A new advisory science has been born this year in Europe: how to launch and defend hostile bids. The aggression and free-flowing finance are straight out of America, but the old continent's politics add an extra level of difficulty. The latest landmark battle, following the struggles for Telecom Italia, Gucci and Société Générale, is raging in the French oil sector. TotalFina's raid on Elf Aquitaine, and Elf's counter-attack, highlight once again the primacy of politics in shaping French business. The battle also provides Europe-wide lessons for the M&A tactical manual.
TotalFina versus Elf is firmly stuck in a Parisian courtroom. Bidder and defender have both appealed against the regulatory approval given to the adversary's actions, and rulings are due by mid-October. Thereafter, the market will have a short period to pick the winner. Elf was the first to resort to the law; it did so because it desperately needed to buy time. Its defence plan, thought up by Morgan Stanley, Goldman Sachs and Lazard Frères, was proving difficult to sell to institutional investors. But so cunning was TotalFina's raid that the defence advisers, now privately pessimistic about their chances, had few options.
A link-up between France's two oil powers has been rumoured recurrently throughout the 1990s. As in other globalized industries, critical mass and merger synergies are in vogue. The combined firm would rank behind only Exxon-Mobil, Royal Dutch/Shell and BP-Amoco-Arco in turnover. The two bosses, Thierry Desmarest of TotalFina and Phillipe Jaffré of Elf Aquitaine, lunched together regularly. Jaffré claims they did not substantively discuss a merger.
Then, on July 3, TotalFina attacked, launching an all-share offer for Elf, then valued at €42 billion. The offer, advised on by CSFB, Paribas and Merrill Lynch, was cheap: Elf is now trading above the value of the four-shares-for-three exchange bid. The proposed annual synergies were low at €1.2 billion over three years. They were to be achieved, said chairman and chief executive Desmarest, "in a manner respectful to the social policies that we are committed to". That meant 2,000 fewer jobs at French sites, through voluntary and natural reductions. "You know how it is in France," shrugs an investment banker involved in the deal.
The modest synergies, which Elf attacked in its rejection of the offer, gave Desmarest maximum flexibility to form his own strategy once in charge of the combined company. The all-paper bid at a low premium preserved a large stake for TotalFina's own shareholders, and kept the company's financial powder dry for future investments and possibly acquisitions. And, conveniently, the share offer allowed TotalFina to use pooling-of-interest accounting rules, meaning the company would not have to book billions of francs in depreciation costs for goodwill.
Before launching the bid, Desmarest approached the French finance ministry and the office of prime minister Lionel Jospin, to inquire whether the government would use its golden share in Elf Aquitaine to veto the acquisition. But Desmarest knew the government likes to see a French national champion emerge - as manifested by its tolerance of BNP's bid for banking rivals SG and Paribas. In the last days before the bid, Desmarest received political blessing.
On July 5, Elf's defence advisory team found itself in difficulty. The leaders among the advisers were the brothers Yoel and Michael Zaoui, respectively of Goldman Sachs and Morgan Stanley. The group of investment bankers knew each other well, says an Elf adviser from Lazard Frères: "We see each other on every single deal in France." But seldom have they been made to struggle so.
The defenders studied three main options. The first was just to say no, and offer a stand-alone commercial plan. "Nobody thought it was a viable option that would bring more value to shareholders," says the source at Lazard. "The merger has some logic to it, there are synergies, and it is the fashion to be a big company."
Few companies retain their independence, once bid for. The most common outcome in takeover battles everywhere is victory for a white knight. Elf's defence team spent until mid-July studying every candidate in the industry, analyzing the government's likely view of foreign acquirers, and taking secret soundings.
An M&A specialist in the Elf camp says: "A white knight didn't seem to be on the cards quickly, because of the position of the government with its golden share. None of the potential suitors was sufficiently confident about the golden share. And none of these companies was willing to fight the French government in court." Each possible rescuer had its own disadvantage: ENI, with which Elf has held past merger discussions, is 37% owned by the Italian state, which didn't want to be involved in a corporate struggle against the French state. Elsewhere in Europe, Repsol was too small, BP was still digesting two huge mergers, and Shell was busy with restructuring. The advisers believed Chevron of the US had no hope of getting the golden share waived.
With nearly two weeks up, the bankers were scrambling to build a defence against the bid, which Elf's management viewed as a sly attempt to buy it on the cheap during the quiet of summer. The only option left was a pacman defence: a counterbid for TotalFina. The teams worked around the clock to formulate and launch it by July 18. "It is an investment-banking miracle that we've been able to put this thing together," says an adviser to Elf: "But we always knew that pacman was a difficult strategy to sell."
The great disadvantage of a pacman manoeuvre is that it acknowledges your adversary's case for a merger. An M&A specialist at Morgan Stanley says: "You implicitly recognize some of the merit in the bid; however, you believe there is more value to be achieved if you structure it in a different way." You can contrast yourself only through your offer to shareholders, your industrial plan, or the appeal of your boss.