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Cross-Border Deals Feed an M&A Boom

THE WALL STREET JOURNAL: Cross-Border Deals Feed an M&A Boom



June 27, 2005

European mergers and acquisitions have almost doubled in value during the second quarter from a year earlier, as corporations’ increasing appetite for takeovers raises hopes that 2005 could be the biggest year for deal-making since the boom of 1999-2000.

Bold, cross-border takeovers in the financial-services, telecommunications and real-estate sectors are driving much of the deal activity. Meanwhile, private-equity firms have intensified their influence over the M&A market, a reflection of the success of these loosely regulated investment pools at raising capital.

“If you eliminate the bubble years of 1999 and 2000, this could be the best year ever for European M&A,” said Paulo Pereira, head of European mergers and acquisitions at Morgan Stanley.

In the second quarter to June 24, according to the most recent figures released by data provider Thomson Financial, announced transactions involving any European buyer or seller totaled $264.4 billion (€218.7 billion). This compares with $142.3 billion over the entire second quarter of 2004, and $196.8 billion during the first three months of this year.

The increase in M&A transaction values has raised the prospect of the first $1 trillion year in Europe since 2000, although at the moment the M&A market is on track to reach $900 billion in announced transactions.

“It would take another megadeal of the Shell or Sanofi size” to get us to $1 trillion, said Tony Burgess, Deutsche Bank’s head of European M&A, referring to two deals in 2004 valued at $80 billion and $65 billion, respectively.

Mr. Pereira ascribed some of the M&A acceleration to a “domino effect,” whereby a deal in one sector spawns other, often larger, ones, especially in the financial-services and telecommunications sectors.

During the second quarter, for example, three significant takeover attempts have occurred in the Italian banking sector, including UniCredito Italiano SpA’s $19 billion bid for HVB Group AG of Germany.

Those three bids also demonstrate another M&A theme in 2005: the growing determination of companies to do cross-border deals, often because growth opportunities in their home markets have become limited. That determination still runs up against the patchwork of protectionist policies still in place across many European Union countries.

“The [cross-border] walls aren’t coming down. It’s just that some windows are being opened,” said Carlo Calabria, head of European M&A at Merrill Lynch.

Private-equity firms continue to expand their M&A activity, particularly in transactions in the middle range valued at $500 million to $5 billion.

“The corporates are dominating the higher ranges [above $5 billion], but that could become more contested as they become increasingly capitalized,” Mr. Burgess said.

So far this year, private-equity firms have grabbed 23% of all M&A transactions in Europe, up from 20% in 2004 and just 5.5% in 2000, according to data provider Dealogic.

Private-equity firms are also pooling their capital resources into buyout teams, allowing them to bid on companies valued at $10 billion or more, Mr. Calabria said. For example, a battle to acquire Spanish telecommunications company Grupo Auna SA, valued at $15 billion, pits two competing teams of private-equity firms.

Many private-equity firms are aiming to sell acquisitions made in the past few years, offering a new segment of assets up for sale.

“Increasingly, you will see [M&A] activity on the sell side as private-equity firms seek to monetize their earlier investments,” predicted Mr. Pereira of Morgan Stanley.

The sizes of the deals are climbing. Takeover values of targeted European companies are averaging $237 million this quarter, up from $109 million a year earlier and $170 million in 2005’s first quarter, according to Dealogic.

Indeed, while the first quarter had only one announced deal above $10 billion — Spanish real-estate company Metrovacesa SA’s purchase of Gecina of France — the second quarter has seen four: Unicredito’s agreed offer for HVB; Goal Acquisitions Ltd.’s agreed offer for U.K.-based drinks company Allied Domecq PLC; Weather Investments’ agreed offer for Wind Telecommunications SpA of Italy; and Spohn Cement GmbH’s bid for a fellow Germany-based company, HeidelbergCement AG.

Among investment banks during the quarter, Morgan Stanley topped the value rankings of banks working on M&A deals with any European involvement, advising on transactions valued at $98.6 billion, according to Thomson Financial.

It was followed in order by Deutsche Bank AG, J.P. Morgan Chase & Co., Merrill Lynch & Co. and Goldman Sachs Group Inc.

For the rest of the year, M&A bankers are bullish, citing a benign interest-rate environment, the continued availability of cheap borrowing and a license by shareholders for management to do deals.

Peter Tague, head of European M&A at Citigroup, points to a new group of takeover players likely to keep the European M&A market humming: Middle Eastern investors.

Flush with cash from $60-a-barrel oil, they are imbued with a strong desire to diversify their holdings and lower investment-return thresholds, he said.

“That combination has created a buy-side force that we expect to be an important factor in M&A,” Mr. Tague said.

Write to Michael Wang at [email protected]

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