When two’s a crowd can three succeed?
The conventional wisdom is that euroland corporate culture is going through what US capitalism experienced in the 1980s. The surge in mergers and acquisitions in early 1999 seems to show that efficiency, focus and shareholder value are European managers’ new goals. Well, only up to a point. Marcus Walker looks beneath the surface of some of this year’s biggest deals and finds two driving forces are old-fashioned clan rivalry and the pursuit of empire.
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.
A traditional Italian affair
If Telecom Italia’s German merger is an 11th-hour defence manoeuvre between partners whose businesses hardly overlap, Olivetti’s hostile takeover is just as tangential to value-creation.
Traditionally in Europe, many troubled companies were protected from takeover by circles of influence, industrial and financial allies of the management who held strategic minority stakes. In Italy, they were known as the salotto buono – the cultivated drawing-room clique of eminent figures like Fiat’s Gianni Agnelli, Leopoldo Pirelli of the tyre maker, and the ancient Enrico Cuccia of investment bank Mediobanca. The salotto buonoretained much of its influence during the 1990s, despite competitive pressures on Italian industry to raise more capital on open markets.
In October 1997, when the Rome government privatized Telecom Italia, the treasury ministry struggled to find committed strategic shareholders to complement the public flotation of shares.( In Italy, the perception remains than a company needs a core group of shareholders in order to have a stable industrial plan.) To its frustration, the treasury was forced to turn to a group of the usual suspects, including the Agnelli family holding company Ifil and insurer Generali, despite their parsimonious offers. Ifil bought only 0.6%, Generali 1.11%. The combined group of strategic investors was able to dominate Telecom Italia’s board with only 6.97%. The establishment was up to its old trick of controlling as much of industry as possible, with as little capital as possible.
Olivetti’s leveraged offer of €53 billion ($56 billion) on February 20 for all Telecom Italia’s voting shares appeared to change the game. Chief executive Roberto Colaninno began preparing his takeover bid in November 1998, when his bankers at Donaldson Lufkin & Jenrette, Lehman Brothers and Chase suggested the necessary billions could be raised. According to a source close to Colaninno, the idea of a takeover arose because of the success of Olivetti’s fixed-line telephone venture Infostrada. Colaninno bought the necessary fibre-optic infrastructure from the Italian railways in April 1998. So quickly did 1.5 million disgruntled Telecom Italia customers flock to the new competitor, a complete beginner, that it showed Telecom had huge scope for improvement.
Colaninno appeared as the fresh, efficient face of Italian capitalism. He had already revived Olivetti after members of the salotto buono left it with near-terminal debts. Unfortunately for those who sensed a new beginning for Telecom Italia, there are three features of the takeover bid that suggest shareholder interests aren’t its underlying force.
First, Telecom Italia’s chief executive since last November has reforming credentials at least as good as Colaninno. Franco Bernabè previously tackled the disastrously inefficient oil, gas and chemicals group Ente Nazionale Idrocarburi (ENI). A corporate financier who knew Bernabè in those days recalls his determination: “Bernabè closed ENI plants despite massive trade union demonstrations. He is a driver for value.”
Second, there is no industrial logic to an Olivetti-Telecom merger. Olivetti’s plan is to sell all its telecoms interests, the bulk of its own business, raising €7.6 billion. It is not a consolidation play, preparing for global competition through synergies, like the merger between mobile-phone firms Vodafone and AirTouch.
The corporate financier says: “The idea that Colaninno should run Telecom Italia rather than Bernabè is just cheeky. There is nothing to choose between them.” Colaninno promises to slash the workforce by 20,000 and invest heavily; Bernabè makes similar promises and has a proven record of keeping them. The main difference between their proposals to achieve value for shareholders is that in Colaninno’s scheme many would get it now in the form of a buy-out, and under Bernabè’s management they would get it over time.
Third, Mediobanca is backing Olivetti’s takeover. Either the secretive Milan institution has miraculously converted to the cause of value for small shareholders, or else the takeover of Telecom Italia is a more traditional Italian affair than most observers thought.
An investment banker involved in the affair detects frustrated ambition at Mediobanca. For decades, it has assembled coalitions of strategic minority shareholders to direct most of Italy’s biggest corporations: Fiat and Pirelli, chemicals group Montedison and publishing conglomerate Ferruzzi, financial institutions like Generali and Banca Commerciale Italiana (BCI). Telecom Italia is a jewel missing from the crown.
Mediobanca’s capital-market transactions tend to have the effect of cementing the influence of its honorary president Cuccia and his allies. The main difference in Mediobanca’s position nowadays is not a change of purpose but a loss of omnipotence. Direct rivals include the San Paolo IMI banking group and foreign investment banks, while former friends like Fiat and UniCredito Italiano follow more independent strategies. These days, Cuccia has to fight to get his way.
Mediobanca has had a relationship with Olivetti since former boss Carlo de Benedetti was accepted into the established circle of Italian business magnates. It is noteworthy that even Olivetti’s improved offer since March 30 of €11.50 per Telecom Italia share (taking the total bid to €60 billion), is low, say sector analysts. Warburg Dillon Read, for example, reckons Telecom is worth €14 a share. Others put the sum-of-parts value of Telecom at €17.
At a price of €11.50, it will be hard for Olivetti to convince all shareholders to hand over their investment. An extra euro to respond to Deutsche Telekom’s intervention would still fall below fair value. But Olivetti said early on it would accept below two-thirds of all shares. The stock-market regulator demanded to know exactly how little. On April 6, Colaninno said 35%.
One-third of Telecom Italia may still look a massive investment – until you remember that the holder would be a gambling-system maker called Tecnost, only 59% owned by Olivetti if the bid succeeds. And Olivetti is only 15% owned by its controlling shareholder, Luxembourg-registered Bell, which is directed by 39% owner Fingruppo, in which Colaninno has a 15% stake. If Olivetti conquered its declared acceptable minimum stake, Colaninno would control Telecom Italia with 0.18% of its capital. Gianni Agnelli can weep.
Thus a possible outcome of Europe’s biggest-ever stock-market battle is that a circle of Mediobanca friends, led by Olivetti and probably including current Telecom core shareholders Generali and BCI, forms a new minority control syndicate after Olivetti buys out many small stockholders for less than Telecom is worth.
Such a victory would have little to do with creating value. It would be a case of one clan rather than another getting its hands on what is potentially one of Italy’s most rewarding assets.
Defying banking logic
If there is one sector attracting as much interest from M&A advisers as telecoms it is banking. In the optimistic reading, this is consolidation to achieve synergies, to create value, to attract capital, to compete internationally. But despite the spectacular round of mergers in France, Italy and Spain, it is hard to imagine anyone in Europe doing a NationsBank: from a lean regional base, creating a powerhouse to compete with the world’s best through a series of mergers involving radical cost savings.
Lloyds TSB’s resources and record of successful acquisitions in the UK makes it arguably the best candidate. But Lloyds has repeatedly said it won’t buy a continental European bank. Given the spectacle of France’s attempted bank mergers, you can see why.
On the face of it, a banking consolidation could hardly have more logic than BNP’s attempted match with Société Générale, two banks with massive and overlapping branch networks. But when BNP chairman Michel Pébereau launched his $37 billion hostile bid for SG and its own merger partner Paribas in early March this year, he observed the French necessity of promising that no domestic job losses or branch closures would result.
If BNP wins, New York and London will probably be awash with the résumés of ex-SG bankers. But major savings in France will come only as workers age and retire. Apparently, enough of them will get old by 2004 to make the merger worthwhile. A source in the BNP camp admits: “If it was happening in the US, it would be a case of boom-boom-boom-boom” – he makes a sweeping machine-gun motion.
The BNP-SG-Paribas manoeuvres are driven less by shareholder value than by the need to be bigger. On a European scale French banks are quite small. “Either they eventually become subsidiaries of German or Dutch banks when they come across the border, or one French group emerges,” says one M&A adviser who insists that mergers should not just be about scale but must deliver value for shareholders. “You can’t have one without the other, or else you don’t get support from your shareholders for your next deal.” Indeed, the stock market rewarded BNP’s offer for SG-Paribas with a 10% jump in the combined value of the three banks. But it is not clear how enough synergy will arise in coming years to justify such enthusiasm.
One shareholder in all three banks stands to benefit tangibly: AXA’s insurance interests would be furthered. But otherwise, Pébereau’s takeover looks mainly like a plan for a banking Bastille to survive whatever other M&A moves may sweep Europe.
That could conflict with shareholder value. What is better for stockholders: a BNP that is in play when European banking consolidation goes cross-border, and is therefore under pressure to become far more efficient? Or a French national champion whose political prestige and vast workforce act as a poison pill against acquirers?
Another contest between French egos, even more ambiguous for stock holders’ interests, has been taking place since January. The acquisitive Bernard Arnault, who put together the diverse luxury brands group Moët Hennessy Louis Vuitton (LVMH) in the course of the 1990s, built up a 34% stake in Florence-based fashion firm Gucci.
Until March, Arnault made no formal offer to Gucci shareholders. Under the UK takeover code, or the new Italian code, which is influenced by London practice, surpassing a ceiling on minority stakes requires a formal bid for all shares. But Gucci is listed in the looser regulatory environment of Amsterdam, where creeping market conquests are possible.
Formal offers protect small shareholders from waking up one morning to find someone new controlling their company. Gucci chief executive Domenico de Sole accused LVMH of behaving like a clandestine raider. An insider in the Arnault camp says many US funds that owned Gucci shares came to LVMH with offers to sell, so the action helped, not harmed, small shareholders. In addition, he explains, LVMH didn’t want a hostile takeover, but “Gucci’s management wasn’t exactly being cooperative”. The creeping LVMH stake was “to induce Gucci to talk”.
As a negotiating tactic, this failed. Before Arnault could crack open a bottle of his own Château d’Yquem to celebrate, Gucci diluted the LVMH stake by issuing an equal equity stake to a newly-created employees’ foundation. LVMH challenged the move in a Dutch court, which froze the voting rights of both LVMH and the employees’ foundation and told Arnault and de Sole to negotiate.
But on March 19, Gucci revealed the sale of a 42% equity stake to a white knight: the retailing group Pinault Printemps Redoute (PPR), controlled by François Pinault, estimated by some to be France’s richest man. LVMH was flushed out into the open, making an $8 billion offer for all shares.
The Arnault camp was furious at Pinault’s secret entry. This white-knight defence was not what the court had intended, says the inside source: Gucci’s management appears to have traded the company to Pinault while Arnault’s voting rights were suspended: “In the US or UK, that would be called management entrenchment. Shareholders have the right to say: ‘Let’s put Arnault’s price and Pinault’s price side by side, and I will choose the winner, not management.'”
But by late April no side was making a straightforward offer to shareholders. Arnault was offering an improved $85 a share, but only on condition that Gucci’s vital designer Tom Ford stayed, and that Pinault sold up and left. Also, senior management would have to stay on for a while, allowing Arnault to get acquainted with the company. Gucci was rejecting offers with conditions attached, while defending its tactics in court. Pinault was taking over Gucci’s strategy committee and planning to turn Gucci into a multi-brand competitor for LVMH – without making an offer to minority shareholders.
Some shareholders who sold out to LVMH, making a capital gain, have benefited from the shenanigans. But the saga hardly illustrates Europe’s conversion to an Anglo-American paradigm of capitalism. Rather, it shows Europe’s ability to frustrate small shareholders with instability, while rival industrial clans add to their empires.
US and British observers of euroland often like to believe that continental Europe is growing more like them, or at least like the ideal type of Anglo-Saxon market culture. And in many euroland industries the pressure is indeed on for mergers driven by synergies and consciousness of globalization. But so far the management response to that pressure is only patchy.
Death of the domestic shareholder
Charles Alexander, head of European corporate finance at NM Rothschild, identifies the factors preventing value-creating M&A activity in Europe: “There is the position of European banks and key insurance companies with major equity participations. Historically, they do not regard their stakes as for sale – the stakes are there for a reason. In France, Italy and Sweden, interlinking groups of influence [have been] a similar obstacle. [Also,] the inflexibility of labour markets [has] meant that you couldn’t realize synergies at a sensible cost, especially in Germany, France and Spain.”
But Alexander points to slow European growth as a source of change: shake-ups through M&A activity are needed for future earnings growth. He adds: “In the meantime, there has been an internationalization of share portfolios. London fund managers hold far more European equities, and US mutual funds have diversified into Europe. The London and New York fund-managing community is driving management towards shareholder value in the same way it has been doing in the US for a long time. Companies that have gained critical mass, made themselves efficient, and restructured themselves have been rewarded with huge share-price rises.”
But as the takeover battles of 1999 show, there is still scope in Europe for the pursuit of empire and ambition. Dan Dickinson, head of European M&A at Merrill Lynch, says: “There is absolutely no question that Europe is heading [in the direction of shareholder value]. That being said, it is happening more quickly in some areas than in others. In pockets, there are still the old-boy networks, trying to run companies in a way inconsistent with shareholder value. But it’s getting harder for those companies to attract capital.”
His counterpart at Goldman Sachs, Rick Sapp, believes European banking may see future mergers driven more by size than synergies: “There is no doubt that in the more commodity-like industries, scale is an advantage. More scale means more income, which equals more firepower to make more acquisitions.”
At Warburg Dillon Read, co-head of M&A Warren Finegold adds: “Achieving the same focus on shareholders’ interests as in the US or UK is still many years away. Two signs will be when there is a single European stock exchange; and when the UK joins the euro. Then UK funds will redefine their investment mandates as pan-European. The UK as a separate asset allocation will disappear, while the Continent will become more Anglo in character.”
In the mean time, Europe’s M&A boom throws up more curious cases. In the new Europe’s first cross-border nationalization, Eléctricité de France (EDF) bought London Electricity for £1.4 billion ($2.2 billion). The EU cleared the deal in late January. EDF’s electricity is 82% nuclear-powered, for which reason it is firmly in the hands of the French republic and privatization is not on the cards. Very different ideas of capitalism still coexist in Europe.
Some Britons of a Eurosceptic leaning may feel miffed: did they privatize the utilities only to hand them to the French government? A vignette going around has it that President Chirac now has two red buttons on his desk. One operates the French nuclear deterrent. The other is to switch off all the lights in London.
