Pace of European Mergers Slows: Regulations, Euro Make Deals Tougher
By Anita Raghavan, 11/16/2000, The Wall Street Journal, Page C1, (Copyright (c) 2000, Dow Jones & Company, Inc.)

LONDON -- The European merger machine is sputtering.

After an explosive burst last year, the European mergers-and-acquisitions steamroller is starting to put on the brakes as a tougher regulatory climate, volatile stock prices and a slumping euro have conspired to create a more difficult time for European deals and deal-makers.

With just over a month to go before year's end, the number of announced European M&A transactions stands at 12,958 deals, valued at a total of $888.3 billion through Nov. 10 -- well behind full-year 1999's total of 13,590 deals valued at $1.2 trillion, according to Thomson Financial Securities Data. (The data counts a deal as a European merger or acquisition only if it involves a European-based target.)

"I don't think the fizz has gone out of the European merger boom -- it's just gone a little flat," says Richard Peterson, a market strategist at Thomson. He says it is much the same situation in the U.S.

In the U.S. through Nov. 10, there were $1.64 trillion in deals (with U.S. targets), up from $1.4 trillion in the same period last year. But America Online Inc.'s merger with Time Warner Inc. accounts for 11% of the U.S. total this year, so momentum has slowed here as well.

That's not great news for investment banks, which are already seeing slowdowns in other high-fee businesses such as initial public offerings and junk-bond sales.

One of the big drivers of European mergers -- outsized telecommunications deals -- slowed substantially this year as the stock prices of several telephone companies plunged on concerns that they had overpaid for third-generation mobile licenses, which promise faster mobile-phone access to the Internet. European telecommunications mergers dropped to $146 billion so far this year, less than half of the $359 billion in full-year 1999, according to Thomson.

"If you looked at it last year, there was a wall of deals; people simply could not cope with what they had," says Christopher Bright, an antitrust lawyer at Clifford Chance in London. "If you look at it now, it is still rich but it is not quite as daunting."

While this year's total European merger volume is slightly ahead of the $849 billion in deals booked in the same period in 1999, the pace of the past few months suggests that bankers won't be popping the champagne corks quite as fast and furiously this coming New Year as they did last.

The reason? Since June, monthly European merger volume has failed to match similar deal totals in 1999, according to Thomson.

Consider: In September, European merger volume totaled $66 billion, down from $86 billion in the same period a year earlier. And in October, there was only $65 billion of deal activity in Europe, compared with $106 billion a year earlier, according to Thomson. November doesn't look any better: So far this month, there have been $21 billion of European mergers and acquisitions, compared with $297 billion for all of November 1999, the largest single month ever in European M&A.

Contributing to the lackluster environment on both sides of the Atlantic has been volatile stock markets. The Nasdaq Composite Index, which closed at 4234.33 on Sept. 1, traded below 3000 on Nov. 13, and closed yesterday at 3165.49, up 27.22, or 0.87%.

"Uncertainty about markets breeds corporate indecision," said Rick Sapp, head of the advisory group at Goldman Sachs International in London, a unit of Goldman Sachs Group Inc.

"Potential European acquirers are having a hard time valuing companies in the U.S. because prices are so erratic," particularly in the technology sector, says Mr. Peterson.

In addition to the recent gyrations in stock prices, Mr. Sapp says, "We now have a hung U.S. election," which adds to volatility and makes pricing difficult.

Europe still needs more consolidation but there have been some short-term impediments, partly due to the complexity of doing cross-border mergers and the tougher regulatory and political landscapes, says Mr. Sapp.

So far this year, 240 European M&A deals were withdrawn, up from 192 for the same period last year, according to Thomson. While not all deals are withdrawn for regulatory reasons, Mr. Peterson says the 25% increase partly reflects the heightened regulatory scrutiny. For instance, a three-way merger between Alcan Aluminium Ltd., France's Pechiney SA and Switzerland's Algroup was killed by regulators, as was Time Warner's deal with EMI Group.

"Given the regulatory upsets that there have been in the last year or two, deals are taking longer to come through the pipeline," says Mr. Bright of Clifford Chance.

He says much of the deal flow in Europe recently has been driven by industry consolidation: "I think to some extent there is a feeling that there is no more possible in some sectors, and you are seeing glass ceilings established."

To be sure, bankers such as Mr. Sapp and lawyers such as Mr. Bright are bullish about the long-term prospects for European mergers and acquisitions. Lower stock prices will prompt corporate chieftains to brush off dusty deal books and take another look at companies that they may have passed on in the past because of price.

Even the sliding euro, which has made acquisitions of U.S. assets less attractive to Europeans, could have a reverse but positive effect for European merger activity. As the euro falls, European assets become cheaper to U.S. companies, though so far many have stayed away because of the political and labor issues that often surround mergers, particularly on the Continent.

"I think we're going to see a pick-up in business in the first quarter, mostly because trends such as globalization and restructuring need to keep happening in Europe," says Don Meltzer, head of global mergers and acquisitions at Credit Suisse First Boston Corp.


  1. The article expresses the opinion that European acquisitions are more attractive for US firms because of the weak Euro.  However, a weaker Euro would also indicate lower cashflow expectations from European assets.  Why, then, would the argument asserted in the article be true?
  2. To the extent that firms are interested in diversification, could it not be argued that greater uncertainty implies a greater need for diversification?  Argue for and against this hypothesis.
  3. Would the need for cross-border acquisitions increase or decrease if investors diversify their portfolios?