M&A: Europe plays the takeover game

For a continent converting to shareholder value, Europe's current epic takeover struggles are a peculiar bunch. A merger of bloated French banks involves no sackings. A fight between two French magnates in a lax Dutch arena for an Italian fashion house largely ignores the firm's US shareholders. And an Italian telecoms giant with a proven reformer in charge is subject to a hostile leveraged buy-out. To escape, it tries to merge with a German state-controlled giant with which it has little overlap.

Probe beneath the surface of a merger in euroland, and you may well find that good old-fashioned European intrigues are being played out.

The real changes are threefold. Global consolidation in many industries is adding urgency to some European industrialists' quest for empire; that is leading to the use in some cases of aggressive takeover tactics, instead of waiting for traditional cosy ententes.

Second, the eurozone's booming capital markets can provide unprecedented fuel for companies' ambitions.

And third, chief executives have learnt a new Anglo-American song about value creation. It helps to woo fund managers based in London and New York, and – perhaps more effectively – makes politicians feel they shouldn't intervene as much as in the past.

In most of Europe it remains difficult to revamp a company after you've done your merger deal because realizing a sleepy company's latent value usually means sacking people. But there are other ways to gain post-merger synergies. You can try cross-selling, for example. Or you can reduce unit costs by integrating, say, two banks' IT platforms. But more typically, post-merger synergy-creation is a euphemism for sackings. As one leading London M&A adviser quips: "Good morning. You are a synergy. You're fired."

And that remains anathema in much of continental Europe. An American investment banker posted to Europe says: "Last week I met the CEO of a big German company. He mentioned the phrase shareholder value, but was also quite explicit: the company should be run by the management, for the good of the company, including its employees." The investment banker adds: "People talk about shareholder value. But do they also walk the talk?"

When M&A specialists are asked to name examples of companies active in mergers in the pursuit of value, they regularly come up with cases from the UK, Sweden and Switzerland, like BP Amoco, Novartis or ABB. Companies that fit the Anglo-Saxon M&A paradigm – consolidators creating synergies in pursuit of global goals and stock price growth – are harder to find in Germany, France or Italy.

Rhône-Poulenc/Hoechst and DaimlerChrysler have been praised for showing strategic foresight in globalized industries. But many other expansionists, such as German conglomerate Viag in its failed attempt to merge with Alusuisse Lonza or telephone company turned LBO fund Olivetti, have shown more ambition than industrial logic.

Telecom Italia's proposed merger with Deutsche Telekom, on the other hand, shows desperation. The two companies' chief executives, Franco Bernabè and Ron Sommer, had been in contact since February. But when Bernabè's initial plan of independent survival against Olivetti's hostile takeover collapsed, he and Sommer worked around the clock to reach a deal in a matter of days.

On April 22 Bernabè and Sommer resurface in London and embrace before the world's media. In a press conference strong on visions, Bernabè says their marriage will create "Europe's global telecommunications powerhouse." The companies will achieve e600 billion of annual synergies, he says. But while talking of integrating marketing and billing, he says no net labour cutting is involved, beyond what he was planning anyway for Telecom Italia.

In fact, the two groups are hardly text-book candidates for value-creation through integration. Their fixed-line phone franchises do not overlap. Telecom Italia is strong in mobile phone services, and has expanded into Latin America. Deutsche Telekom is more interested in on-line access and eastern Europe.

Bernabè aims to convince his shareholders to wait for a Deutsche Telekom share offer worth perhaps e12 to e13 in late 1999, despite political barriers and an EU Commission inquiry, in preference to Olivetti's concrete and imminent e11.50 bid. Bernabè tells Euromoney: "I think that the shareholders know their best interests. I have done all I could to increase shareholder value. Our plan is the best for our shareholders in the long term, is the best for our employees, and is the best for Europe."

But back in February, Bernabè told the M&A advisers hired to defend Telecom Italia against Olivetti that they could forget about any change-of-control transactions, suggesting his preferred option was to fend off Olivetti without white knights. This solo strategy failed when too few shareholders turned up in Turin to vote on it. Observers were puzzled, since plenty of shareholders had registered to attend. Intriguingly, many investors showed up at the venue, but never entered it.

It is possible that Telecom Italia feared the ballot's outcome: many international fund managers thought Olivetti's plans for Telecom were impressive. Failing to reach a quorum is a form of defeat with fewer ramifications than losing a shareholder vote.

In fact, the odds were always against Telecom Italia surviving alone. Paul Gibbs, M&A analyst at JP Morgan, has conducted a study of how hostile takeovers work out. He says: "Once you've been bid for, you have something like a one-in-three chance of survival. Probably, you either get taken over or a white knight will own you." Statistically, the white knight is favourite.