Jill Fenton European Unions: what you need to know about international mergers and acquisitions
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By Jill Fenton

Abstract

You may have noticed, over the past few months, press and market commentary regarding the increased number (and value) of domestic and cross-border publicly listed merger & acquisition (M&A) deals in Europe.

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Jill FentonYou may have noticed, over the past few months, press and market commentary regarding the increased number (and value) of domestic and cross-border publicly listed merger & acquisition (M&A) deals in Europe. According to Thomson Financial, the value of M&A deals announced in Europe in 2006 so far is more than double that of the same period in 2005 (The Times, 20th March 2006). In 2005, almost a third of all European takeovers were cross-border deals (Thomson Financial, The Wall Street Journal Europe, 30th December 2005). An article in the 6 April issue of The Economist provides an up-to-date review of the hope and the hype of takeovers <http://digbig.com/4hcrx>.

The volume increase in deals can be attributed to a number of factors, including:

  • growth in investor, company and consumer confidence

  • cash-rich public companies revelling in recent restructuring, cost- cutting, etc.

  • favourable economic environments and low interest rates

  • reduction in domestic organic growth opportunities due to consolidation and stagnation

  • relaxation of regulations

  • introduction of common accounting standards.

Who's had the urge to merge?

M&A activity has been evident throughout Europe and in a wide range of sectors (notably, few have been cross-sector). A few examples include:

Sector: Industry
Acquirer: Mittal Steel, Netherlands
Target: Arcelor, Luxembourg

Sector: Utility
Acquirer: E.ON, German
Target: Endesa, Spain

Sector: Telecoms
Acquirer: Telefonica SA, Spain
Target: O2 plc, UK

Sector: Financial
Acquirer: Unicredito, Spain
Target: HVB Group, Germany

Sector: Financial
Acquirer: BNP Paribas, France
Target: Banca Nazional del Lavoro, Italy

Sector: Consumer
Acquirer: Pernod Ricard, France
Target: Allied Domecq, UK

Source: press articles; Hoovers.com

According to City analysts, assuming positive economic and market trends continue, the enthusiasm for M&A as a key growth vehicle will remain. Paulo Pereira, head of European M&A at Morgan Stanley, for example, commented in late 2005 that giant merger-of-equals deals were likely within Europe. The financial services, pharmaceutical, energy and consumer sectors are likely targets (The Wall Street Journal Europe, 30th December 2005).

Why do I care?

Very interesting, you may be thinking, but why do I care?

Consider the following scenarios:

  • A colleague has asked you what shareholder value means - how do you answer in the context of M&A?

  • A senior partner wants to understand what's happening in the European markets, for particular sectors or across sectors, and why. How do you respond?

  • You have to produce a profile on a domestic sector, including details of players, strategies and opportunities, and non-domestic companies and influences keep popping up in your research. What should you consider and include?

  • Your firm's client has been approached by a European bidder. The client has asked for your advice: What are the potential market opportunities to justify this deal?

  • You keep hearing about globalisation and want to understand more about the real opportunities: Could your business/clients benefit?

  • OK, so these are rather specific examples depending on your line of work, but the principle remains the same: Those of us who work with and use business information should be aware of the key influences, drivers, sectors and sources involved in company mergers and acquisitions. This knowledge enables us to effectively inform and advise our colleagues and clients on market opportunities.

  • Getting up to speed on the how and why of M&A requires the usual combination of tools including open web, free sources, the ability to ask good questions, and your own know-how. Let's take a look at how we can address some of those questions that touch on M&A:

Knowledge of why M&A occurs

M&A can be used by publicly traded companies for many different reasons: to grow, to generate cost-savings or to exploit cross-selling opportunities. The key principle to remember, however, is that these companies are trying to create 'shareholder value' - the 'pot' of equity available to shareholders (the owners of the company). M&A is only one of many options available to increase the value and financial wealth of a company.

Increasing the pot (that is, raising equity) relies partly on the continued success of the stock value. Hence it is crucial for a company to ensure it remains attractive to investors, for example, by merging with a product-compatible competitor. A positive investment cycle may look like this:

consumers/investors investing => high stock value => increased equity => increased shareholder value => consumers/investors investing =>high stock value => increased equity => increased shareholder value

Q: A colleague has asked you what shareholder value means - how do you answer in the context of M&A?

To answer this question adequately, you have to be able to explain the term, but then also put it in context. You can create context by using examples from the field, such as:

* Why have companies within X sector been involved in M&A deals? * Have the deals been successful? * What were they trying to achieve? * Is this an option for my client/company?

Numerous publications, definitions and examples on the internet describe 'shareholder value' and M&A principles. In fact, many companies exist purely as advisors on these topics. Business journals and consulting and corporate finance houses are often a good source for a basic overview.

* Wikipedia - <http://en.wikipedia.org/wiki/Shareholder_value> * McKinsey Quarterly Review - <http://www.mckinseyquarterly.com> * Harvard Business Review - <http://www.hbr.com> * Forbes - <http://www.forbes.com> * BusinessWeek - <http://www.businessweek.com>

Consider the UK retail bank merger of Halifax plc and Bank of Scotland. At the time of the merger, effective in September 2001, the UK financial services market was dominated by large national retail banks, such as Barclays and Lloyds TSB. Bank of Scotland and Halifax recognised that they needed to increase their customer base, product mix and brand positioning to gain competitive advantage. Combining the Bank of Scotland's strong Scottish retail banking business and successful corporate banking business with the largest mortgage provider in the UK and a key retail banking player (Halifax) was seen as the answer.

The group achieved its merger synergies target of GBP 800mn for end 2005 by interim 2004. It now has the largest private shareholder register in the UK with 2.5m private shareholders and claims to be the largest mortgage and savings provider in the UK with 22 million customers and assets of over GBP 540bn. It also states that it is a major player in the new current account and credit card markets in the UK. The company had profits before tax at 31st December 2005 of GBP 4.8bn.

Knowledge of key external drivers

M&A activity ebbs and flows in relation to external drivers; it doesn't occur in a vacuum. To understand the underlying reasons for mergers, you must also understand the influencing external drivers with regard to when M&A becomes an attractive vehicle.

Q. A senior partner wants to understand what's happening in the European markets, for particular sectors or across sectors, and why. How do you respond?

Responding adequately to this question requires review of such factors as consumer and market confidence, macroeconomic indicators, and industry-specific factors, for example regulation.

Consumer and market confidence

As investment confidence grows (due to a number of factors including macroeconomic, individual company circumstances, etc.), market activity boosts equity volumes which in turn increases the wealth of invested companies. Tracking consumer and market investment and consumer borrowing is a useful way of estimating the potential wealth of companies and sectors and therefore the likelihood of growth opportunities, including M&A.

Again, the positive cycle may look like this:

consumers/investors investing => high stock value => increased equity => increased shareholder value ('cash-rich' companies) =>consumers/investors investing => high stock value => increased equity => increased shareholder value ('cash-rich' companies)

The negative cycle may look like this:

consumers/investors borrowing/cautious => low stock value => increased debt => reduced shareholder value ('poor' companies) => consumers/investors borrowing/cautious => low stock value => reduced shareholder value ('poor' companies)

However, do note that these cycles do not apply consistently to all sectors. For example, the financial services sector works in a very different way.

It is also relevantto consider regulatory and legal developments within countries with regard to future attractiveness to investors (individuals or institutional), for example pension regulations.

Sources are often country-specific and may even be industry-specific:

Macroeconomic indicators

Consumer and market confidence relate directly to macroeconomic movements. Interest rates, for example, have a direct affect on individual borrowing and therefore investment capacity. Consumer spending, consumer debt and bank borrowing rates are all relevant to the potential wealth of equity markets. Monitoring key macroeconomic indicators on a regular basis (even through monthly/quarterly news bulletins) should give you a good idea of how 'strong' the current markets, and trading companies within them, are.

Macroeconomic research is far beyond the scope of this article - in fact, it's probably a good topic for a series of articles all on its own. However, these resources can be a good first-step in developing a portfolio of information on applicable macroeconomic factors affecting M&A activity:

Knowledge of European companies and sectors

Q. You have to produce a profile on a domestic sector, including details of players, strategies and opportunities - and non-domestic companies and influences keep popping up in your research. What should you consider and include?

Q. Your firm's client has been approached by a European bidder. The client has asked for your advice: What are the potential market opportunities to justify this deal?

There are obviously hundreds of sources out there to help you research a company and its market/s which I won't list here. One tip to add value to your profile or overview: Are you considering the key 'shareholder value' factor during this due diligence exercise and asking the correct questions:

  • What is the company/client trying to achieve - what is its strategy?

  • What has happened in this market historically?

  • What are the players doing?

  • Is there consolidation, stagnation, or growth? Why?

  • Where are the targets and acquirers, if any?

  • What is the market and investment environment like, and what does the future look like?

  • Which other sectors are showing strength and why? Are they a threat?

  • What are the barriers to growth, for instance, is regulation a factor?

  • Where are the domestic and non-domestic opportunities?

  • Where are the 'shareholder value' growth opportunities?

You need to consider all 'growth' options (M&A may not always be relevant). Hence it is vital to understand all the external factors to be able to identify alternatives.

Again, consider the HBOS example above. Sources to analyse the Bank of Scotland/Halifax merger and its reasons and outcomes included; company literature (for example annual reports); stockbroker/analyst commentary (AFX News is a useful source <http://www.afxnews.com>); UK retail banking sector commentary, history and data, available from market research and industry associations (for example the British Bankers Association <http://www.bba.org.uk>); and general press monitoring. Identifying sources of key external drivers and their projected influence on future business opportunities was also important. For example, historical and estimated trends in the UK housing sector, consumer spending, borrowing, unemployment and interest rates are all vital to HBOS' primary business line: retail mortgages. In addition, trends in European retail banking, most notably the merger of Abbey and Banco Santander in 2004, should be considered as these could ultimately impact HBOS's market share and highlight opportunities either domestic or otherwise.

Knowledge of M&A sources

Q. You keep hearing about globalisation and want to understand more about the real opportunities: Could your business/clients benefit?

Having the ability to track historic, rumoured and progressing M&A transactions can be very useful when assessing the attractiveness of a market or trends within a sector.

Given their very nature, M&A deal sources tend to be in the corporate domain and are specialised by design. A key tip when using these systems: paper-based planning often helps before you venture online. Before you log in to a paid information source, or even before you open your browser for a web-crawl, ask yourself: what exactly are you looking for? Target, acquirer, geography, sector, date, value ... ? Pre-planning can save a lot of time and headache.

Alternatively, business and news sources should give you sufficient information to determine which companies, sectors and countries are being targeted, why, by whom and for how much.

Getting abreast of and staying up-to-date with the evolution of M&A can be approached much like any other ongoing intelligence and awareness project. Pick a few sources to review on a regular basis, and keep a file of ideas and insights you develop as you review them.

Conclusion

M&A activity in Europe and throughout the world seems likely to continue at a healthy rate for the foreseeable future.

As a business information professional today, maintaining a 'silo' understanding of a market or player is not sufficient. You must also maintain a thorough understanding of the key components: influencers (value creation), drivers (consumer and market confidence; macroeconomic indicators) and players (why, who?) within a sector. Such an understanding will help you appreciate the bigger picture and effectively advise your colleagues or clients on market opportunities. With the predicted increase in cross-border M&A, an understanding of non-domestic markets and sources will become more significant with time.


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