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— Analysis —
When thinking about European dealmaking over the past decade, Vodafone Airtouch plc's €180 billion ($186 billion in 1999) successful bid for Germany's Mannesmann AG, launched in 1999, is a good place to start. By allowing the U.K.'s Vodafone to buy one of the pillars of its economy, Germany showed an economic openness that would have been unthinkable just a decade or so earlier. Indeed, like the launch of the euro in 1999, the Vodafone-Mannesmann merger was yet another symbol of the highly successful effort to unite the countries of Western Europe into a single economic zone. In the years that followed, European Union member states showed an unprecedented willingness to accept coordinated regulation from a supranational body, and capital moved more freely not only within Europe but to it. Dealmaking flourished as buyers from all over the world looked for opportunities among the formerly state-owned enterprises that were privatized in the 1990s and the many large companies that were rationalizing their operations. But the same economic openness and privatization that fueled dealmaking across the Continent also fueled protectionism. As Europe became economically more integrated, its individual countries became more intent on preserving their largest employers and keeping them out of foreign hands. In 2004, when French pharma giant Aventis SA spurned an offer from domestic rival Sanofi SA and started negotiating with Novartis AG of Switzerland, France made clear such a deal wouldn't be an option. A few years later, President Nicolas Sarkozy created another French "national champion" when he orchestrated the €90 billion merger of utilities Suez SA and Gaz de France SA.
But for all the points Sarkozy and other European politicians have scored with their constituents by thundering against the incursion of Anglo-American capitalism and M&A, the Continent's dealmakers have squarely accepted its language and its mores. The increase in cross-border deals and the corresponding emergence of a cross-border M&A community have led to the migration of Anglo-American dealmaking techniques across borders and categories of transactions. But a fairly recent hostile takeover with players from four different countries shows the perils of that migration. In 2007, Fortis Bank SA/NV teamed with Royal Bank of Scotland Group plc and Banco Santander Central Hispano SA on a $100 billion takeover of ABN Amro Bank NV. A year after Fortis closed the deal, the Dutch, Belgian and Luxembourg governments collaborated to seize what was by then a troubled company, each taking control of its national Fortis subsidiary. Global in life, Fortis became national in death, a fate that, like the financial crisis more broadly, revealed the limits of cross-border regulation -- and, some skeptics now argue, of cross-border dealmaking. Fortis' takeover of ABN and the subsequent collapse of the combined company are a troubling coda to the past decade in European M&A. Would European countries, long loath to allow significant cross-border banking consolidation, now accept it out of fiscal desperation? Or will they continue to bar it lest the Fortis fiasco repeat itself? The capital infusions that many countries have made in their banks suggest governments will, for at least a time, play greater roles in the economy than they have over the past decade. How lasting that shift will prove to be, of course, remains to be seen. Below, we consider the most significant European deals of the past decade and how they contributed to, characterized or changed the Continent's M&A landscape. Setting the stage: Vodafone-Mannesmann The Vodafone-Mannesmann marriage was outsized in every respect. It was the last and largest of a wave of telecommunications deals, several hostile, that reshaped the industry in the U.S. and Europe in the late 1990s. It sprawled across three countries with different regulatory plans. Its outcome reflected the rising power of institutional investors even beyond their own borders. And it portended an M&A regime that Europe soundly rejected. Mannesmann anticipated Vodafone's interest and tried to forestall it by agreeing to buy Orange plc, the U.K.'s third-largest phone company, for €16 billion ($27 billion in 1999) in October 1999. Vodafone countered on Nov. 14 with a €100 billion ($103 billion then) offer for Mannesmann that it bumped to €125 billion five days later. With between 30% and 35% of the target's stock in German hands, Vodafone knew it would need every vote it could get, and it registered its exchange offer in the U.S.; though Mannesmann wasn't listed there, U.S. shareholders held about a quarter of the German telecom company's shares. Vodafone also had to satisfy U.K. and German securities regulators, an exercise filled with thorny legal questions of the sort that Daimler-Benz AG faced in acquiring Chrysler Corp. in 1998 and Vivendi SA handled two years later in buying Seagram Co. Ltd. Lawyers needed to solve those problems if their clients were to effect cross-border deals. But politicians and regulators had to allow such deals in the first place. In the case of Mannesmann, those in Germany did, choosing to follow the U.K. approach that bars an acquisition target from taking frustrating actions against a hostile bid. That policy orientation was enshrined in the EU Directive on Takeover Bids, which the member states considered while Vodafone pursued Mannesmann. With Mannesmann shareholders free to do as they pleased, many Continental investors sold their stock as the target's stock kept rising. Even German index funds did so on the chance that Mannesmann would be sold and fall out of the DAX index, while U.K. index funds bought Vodafone stock, increasing its value and with it the value of the bid for Mannesmann, which signed a €180 billion deal with the bidder on Feb. 3, 2000, less than a month after America Online Inc. and Time Warner Inc. agreed to their $100 billion merger. Having seen one pillar of its economy taken over, the German government didn't want a repeat. So it helped to forestall the passage of the Takeover Directive, which was rendered toothless before it was approved in 2004. Instead of having to adhere to a uniform set of takeover rules, EU member states were free to establish their own. The resulting regulatory patchwork gave countries the leeway to shelter their companies from unwelcome advances. Protectionism: Sanofi-Aventis; Endesa/Gas Natural/E.ON; GDF-Suez The European instinct toward protectionism manifested itself in ways conditioned by the rise of a cross-border M&A market. The very need for it sprang from Europe's greater openness, and politicians often responded to a hostile bid from a foreign company by pushing the target into the hands of a domestic competitor in hopes of creating a corporate entity that could compete internationally. "Protectionism was a much bigger issue in 1995 than it was in 2005," says Alan Klein, a partner at Simpson Thacher & Bartlett LLP in New York who spent several years in the firm's London office. "In 2005, the universe of companies that would be protected was much narrower." But that universe still included banking, where companies didn't even bother testing foreign governments by floating offers, and energy, a sector that experienced two of the most protracted episodes of protectionism: the merger of Gaz de France SA and Suez SA in France and the battle for Spanish utility Endesa SA. Another prominent example of protectionism came in pharmaceuticals. France's Aventis SA found itself in play in late 2003, when oil company Total SA and cosmetics company L'Oréal SA, the respective owners of 24.4% and 19.5% of Aventis, said they would not renew their standstill shareholder agreements after they expired in December 2004. Sanofi-Synthélabo SA offered €48.5 billion ($61 billion in 2004) for its rival in January 2004, but Aventis rejected the approach and started negotiating with Novartis AG of Switzerland. Two French politicians made clear such a deal wouldn't be an option. In March, Prime Minister Jean-Pierre Raffarin said the French government would consider a foreign bid for Aventis a threat to the national interest because it might leave the country without a company that could mass-produce vaccines in the event of a bioterrorism attack. Aventis persisted in its opposition to Sanofi with a novel "Plavix pill," a takeover defense under which Aventis shareholders would receive warrants redeemable for shares of the combined company if Sanofi took Aventis over and thereby lost patent protection on the blockbuster anti-coagulant Plavix. And on April 22, Novartis and Aventis announced that they had embarked on merger negotiations, news that got a swift response. The next day, French stock market regulator Autorité des Marchés Financiers ruled the Plavix pill illegal, and on the same day Sarkozy, then France's finance minister, summoned the Sanofi and Aventis CEOs and told them to iron out a deal. They complied within 48 hours by signing a €55.3 billion merger agreement. The outcome was protectionism with a twist. The mere fact that a pharma company -- itself the product of a merger between Germany's Hoechst AG and France's Rhône-Poulenc SA -- had two large shareholders of such disparate industries reflected the industrial rationalization that helped fuel European M&A the past decade. And Aventis shareholders had a vote on the deal, which forced Sanofi to increase its initial offer, though not by as much as would have been the case in a completely open auction. Sarkozy also helped orchestrate another combination, the €90 billion merger of Suez and Gaz de France, a saga that lasted more than two years and revealed the potential political costs of protectionism. Suez initially signed a deal with GdF in February 2006 in part to short-circuit a potential bid from Enel SpA, Italy's largest utility and one in which the country owns a 33% stake. Any solution had to appease GdF's unions and Suez's shareholders. Just a year earlier, the French government had sold a 19.8% stake in GdF to investors only after promising the utility's unions that it wouldn't reduce its stake in GdF to less than 70% without the approval of the French parliament. Gaining that approval took months, and a French court blessed it, provided the government reduce its GdF stake after the EU's deregulation of the electricity markets took effect on July 1, 2007. That meant the fate of the deal would rest with Sarkozy, who was elected president that May. Once again, Sarkozy could create a national champion only if he could satisfy the shareholders of a large French company. The largest of those was the reclusive Belgian billionaire Albert Frère, who held 8% of Suez. Frère approved a deal in which GdF would merge with Suez and spin off 65% of the target's environmental unit to Suez shareholders, a solution that left the French government with some 40% of the combined GdF-Suez. The French economy is large enough to have allowed Sarkozy the luxury of crafting national champions in two industries. Spanish politicians did not have the same choice when a bid from Barcelona utility Gas Natural SDG SA put Madrid rival Endesa in play. The historic enmity between the two cities led Madrid politicians to carp about the offer, but they were even less pleased when Germany's E.ON AG made a hostile bid for Endesa in February 2006 and delayed in approving it. Meanwhile, Spanish construction firm Acciona SA accumulated a 25% stake in Endesa, and after a suspiciously timed meeting between Spanish Prime Minister José Luis Rodríguez Zapatero and his Italian counterpart at the time, Romano Prodi, on the island of Ibiza in February 2007, Acciona and Enel teamed up to buy Endesa for €43 billion ($63 billion in 2007). With Acciona reeling from the collapse of the Spanish real estate market, Enel bought out its partner in February, meaning that the Spanish government had sold Endesa to an Italian utility to thwart a sale to a German utility. The Endesa saga featured numerous subplots, one of which was the alleged inadequacy of E.ON's bid under U.S. securities laws. The Securities and Exchange Commission declined to intervene, a decision blessed by the courts and one that signaled a retreat from the kind of intense involvement in non-U.S. deals that marked the SEC's approach to Vodafone's offer for Mannesmann. Metals, the great exception: Alcan-Pechiney; Mittal-Arcelor; and Tata-Corus While politicians have helped keep Europe's utilities sector fragmented on national lines, they've tolerated significant consolidation in the metals industry even though the buyers have come from outside the Continent. The tepid response may stem from the troubles European metals companies have faced and the money their governments have spent propping them up. Arcelor SA was a combination of ailing steel companies from Belgium, France, Luxembourg and Spain, while Koninklijke Hoogovens NV and British Steel plc merged to form Corus Group in 1999. The economics of the utilities industry allow for protectionism; those of the metals industry do not. The flurry of hostile European metals deals began with Alcan Inc.'s €5.6 billion acquisition of Pechiney SA, which was also the rare completion of a deal only a few years after a regulator had rejected it. In 1999, Alcan, Pechiney and Alusuisse Lonza Group Ltd. tried to combine in a three-way merger that failed because the companies couldn't agree on which assets to divest to satisfy EU antitrust regulators. The next year, Alcan bought Alusuisse and in 2003 launched a hostile bid for Pechiney, which the French government had privatized in 1995. Montreal-based Alcan sought to forestall opposition to the deal by promising to list on the Paris bourse and locate the combined company's headquarters in the city. That and a price bump secured the deal, which was the first successful hostile takeover in France since Nestlé SA took over Source Perrier SA in 1992. The deal was noteworthy for other reasons as well. It was the first bid to take advantage of a change in French law allowing a bidder to condition its offer on receiving antitrust approval, a response to the EU's rejection of two mergers after they had closed, the larger of which was Schneider Electric SA's $7.9 billion purchase of LeGrand SA. And the offer was the first in France to feature a floating-exchange ratio, an innovation that Sanofi used in its bid for Aventis. Alcan itself sold to Rio Tinto plc two years ago. Alcan-Pechiney was dwarfed in size and significance by Mittal Steel Co. NV's takeover of Arcelor, which marked the emergence of players from India and Russia in big-ticket European M&A. Like Vodafone's move on Mannesmann, Mittal's on Arcelor was precipitated by the target's agreement to buy a smaller rival, in this case Canada's Dofasco Inc. Lakshmi Mittal spent 30 years building one of the world's largest steel companies, and acquiring Arcelor would make him the industry's largest player, one that could stand up to both the large mining companies that supply the raw materials steel companies use and the manufacturers that buy their products. To effect that vision, Mittal offered €18.6 billion ($23.3 billion in 2006) for Arcelor in January 2006. Arcelor was incorporated in Luxembourg, and it lobbied the nation's legislature to pass a takeover law that would have allowed the target to stare down Mittal's bid. That didn't happen. France, Spain and Belgium didn't stand in the way of the offer, either. Arcelor played two more cards. First, it put its Dofasco shares in a trust that prevented Mittal from selling the company until 2011. Second, Arcelor negotiated a deal with Russia's OAO Severstal in which that company would have taken a 32% stake in Arcelor. Critically, Arcelor gave its shareholders a vote on the deal with Severstal even though the target wasn't legally required to do so. Mittal countered by raising its offer and rallying Arcelor shareholders to reject the company's agreement with Severstal. They got a blowout price for doing so: €26.9 billion, 49% more than Mittal's initial offer, a hike fueled by skyrocketing steel prices. Arcelor's response to Mittal was sufficiently measured to allow for a takeover -- a significant development that reflected' greater acceptance of shareholders' right to determine the company's fate by boards. The political implications of the bid are less clear, since the French government allowed Mittal's bid to play out at the same time as it thwarted Enel's possible acquisition of Suez. Sarkozy has said he wouldn't have stood for the takeover of Arcelor had he been France's president. Tata Steel Ltd.'s takeover of Corus didn't generate a fraction of the political attention that Mittal-Arcelor did. "We went through our debates on political intervention in M&A in the mid-1980s," says James Palmer, a partner at Herbert Smith LLP in London who didn't work on either deal. "We used to have bid defenses that said, 'They're foreign,' and that has been a complete nonstarter in the U.K. since the late 1980s." And while European countries sometimes seem to make up takeover rules as they go along, depending on the political winds and the identity of the bidder and target, the U.K. Takeover Panel has since 1968 interpreted a takeover code that bars targets from taking frustrating actions -- the model that the EU rejected after Vodafone-Mannesmann. As a result, the U.K. has an open, predictable M&A market that has had its share of technical developments over the past decade but not the fundamental change that's swept through Europe. Like Arcelor, the battle for Corus featured two bidders from emerging markets, India's Tata and Brazilian rival Cia. Siderúrgica Nacional. The rivals traded bids beginning in October 2006 before the Takeover Panel took over the auction in January 2007 by scheduling a one-day, multiround auction after the market's close on Jan. 30 that Tata won with a bid of £6.7 billion ($13.1 billion in 2007), or 608 pence per Corus share, up from Tata's initial offer of 455 pence. Corus may end up being a milestone in the U.K. market, Palmer says. "One of the things that we as a firm envisage is an increasing shift to acquisitions by Asian bidders buying up globally. We see that as a steady trend which I think is going to bring back some of the political issues." free flow of capital: Private equity The European M&A market's greater openness was also a boon to U.S. private equity firms that started looking to the Continent for opportunities in the mid- to late 1990s and didn't take long to find them. By 2000, European PE volumes outstripped those in the U.S., an edge the European market retained until 2006, and the Anglo-American PE shops' near ubiquity in Europe meant the documents for almost every auction were prepared in English. Blackstone Group LP's €3.1 billion purchase of Celanese AG was a signal deal for the European PE market because it was the first take-private of a large German company by a leveraged buyout shop. The deal took an agonizingly long time to complete. Blackstone first approached Celanese in 2001, but the parties didn't sign an agreement until December 2003. Blackstone gained control of the company in April 2004, but Paulson & Co. and Arnhold and S. Bleichroeder Advisers LLC sued for appraisal and settled in August 2005 only after Blackstone agreed to pay them €51 ($64 in 2005) per share for almost 6 million shares, €18.50 more per share than most shareholders settled for originally. Perseverance paid off richly for Blackstone. The buyout shop took Celanese public in January 2005 and realized $1.94 billion on its initial $405 million equity investment. More problematic than Bleichroeder and Paulson was the response the Celanese deal inspired in Germany, where politicians, including Social Democratic Party head Franz Müntefering, took to calling PE buyers "locusts." The combination of that pressure, senior managers' continuing reluctance to take their companies private and the significant structural difficulties that German law poses for buyers of public companies meant that PE shops looked elsewhere in Europe for their largest purchases. Of the 20 largest European LBOs of the past decade, only one target was German: Kion Group GmbH, which sold to Kohlberg Kravis Roberts & Co. and Goldman Sachs Group Inc. for $5.1 billion in 2006. PE shops tended to hunt their biggest game in the U.K., which accounted for eight of those 20 deals including the largest, the $20 billion LBO of Alliance Boots plc in 2007. But a narrow focus on size misses the significance of private equity for the restructuring of European industry over the past decade. Private equity shops may have had trouble taking public companies private in many European countries but feasted on underperforming or unwanted divisions of such large companies as E.ON, Siemens AG and even Mannesmann, many of whose businesses Vodafone ended up selling. And if PE shops didn't end up buying as many large targets in Europe as in the U.S., they did participate aggressively in auctions and drove up prices for strategic acquirers. The great collapse: Fortis In the U.S., a frenzy of large LBOs marked the height of the M&A bull market. The equivalent sign in Europe was Fortis' takeover of ABN Amro. But while the PE firms were able to walk away from some of their most aggressive deals, Fortis was felled by its folly, leaving government regulators to manage the pieces. Fortis' downfall began with a takeover inspired by an activist shareholder. U.K.-based Children's Investment Fund Management (UK) LP, an ABN shareholder, effectively put ABN in play in February 2007 by urging the bank to sell assets and forswear acquisitions. With Fortis, RBS and Banco Santander looming, ABN agreed on April 23 to two transactions: a €67 billion ($91 billion in 2007) stock merger with Barclays plc and the $21 billion sale of LaSalle Bank Corp. to Bank of America Corp., a deal that included a go-shop clause. The Fortis trio responded with a €72 billion, 70% cash and 30% stock bid for the Dutch bank as well as a $24.5 billion offer for LaSalle conditioned on the success of the bid for ABN. ABN shareholders sued in Dutch court to challenge the LaSalle sale, but the Dutch Supreme Court ruled that ABN didn't have to put the deal to a vote, and on Oct. 1, 2007, BofA closed its purchase of LaSalle, Detroit's biggest bank. Not dissuaded in the least, Fortis raised the cash component of its bid to 93%, or €67 billion, an extraordinary amount of cash for institutions with capital requirements to meet, and successfully closed its offer for ABN on Oct. 10, 2007, two months after the debt market crash that busted the leveraged buyout bubble. Banco Santander took ABN's Latin American assets, RBS its wholesale operations, and Fortis its Dutch and Belgian businesses. Santander walked away from the takeover strong enough to buy two troubled U.K. institutions and another in the U.S. last year. RBS and Fortis weren't so lucky. In October, the British government took a 58% stake in RBS as part of its bailout of the U.K. banking system. The Dutch, Belgian and Luxembourg governments took over most of Fortis, the Dutch seizing what was left of the old ABN while Belgium and Luxembourg took their national Fortis assets. The Netherlands has opted to hold on to ABN until the market improves, but Belgium in October agreed to sell control of its Fortis assets to BNP Paribas SA, which like every other major French bank had received a significant cash infusion from the French government. Fortis shareholders mounted a legal appeal, winning a temporary freeze on the sale. Fallout from the case led Belgian Prime Minister Yves Leterme and his government to resign after a judicial inquiry found "strong indications" that the state had sought to influence the court to back the dismantling. The Fortis-BNP deal was reworked to win shareholder approval, but once again, the tension between national and trans-European regulation was stark. Had the French, by luck or design, created a national champion with international reach by helping BNP Paribas purchase Fortis assets? Having seen the results when ABN Amro, a pillar of the Dutch economy for centuries, was sold to a group of foreign banks, would the Dutch or any other government allow such a sale again? The answers may be as important to European M&A over the next decade as the response to Vodafone-Mannesmann was over the past 10 years. |
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