Acquisitions in Europe

Discussion of the euro in newspapers across Europe has been hard to avoid, and even now, when the euro has become a reality for many countries, the political debates are still raging.

What is not in debate is that business in Europe is undergoing its most profound restructuring since the introduction of the Single Market, and the last few years have seen a dramatic rise in both the value and size of M&A deals in Europe.

There are a number of factors that suggest that this upward trend may not continue – for example, the much-debated global recession and credit crunch and the failure of the high-yield bond market in autumn 1998. However, mitigating these factors is a number of long-term positive drivers for the European M&A market:

* the introduction of the Single European Currency and the resulting potential for wider and deeper bond and stock markets

* continued global and pan-European consolidation in key industries. For example, in telecoms, pharmaceuticals and financial services – witness the recent Vodaphone/Airtouch, AXA/GRE, Astra/Zeneca and Daimler/Chrysler transactions and announcements

* family firms across the Continent reaching maturity, forcing succession issues

* an increasing acceptance in Continental Europe of the “equity culture” and concepts of shareholder value.

In addition to these factors, the absence of a true global recession and credit crunch means that banks are still likely to be keen to fund “quality” acquisitions, especially if vendors’ current price expectations lessen. Further, the high-yield debt market is showing signs of a remarkable resurrection following the collapse in late 1998.

In the euro 100 million to euro 1 billion category of transactions, the sheer weight of private equity money raised by financial buyers over the last few years is another factor driving M&A activity forward. In 1997, more than euro 20 billion of private equity was raised or committed to European funds – much of which was directed towards the Continent. A high level of fund raising was also seen during 1998.

This increasing wall of money is reflected in both the number and value of private equity deals completed over the last few years.

However, perhaps the most interesting fact is that in 1997 the value of Continental European deals for the first time exceeded the value of UK deals. This trend seems to have continued in 1998.

One of the implications of the weight of money and the burgeoning M&A market in general is that vendors in Continental Europe are becoming increasingly sophisticated. Auctions are more common and international competition for good deals is intense even though they are inherently more complex than domestic transactions. These complications are due to the significant differences that still remain in various European jurisdictions. Areas in which these differences particularly lie include:

* tax

* accounting and auditing standards

* pension provision

* corporate and shareholding structures

* culture and language

* industry structure

* regulatory requirements.

Successful private equity players need to get behind the lack of transparency these national variations create as well as generate a network of contacts to source deals before they go to auction. Because of this requirement, and the complexity of cross-border due diligence, market players involved in such acquisitions need high quality professional advice.

They require genuinely cross-border teams that are accustomed to working together, commercial due diligence that adds value to a transaction and dedicated specialists who can quickly respond to rapidly changing timetables and circumstances.

On balance, notwithstanding the mega-transactions that have taken place in recent months, it is quite possible that the total value of cross-border European M&A deals may taper off in the short to medium term.

However, there are strong drivers for the number of M&A deals to be maintained. With the help of local knowledge and cross-border expertise, M&A activity will continue at record levels for both strategic and financial buyers in an extremely attractive – and competitive – market place.