the French state).
Alarmed that the management of Alstom s energy business, which provides more
than 70% of its revenues, would move to America if GE succeeded, France s
interventionist economy minister, Arnaud Montebourg, quickly welcomed, if not
prompted, Siemens s offer of an asset swap. The idea would be to transform
messily overlapping competitors into European champions, one in energy
(Siemens) and the other in transport (Alstom).
The prospect of losing most of this industrial jewel to a foreign buyer has
touched a nerve. It represents a total break with France s vision of itself,
says Patrice Geoffron of Paris-Dauphine University. People had come to accept
that French companies could no longer compete on their own in mass carmaking,
he says (and one surmises that no one much cares about cement). But Alstom is
prominent in two technologies that look likely to be increasingly important, Mr
Geoffron points out: clean energy, including renewables, and high-speed rail.
It is as if France is surrendering its future no less than its past.
Sceptics about the value of big mergers often turn out to be right: promised
synergies never materialise and managers get sucked into the tedium of
integrating IT systems and the like. That is not enough to deter bosses, who
usually like the idea of ruling an expanded empire. The mere suspicion that a
rival is thinking about an acquisition can drive them to launch a bid of their
own. The big deals of the late 1990s reshaped the business landscape, even if
not all of them were judicious. The same looks set to happen again, as a herd
of giant, clumsily named corporate mammoths is unleashed upon the world.