by Marcus Walker, Luciano Mondellini, Phillip Moore and Nick Kochan.
Vodafone’s takeover of Mannesmann: The bid that couldn’t fail
Some have it, the rest want it: the skills, track records and connections that help you win advisory mandates on Europe’s high-profile deals. Advising on the very biggest transactions can send you shooting to the top of the M&A league table. You only have to look at the rankings since the euro came in: the six advisers to Vodafone AirTouch and Mannesmann occupy the top six places.
But in addition to the high profile sector of telecoms, advisory work continues across the board as investment banks fight to carve out a franchise in a pan-European and often global marketplace. The success of their overall investment-banking business may depend on it: winning corporate clients in other areas, especially primary capital markets, may hinge on being close to them during their key strategic decisions to merge or acquire.
Our illustration shows five top dealmakers whose careers are closely bound up with Europe’s merger boom. Merrill Lynch’s Dan Dickinson, head of European M&A, has overseen his firm’s rise from nowhere to a top-three ranking; he also advised Mannesmann on its defence against Vodafone. His counterpart at Warburg Dillon Reed, Warren Finegold, was a leading aide to Vodafone boss Chris Gent during the contest. So too was Goldman Sachs’ Simon Dingemans, co-head of the UK advisory group, who also advised on the original Vodafone-AirTouch marriage. Lehman Brothers’ head of European M&A, Vittorio Pignatti, worked out how Olivetti could bid for Telecom Italia in 1999, and has helped establish Lehman as a specialist on Italy’s complex business scene. And JP Morgan’s co-head of global banking advisory, Terry Eccles, the man who put Lloyds and TSB together, advised the besieged NatWest on its acquisition by the Scots.
The following pages report on their and rivals’ efforts. Commensurate with their fee-earning power, the advisory specialists will become tomorrow’s most senior investment bankers, challenging the hegemony of capital-markets bankers during the past decade.
The reports in this survey start with the sector everybody bets will create a new generation of top global corporations: technology. In Europe, much of the new internet economy is too young for M&A, but corporate financiers hope to win the IPO mandates that will lead to M&A deals as the more successful e-commerce ventures mature and branch out.
But we haven’t forgotten that it’s not all e-commerce out there: deals are being done for oil companies, carmakers, drugs groups, insurers and others. And while investment banks are now set up to cover pan-European industry sectors, they also know that in European commerce, varying culture and law require local immersion. Experienced hands in the four main economies of Europe, Germany, France, Britain and Italy, explain how they view their countries’ M&A scene in 2000.
Quattrone’s boys find a home
There’s no bigger name in technology investment banking than Frank Quattrone, the mustachioed, sweater-wearing, karaoke-singing leader of a corporate-finance group whose latest home is Credit Suisse First Boston. Colleagues poke fun at his dress sense, but they admire his professional skills enough to follow him loyally from bank to bank.
| Marc Odendall | ||||||
Marc Odendall, head of CSFB’s European technology group, is a card-carrying member of the Quattrone appreciation society. In April 1996, Odendall joined Deutsche Morgan Grenfell on the same day that Quattrone and 20 followers arrived at DMG from Morgan Stanley. Quattrone’s lieutenant George Boutros had negotiated a slam-dunk deal with the board of Deutsche Bank: if the technology group delivered high revenues, it would share much of the reward. But when Deutsche took heavy hits in its proprietary trading during the Asian and Russian crises, the Quattrone gang, which was beating all expectations, took up most of the bank’s bonus pool. This did not endear them to Deutsche, which tried to renegotiate the agreement. Quattrone took his team of 170 bankers elsewhere.
The group chose CSFB in July 1998. “CSFB was a very strong all-round investment bank with a strong equities team and distribution capabilities, but little presence in technology. For us, it was a perfect match,” says Odendall. The global group, now 300-strong, had the number-one market share in technology financing and M&A last year. It is more integrated into CSFB than it was at Deutsche. But it still enjoys considerable autonomy and unusually, CSFB’s technology research resources come under the industry-group’s wing.
It’s a world apart from other sector teams in culture, too. It’s unusually young, for a start; often, talented associates execute transactions that would be handled by directors elsewhere. Odendall says: “If people are really good, we just give them as much responsibility as possible.”
Bankers in blue jeans
As for dress code, Odendall says: “Most of my team walk around in T-shirts and blue jeans; we don’t care too much about form, because our clients don’t either.” (Disappointingly, the dapper Frenchman Odendall has turned up for this interview in a sharp suit.) Despite the informal culture of many new-economy start-up companies, not all of CSFB’s clients approve of investment bankers in Nike pumps and baseball caps. Bankers don’t dare so much as to take their jacket off in the presence of Bernard Arnault, the diminutive corporate Napoleon who has invested about $500 million in tech ventures.
| George Boutros | ||||||
CSFB’s deals for European clients in the past year include lead-managing the flotation of UK internet provider Freeserve, advising Philips on acquiring VSLI in the US, and last month’s acquisition by Alcatel of voice and data networking company Newbridge. The latter, at $7.1 billion, was the largest technology M&A acquisition by a European company so far.
Winning the Freeserve mandate was a particular breakthrough for the CSFB group’s European business, because in spring 1999 the seller, Dixons, had mandated the bank’s most powerful rival in European technology, Goldman Sachs. But Goldman had told Dixons it should wait before floating Freeserve: the venture’s revenues were too small, and it needed a US strategic partner to be credible.
CSFB’s pitch was more aggressive: the business was ready for a summer flotation; and as the top UK internet provider by subscriber numbers, US internet companies had nothing to teach it about its own market. CSFB even lobbied the London stock exchange to change its rules, to allow a company that was less than three years old to list. Sure enough, the $417 million IPO was launched in July, both in London and on Nasdaq.
Odendall says: “We love the big-event transactions, the first-of-a-kind IPOs where no model exists. That’s what the group did in bringing Freeserve public. No one else understood it. Your challenge is to understand why it is going to be a winner and explain it to the market.”
At present, banking work in the European tech sector is more about raising finance for young companies than arranging mergers. Boutros, CSFB’s global head of technology M&A, thinks the second part will follow soon: “The state of European technology M&A activity is consistent with that of European technology markets overall. Europe has lagged the US by several years. [But] we anticipate that M&A activity in Europe will mirror that in the US and will exhibit a very steep ramp.”
Once consolidation within Europe is underway, a round of transatlantic internet deals beckons. Boutros observes: “There are a number of players in Europe that are establishing attractive currencies with rich multiples that will enable them to acquire and merge with companies in the US.”
Marcus Walker
Chase exploits its loans power
A trio of top Wall Street firms take an ever larger chunk of the European M&A market and push established European advisory houses down the league tables. Below the top three positions, names like JP Morgan, CSFB, Lazard and Warburg Dillon Read fight it out to stay in the chasing pack. Outside the top 10 come the wannabes. One of them in particular is confident it can exploit its special skills and emulate Merrill Lynch, which came from nowhere during the late 1990s to join the elite.
For Chase Manhattan, it’s a bold claim in view of its 4.8% market share in overall European M&A last year, compared with the 15% share you would need to break into the European top five. Yet the bank’s breakthrough deal in Europe was the one that, more than any other, set the tone for Europe’s fast-moving and aggressive M&A boom: Olivetti’s takeover of Telecom Italia last May. Chase’s money-raising prowess was clearly crucial to its success.
Richard Blakesley, an Englishman who joined Chase from Lehman Brothers in 1997 to be head of European telecoms and media M&A, explains how Chase aims to land further such transactions: “The things that get you hired are, in order of importance, a strategic grasp of the situation and the ability to give clients confidence that you can handle it; being aggressive and persistent about pitching ideas; and contacts. But contacts and relationships are not as important as they were. Ten years ago, they distinguished European-style investment banking from the US style. Now there is convergence. The losers will be the least consistent pitchers of ideas.”
Chase tends to do best at winning M&A business by cross-selling to its financing clients. One such case was Irish telecoms operator Esat, which came under takeover attack last December. Chase had long been telling Esat’s chief executive and 14% shareholder, Denis O’Brien, that he was extremely vulnerable. During 1999, O’Brien was finding it impossible to work with his partner in mobile-phone venture Digifone: Telenor, the state-owned Norwegian telecoms company that was then merging with Sweden’s state telecoms company Telia to form a new group called Newtel.
Advised by Chase, O’Brien offered to buy Newtel out from the Digifone venture, but the Scandinavians were in acquisitive rather than retreating mode. On 28 November, Newtel executives asked to see O’Brien, who was in New York, and hopped on a Concorde flight across the Atlantic to meet him. Blakesley was on the same Concorde, after missing his more modest scheduled flight by cleverly mislaying his passport. Also on the plane was Newtel’s adviser from HSBC, Richard Tolkein, known in the market as “the hobbit” thanks to his name and height.
At the meeting, Newtel made O’Brien an offer for his company of just over $70 a share. Blakesley was convinced they had neglected to look at the share price that morning: it had just risen 10% to $68. All the Scandinavians got out of O’Brien was an offer of sandwiches which they turned down. A hostile takeover battle was underway.
Throwing herrings
Newtel shot itself in first one foot, then the other. In mid December, the Swedes and Norwegians fell out about which country Newtel’s headquarters should be in and their merger collapsed amid what Esat’s boss described as “throwing herrings at each other”. The Norwegian component, Telenor, continued to hunt Esat alone, but blundered by increasing its bid at the wrong time.
| Richard Blakesley and John White | ||||||
Blakesley says: “Telenor’s mistake was to raise their offer before Christmas. Their adviser was telling them to get back in the game by getting the press coverage before the holiday. We were hoping for them to raise their offer, because they would thereby underpin Esat’s share price.” New-year markets are often weak, and Esat was worried that its stock might drop far enough to be vulnerable to a higher offer in early January. Instead, Telenor’s premature offer of $85 sent Esat shooting up past $90. The herring-throwers were dead in the water.
After Newtel’s self-destruction, the battle became one-sided. Blakesley says: “I wish all takeover defences were as easy as that.” But Esat knew it was unlikely to stay independent if better-equipped predators came to Ireland. Reluctantly, O’Brien accepted a £1.5 billion ($2.4 billion) offer for Esat from British Telecommunications on January 11.
Chase’s Blakesley and White expect that the smaller end of the European telecoms sector – young, fast-growing companies like Esat – will continue to be a source of M&A deals in 2000. “Working for [little companies getting big quick] is almost as exciting as the really big deals,” says Blakesley. As for the larger deals, his expectation for 2000 is: “I think you will see a PTT merger in Europe this year. Mid-sized PTTs are the most likely candidates, because they lack scale are and losing ground.”
John White predicts transatlantic telecoms deals in 2000: “Scale is the issue in the global telecoms game. You will get at least one big transatlantic deal this year of over $80 billion, involving players with a small footprint who need to fill it out.”
Marcus Walker
Lehman’s Italian insiders
“In the end, Fiat could merge its autos business with a major European or US player to focus itself on industrial machinery where it already has New Holland and it could become global leader by buying one of the other big US players.” The person talking is Lehman Brothers’ head of European M&A, Vittorio Pignatti-Morano. Amid the rampant speculation about what the Agnelli family will do with their car company, Pignatti’s is an unusually authoritative opinion. One outcome that might fit his analysis would be the sale of the cars business to DaimlerChrysler and a transatlantic bid for John Deer.
| Vittorio Pignatti | ||||||
The 43-year old Pignatti is one of the more influential figures amid the narrow lanes and piazzas of the Milan’s financial district. In his 20-year career at the top of Italian investment banking, he has handled many of the major deals that have reshaped the country’s economy. Pignatti joined Lehman in 1988 after seven years as director of investment banking at Paribas Italia, and a stint at Manufacturers Hanover in New York after completing a masters degree in economics at Columbia. At Lehman, he was the first recruit of present vice-chairman Ruggero Magnoni, whom Lehman chairman Peter Cohen had hired to open a Milan office and re-establish the firm’s name in Italy. “It was exciting,” Pignatti recalls: “we started doing M&A, equity and tax products from the beginning, when in Italy there was basically nothing. Other American firms at the time were cautious about entering a market where the only issuer was the treasury.”
Olivetti’s audacious takeover of Telecom Italia is probably Pignatti’s masterwork. It required not merely banking skills but intricate diplomacy in Italy’s business and government circles.
Another landmark in Italian M&A was the sale of BCI to Banca Intesa last year. The fate of BCI had preoccupied the country’s most powerful financial clans for years. Intesa’s offer for BCI was invited by Mediobanca, the secretive Milanese investment bank, after Mediobanca and its allies had defeated earlier approaches to BCI by Sanpaolo IMI and UniCredito Italiano.
Having worked closely with the protagonists of the BCI saga, Pignatti doesn’t seem impressed by Italy’s financial system. “For 50 years, competition in the banking system has been prevented because it was feared it could have been damaging to the stability of the country. Now competition has been imposed from abroad but the people at the helm are still keen to see a managed liberalization process.” But Italy is not unique in this respect, as Pignatti points out.
Born in Emilia, the region north of Bologna less famous for finance than for its cuisine and its car companies like Ferrari, Bugatti and Lamborghini, Pignatti has picked up a characteristic Milanese way of talking, combining high-speed and flamboyancy. His conversation throws off clues about the next developments in Italian business.
Thus, when everybody in Italy supposes that UniCredito Italiano will buy Banca Nazionale del Lavoro (BNL) to increase its size before it merges with Spanish giant Banco Bilbao Vizcaya-Argentaria, Pignatti believes that BNL could well merge with Banca di Roma instead. He says: “This alternative would require substantial cuts as the two banks have substantial market overlap.” A harsh cost-cutting deal might prove difficult in Italian banking. More likely is that stability rather than profitability will be the main concern. The powers behind a possible BNL-Banca di Roma deal are the Bank of Italy, to which both lacklustre banks are traditionally close; and Mediobanca, which would thereby secure the fate of its shareholder Banca di Roma. Such an outcome would cast a further shadow on the transparency of the banking sector.
Alessandro Foti, Lehman’s present-day head of Italian M&A, is not happy either with the way Italian banking consolidation has proceeded. After two years of merger mania, the most successful acquirer has turned out to be Banca Intesa: a holding company created in 1998, which runs a federation of banking franchises including Cariplo, Ambroveneto and now of course BCI. But every bank is run mainly for itself and there are few Anglo Saxon-style synergies. “The federative system is definitely not the most efficient but it is a sort of compromise that for the moment works in Italy,” Foti says.
Foti is the latest rising star of the Italian connection at Lehman, following in the footsteps of Magnoni and Pignatti. Still in his late thirties, he joined Lehman in 1996 after spending seven years in Mediobanca’s department for participations and special affairs, the most influential section of the powerful firm. There Foti was involved in major deals for clients such as Pirelli, Montedison and Gemina, as well as the restructuring of the Ferruzzi industrial empire.
Foti enthuses about the internet revolution that could provide a significant boost to an Italian economy dominated by medium-sized companies. “I think we have been very lucky,” he says: “The internet revolution gives small and medium enterprises the opportunity to be competitive and Italy is very rich in talent in that respect.”
He expects M&A deals for media and internet companies will abound in Italy this year, and names publisher De Agostini or yellow-pages publisher and internet portal Seat Pagine Gialle as the most immediate candidates for deals. His words find confirmation two days later when Telecom Italia scraps the plans to float its internet unit and merges the unit with Seat, turning Seat’s shares into the stock of Telecom Italia’s Tin.it.
But the most intriguing media player in Italy is Mediaset. It forms the private-sector pillar of a television duopoly shared with the state broadcaster RAI. More importantly, it is the vehicle of Silvio Berlusconi, the Milanese tycoon and former prime minister, who will stand for election next year as the main candidate of a centre-right alliance, bringing with him this huge conflict of interest.
Berlusconi’s dilemma is to keep Mediaset and lose the elections, or give himself a good chance of winning at the polls after solving his conflict of interest and selling Mediaset. So far, Berlusconi has not made his decision: hence he has not tried much to push the present centre-left government into new elections.
Mediaset is too small to compete on a pan-European scale. It has a limited business in Spain and failed to break into France in the early 1990s. Pignatti’s view is that there could be “an alliance with a major European group.” Media companies such as Canal Plus or the Munich-based Kirch might be interested in bidding for it, but the powerful Bertelsmann might just turn out to be the winner.
And if you’re wondering how close Lehman Brothers is to Berlusconi, it suffices to know that the bank will be involved later this year in the IPO of Berlusconi’s most beloved asset: soccer club AC Milan.
Luciano Mondellini
The media-internet matchmakers
A difficulty in understanding media-sector M&A is that the explosive advent of the internet has blurred the definition of the industry. But it’s not a problem the media team at Warburg Dillon Read, which has advised on some $36 billion of announced transactions since the end of July 1999, is complaining about too vociferously.
| Simon Warshaw | ||||||
Simon Warshaw, who heads up the London-based media group, says the bank’s track record of advising clients such as Canal Plus, Reed Elsevier, Carlton, EMI and Mirror Group in recent transactions has established the ideal springboard from which to target internet-related deals in future.
“We define media as broadcasting, which includes free and pay TV,” he explains, “as well as consumer, business and professional publishing, recorded music, cinema, sports rights, radio, outdoor advertising, directories and, of course, the internet-based activities of these groups.”
The inevitable challenge – and complication – is that there are teams within the bank covering other industrial sectors which also have a claim on involvement in the dot com sector. “The media companies are the ones which understand content, communities and advertising, and a lot of the dot com businesses in various sectors revolve around those concepts.”
Warburg’s solution to the overlaps which arise as the internet invades almost every industry sector has been to establish what it calls its European internet group. A joint venture between the bank’s corporate finance and research, this is to be a dedicated team of 40 bankers and 15 analysts. The nine-strong media team led by Warshaw will be an integral part of this group, bringing to the party the team’s relationships with players in the traditional media sector including Reuters, EMI, Mirror, Carlton, Canal Plus, Cordiant and Euromoney.
Multi-billion dollar consolidation activity has yet to become an entrenched way of life in the internet sector as it has in the banking or telecoms. But Warshaw is convinced that the recently announced AOL/Time Warner tie-up is a harbinger of what lies ahead in the broader internet world. “The AOL/Time Warner deal has cemented the relationship between new and old media. It has underpinned the value of content because it has shown that people recognize that relatively new internet companies are unable to develop the creative skills, the libraries and the familiarity with content that the established media players have developed.”
Equally important is that the AOL/Time Warner liaison has provided some hints as to how future mergers between old and new economy players may be financed. “I think that the time has now come when some of these new companies can start to use their very highly rated paper to acquire cash-generative traditional media assets,” says Warshaw. “The one thing that AOL/Time Warner clearly demonstrated is that the value of this paper is real. Although a discount may have to be applied to it, it is evident that it can be used to acquire real assets. For the time being Europe is not a homogeneous market and there are very few companies of the size and scale of AOL that could do an equivalent transaction in Europe. But I would not be surprised if we see an equivalent transaction here at some stage over the next 12 months.”
Phillip Moore
Corporate Britain: neglected and stressed
David Verey, chairman and chief executive of Lazard London, will find sympathizers among experienced British businessmen and bankers when he expresses dismay at the low stock prices of numerous sectors. “If you strip out the technology stocks and a few others, we are in a huge bear market,” he says. “I don’t want to overdramatize, but it has a feel across a number of sectors of being similar to 1974 [when the stockmarket collapsed]: share prices of major companies across industrial and commercial Britain have halved in less than a year. Some have fallen by more, some in an even shorter period. There’s something quite unusual going on. Companies do well, increase their profits and expand their business, and their share price goes down by 30% in a day. I’ve been seeing a lot of CEOs who run good, sound British businesses and they are completely fed up.”
Over-hyped shares
So does that mean Lazard is skeptical about the merits of investment in the much-hyped new economy? Verey says: “There is no question that the shares of some companies are hugely over-hyped. What worries me is that when you meet young internet companies, the person who does all the talking is the marketing guy. Now, some of those companies will be successful. We’re doing a huge amount of work in the area, as is everybody else. But we have to be very careful that in a wave of excitement we don’t fling all our people at the internet.”
There remains the rest of the economy, currently unfashionable though it may be, and many of Lazard’s corporate clients may seek its advice on how to stay independent. Because Verey says: “From an M&A point of view, [the current selective bear market] has two effects. Investment bankers get on their ponies, zoom off to potential buyers and say ‘golly this stuff’s cheap’. And it has the effect of making possible predators look at the UK market much more closely.”
Verey says: “Deals between UK companies will continue to happen, but it is not going to be mega, because people’s confidence has been knocked. The UK participant who a few years ago might have had a crack at his competitor has seen his share price collapse. He is scared witless that if he makes a bid for somebody else, the same will happen as happened to Glaxo: his share price will fall 30%.”
Despite the opportunities for cross-border bids for British companies, Lazard won’t be pitching aggressively to win mandates from opportunistic raiders. Verey says: “One of the things that we are very conscious of is that relationships are important. Reputation is important. We have a lot of clients with whom we have had a lot of repeat business, and we intend to keep it that way. Our aim is to help our clients. Doing transactions for the sake of doing transactions is not what we’re in business for.”
This relaxed attitude about whether Lazard bags megabuck fees or not is characteristic, long-standing, and to the firm’s more aggressive rivals, probably rather eccentric. But it is engrained in the Lazard houses’ culture, and is only made possible by being the last major international partnership to survive in the M&A business. “Our view is that we must be on the same side as the clients,” says Verey. “We don’t have to sell anything or do any transaction. If you are a firm that is driven by the necessity of doing transactions, then inevitably your people will behave in a different way.”
One of Lazard’s most recent UK deals was the sale in January of Schroders’ M&A business to Salomon Smith Barney for $2.2 billion. Schroders had slipped alarmingly down the European M&A league tables, losing market share to aggressive American investment banks. Was it ominous for Lazard London to work on this deal: one blue-blooded British advisory house advising on the demise of another?
“We are extraordinarily lucky not to be in the same position,” says Verey. Lazard’s transatlantic character, he argues, marks it out from Schroders and other European-establishment firms. “Lazard Frères in New York is a great American investment bank. That the American firms have made progress in Europe and the UK is not at all surprising to us: we have made progress in the UK because of being in part an American investment bank.”
Marcus Walker
Merrill the mobile specialist
Merrill Lynch’s telecoms M&A team has been involved in nearly all the major mobile-phone consolidation moves of the past year. It advised Bell Atlantic on its purchase of control in Vodafone AirTouch’s US wireless business; Cable&Wireless on selling One2One to Deutsche Telekom; Mannesmann on acquiring both Omnitel and Orange; Bell South on taking control of Germany’s E-Plus in alliance with KPN; and Mannesmann on its defence against Vodafone.
| Olivier Perraudin | ||||||
The bank’s head of European telecoms M&A is Frenchman Olivier Perraudin, a Merrill Lynch man for 16 years in the US and Europe. He explains the pattern in the deals he has worked on: “Very early in 1997 we realized that consolidation and the restructuring of ownership of wireless operators was crucial. What we are seeing in the sector is operators aiming for control of their assets and footprint and unwinding complex ownership structures. Before, everyone was holding each other’s tail.”
Mannesmann was a central player in acting to rationalize Europe’s complex telecoms ownership, pressing aggressively to take control of businesses in Italy and the UK – too aggressively, as it turned out, for the company’s independent survival. But Vodafone’s acquisition of the Mannesmann group amounts to a continuation of the latter’s strategy: Vodafone now has a controlled footprint in several major European markets.
Perraudin is, up to a point, pleased with the outcome of the Mannesmann-Vodafone battle. “If I am a shareholder of Mannesmann, this was the most beautiful coup ever. People have to ask themselves who really won this battle. The biggest winners of all are the Orange shareholders. In the space of four months, approximately e100 billion, e190 per share, was created. As for Mannesmann shareholders, the acquisition of Orange was a highly value-enhancing transaction, as it created a significant re-rating of wireless stocks and commanded a large control premium from Vodafone.”
He says that Vodafone’s victory has put tangible pressure on rivals: “You would not believe what Vodafone-Mannesmann has triggered among CEOs in terms of reopening channels that had closed. They face a e300 billion giant, trading at more than 30 times cashflow.”
In 2000, so many telecoms players have so much left to do to establish convincing European footprints that the permutations are almost endless. Deutsche Telekom has a very uneven presence in Europe: the rumour mill has been suggesting a renewed attempt to merge with Telecom Italia. France Télécom needs to move a little faster than in the past, after failing to win E-Plus in Germany. Holland’s KPN has made a couple of smaller acquisitions, but needs a big deal. Telecom Italia may take its mobile subsidiary Tim into a cross-border deal.
But the company that has really lost its way, following the Vodafone-Mannesmann episode, is BT. It felt most comfortable taking minority stakes everywhere it could get them, but with rivals aggressively pursuing control, the strategy now looks to have backfired. BT also gambled on a partner, Vivendi, that is not the easiest ally to live with.
The two most imminent scraps in European telecoms may be between BT and Vodafone, which lacks a serious presence in France, for Vivendi’s telecoms assets; and between several European groups for the now highly expensive Orange, which Vodafone has to split off from its conquest, Mannesmann.
Telecoms looks set to dominate European M&A league tables once more. Perraudin is planning another busy year.
Marcus Walker
Germany after Mannesmann
Does Vodafone AirTouch’s groundbreaking takeover of Mannesmann signal that Germany is now a wild M&A jungle? One of Mannesmann’s defence advisers takes a balanced view. Christian Thun-Hohenstein, global co-head of the telecoms and media group at Deutsche Bank, says: “It does signify corporate change to a certain extent, but Mannesmann was a special situation. Among the Dax companies, Mannesmann was the most obvious candidate for a hostile takeover because it had 60% foreign shareholders and no one held a blocking stake. And it was in a very sought-after sector.
| It was unusual among Dax companies | ||||||
“On the other hand,” he continues, “it showed to German society for the first time that the shareholders have the last say. It also showed that German shareholders, especially institutional, are no different in how they make their investment decisions to any sophisticated portfolio manager around the world. Four or five years ago, this was different.”
Thun-Hohenstein is anxious to refute foreign clichés about Germany being a sclerotic economy with a lingering affection for the nebulous idea of the stakeholder. Here, Thun-Hohenstein makes a distinction between two levels of the German economy: “The macro level is still very complex and difficult. But the micro picture is much better than people realize. Individual companies like DaimlerChrysler or SAP are doing very progressive shareholder-value management. There is so much happening under the surface that is dynamic and gets around the restrictive labour laws.”
For instance, start-up companies sidestep the difficulty that many German corporations face in laying off staff – which is sometimes a strong disincentive to hiring them – by putting all employees on six-month contracts. That gives some new-economy entrepreneurs complete flexibility.
Another reason why Germany is more quickly learning to live with the idea of foreign takeovers of its companies than, say, France, is that Germany remains psychologically a fragmented country where regional identities can be stronger than nationwide patriotism. Many Bavarians, for example, couldn’t give a hoot about Germany as a whole, and an economic policy based on nationalism doesn’t find many supporters.
All this means that Germany may be one of Europe’s liveliest markets for M&A during 2000 and beyond. Activity will vary greatly between sectors, however. In traditionally strong industrial sectors like machine tools and engineering, a lot of consolidation has already taken place, notably the Thyssen-Krupp merger. There remains the disposal of Mannesmann’s numerous non-telecoms businesses including engineering, perhaps to industry buyers if the desired flotation looks financially unrewarding.
The car industry has made most of its intra-German moves already, but there remains the question of BMW. Speculation has surrounded the Bavarian company for years, the assumption being that it lacks the scale to survive in a globalized autos business. German utilities such as RWE and Viag-Veba are now busy with their domestic consolidation moves; the next stage will be cross-border deals. The chemicals and healthcare sectors have more to do, at home and abroad.
But above all, Germany needs consolidation in banking. If Germany’s banks – including even Deutsche Bank – want to do cross-border deals to establish a pan-European position, they may need stronger market shares at home.
One area where German banks are particularly keen to play catch-up is the M&A and corporate finance business itself. Deutsche Bank is not the power in M&A that it is in, say, Eurobonds. And US firms, especially Goldman Sachs, have done more than Deutsche to foster today’s German M&A market. Deutsche’s biggest single strength is in bringing companies to the Neuer Market growth stock exchange. Thun-Hohenstein and his colleagues face an uphill struggle to break into the pan-European M&A elite.
Marcus Walker
Morgan Stanley’s drugs deals
When you’ve advised on 13 of the 15 largest M&A transactions an individual sector has ever seen, it helps to be enthusiastic about the industry in question. And it is impossible to spend even a short time discussing the healthcare sector with Robert Bradway of Morgan Stanley Dean Witter without sensing his passion for the industry. Bradway, head of the bank’s European team in healthcare investment banking, can speak about genotypes and phenotypes with authority and enthusiasm.
According to Bradway: “We were the first bank on Wall Street to create a specially focused healthcare group. We did so in 1983 in order to respond to the changes which were taking place in the US market, both in terms of the way health care was being reimbursed and in the way new opportunities were being developed in biotechnology.”
In 1990, the bank broadened this franchise to cover Europe and Japan, and today, Bradway says, its global team has between 50 and 60 professionals (research analysts included) devoted to the healthcare sector. The expansion has paid handsome dividends. European examples of the team’s credentials include, inter alia, its role as adviser to SmithKline Beecham in its proposed (if long-winded) $79 billion tie-up with Glaxo, and Astra in its $31.8 billion merger with Zeneca; Sandoz in its $28.2 billion deal with Ciba Geigy to create today’s Novartis, and Hoechst in the $28.5 billion life-sciences merger with Rhone-Poulenc that created Aventis.
Each of the deals on which Morgan Stanley has advised, says Bradway, has been fuelled by the conversion within European boardrooms to shareholder value. In this respect he views the Sandoz-Ciba Geigy merger as a critical landmark in the recent evolution of the pharmaceuticals industry. “In many respects the Novartis deal catalysed the whole wave of consolidation we have been seeing in Europe because the shareholder value that was created by the transaction was so dramatic,” he says. “It led a number of managers and boards in the industry favourably to reconsider mergers of this kind because it showed that consolidation, as well as innovation, was a critical way of creating value. Additionally, the fact that it was a merger between two Swiss companies proved that shareholder value was no longer just an Anglo-Saxon phenomenon.”
In terms of size and influence, the Swiss deal has probably since been eclipsed by the pending SmithKline-Glaxo union, which Morgan Stanley has been working on since the two giants started courting more than two years ago. “Clearly that deal is of critical importance inasmuch as its strategic impact on the industry will be felt for many years,” says Bradway. “It creates the world’s largest drugs company. It also creates the world’s largest R&D budget at a time when many believe there will be considerable first mover advantages resulting from the explosion of molecular information that is available as the basis for the development of new medical products.”
Bradway says that the SmithKline-Glaxo deal provides a striking example of the competitive advantages that his team enjoys over Morgan Stanley’s competitors. Before the transaction originally emerged more than two years ago, SmithKline was in merger discussions with American Home Products. “That required a combination on our part of transaction expertise able to focus on the key issues in both the US and the UK,” he says. “But when SmithKline and Glaxo announced that they were having discussions meaning it was going to be a UK:UK deal, our same team was able to deliver advice to the client without skipping a beat.”
Taking the Merck out of Astra
Another example of industry-specific advice which was decisive in cementing an M&A transaction, says Bradway, arose from the role the bank played in advising Astra over its negotiations with Zeneca. A fundamental stumbling block to this transaction was a long-standing joint venture Astra had in the US market with Merck. “Two thirds of the world’s drugs profits are made in the US, and the joint venture gave Merck substantial rights to Astra’s prescription product sales in the US,” he explains. “So finding a way out of the joint venture was of critical importance to the Zeneca transaction. We found financial solutions which were aligned with the objectives of Astra and Merck. So it was an amicable process, but it was also a very complicated one.”
Finding the right solution to dilemmas of this nature, says Bradway, is incalculably more important to corporate clients than fee structures. “These are one-off bespoke transactions, and in many cases play a big role in influencing the careers of CEOs and boards approving them,” he says. “That is why clients’ primary interest is in securing the right advice. It’s not like doing a bond issue where you can apply the same template over and over again.”
Phillip Moore
No stars please, we’re Goldman
Goldman has been involved in most of the big banking and insurance transactions of 1999 and 2000. Deals arranged include the Banco Santander-BCH merger, BNP’s hostile acquisition of Paribas, Generali’s conquest of rival insurer INA, Banca Intesa’s great coup in winning the sought-after hand of Banca Commerciale Italiana, Lloyds TSB’s purchase of Scottish Widows, and the clever hostile takeover of NatWest by Royal Bank of Scotland (see box).
| Andrew Chisholm | ||||||
Goldman’s relatively low staff turnover has left a highly experienced financial institutions team in place. Andrew Chisholm, who heads the European group jointly with Chris French, is a good example: a Goldman M&A man since 1985. Many of his 45 executives in the group also have long experience of numerous major European deals.
The group uses this pool of experience flexibly, assembling and disassembling teams for particular deals that combine FIG experts, country experts and capital-securities specialists. “You put them all together, and you’re off to the races,” says Chisholm. The firm requires team players, rather than the star culture that many banks’ M&A teams display. Chisholm says: “There are many members of the group whose names do not get written in lights but who are doing incredibly impressive work all around Europe.”
Chisholm comes fresh from helping Royal Bank of Scotland (RBS) buy NatWest. The deal was a high-profile example of the problem facing the financial-institutions sector in today’s stockmarket climate: whenever RBS looked like winning, its shares plummeted. In contrast, Chisholm’s colleagues working on the far more fashionable Vodafone-Mannesmann deal got to watch their client’s share price rise relentlessly. “It was a constant frustration to watch prices in the banking sector decline as prices rose day-by-day in the telecoms sector,” he says; as for his industry’s current depressed valuation, he adds: “I believe it has overshot.”
What do banks have to do to recover from their sectoral bear market? The answer for incumbents in particular, says Chisholm, is to prove that they can win from the new economy, and to be aggressive on businesses that aren’t yet mature and commoditized. “Financial institutions needs to prove that there is top-line growth potential in addition to more widely publicized efficiency gains.”
Surveying the European scene for this year, Chisholm sees Italy and Germany as rich in potential for banking M&A deals. “The sheer number of financial institutions in Germany with meaningful asset bases is staggering. That leads to fragmentation of the market, with low domestic market shares and a resulting pressure for consolidation.”
“In Italy, there are still a number of big players who will continue to consolidate, and more mid-sized players who will come together, often amongst themselves, especially in the banche popolari sector.”
As for cross-border banking deals: so far, European institutions have trodden cautiously. The preferred method, taken furthest so far by BSCH, is to build up a set of family relations and decide later exactly what you’re going to do with them. Chisholm says: “I think there will be a lot more of it: product-line alliances, constellations of cross-shareholdings, and it will get more and more complicated. The participants in those transactions will be required over time to demonstrate that the arrangements can be translated into shareholder value.”
Marcus Walker
France, home of the hostile deal
Lest anyone should think, following Mannesmann’s takeover, that Germany is now a more open and laissez-faire M&A market than France, Lazard Paris partner George Ralli insists his home market is open to any kind of dealmaking, including even cross-border raids.
Ralli, the firm’s co-head of M&A in France, says: “Hostiles are frequent on the French market – frankly speaking, more than in Germany. Hostile deals with French targets have been made so far by French companies but I don’t see any reason for foreign companies not doing hostiles successfully in France.”
Lazard was heavily involved in the biggest French takeover battle so far, advising oil company Elf Aquitaine on its defence and eventually agreed acquisition by Franco-Belgian rival TotalFina in August-September last year. Certainly, TotalFina’s aggression showed what was possible in France; but Lazard and Elf’s other defence advisers from Morgan Stanley and Goldman Sachs found it difficult to find a white knight from abroad, such as Chevron of the US, that French political circles would stomach. Elf tried a pacman defence of counterbidding for TotalFina, before giving in to a raised offer.
Ralli says: “In the case of Elf, a white knight was not obvious. It was partly for political reasons, there was the [government’s] golden share [in Elf], but it was more psychological than anything else. More important was that most of the synergies of an Elf-Total deal were not achievable from a foreign white knight.”
He sees convergence among European M&A markets, because corporate ownership is cosmopolitan. “I’m not sure that it is totally relevant today to speak about French or German or UK companies. You have to look at the shareholders of the companies, and the shareholdings of Vodafone, Mannesmann or Vivendi are not so fundamentally different.”
If the style of M&A business is becoming more uniform all across Europe, that may favour those M&A advisory firms with the strongest pan-European presence. These appear to be the top US investment banks. Does Lazard fear their encroachment in France? Ralli’s co-head of M&A, Jean-Jacques Guiony, believes the firm is holding its own. “In France, you have Goldman Sachs and Morgan Stanley for the Americans and Rothschild and Lazard for the French. In the league tables for the past five or six years, you find the same four names in different order every year.”
French M&A will cease to be a domestic affair in 2000, believes Guiony. Much consolidation has already happened in sectors including insurance, banking, oil and gas, and utilities. Guiony says: “Some French companies are getting quite strong now in their equity and their ability to make acquisitions abroad. Maybe we’ll see more activity from French companies buying abroad, rather than merging among themselves.”
However, Guiony notes that he thought the same might be true one year ago. Instead, the domestic market produced a string of takeovers that no one would have predicted. Lazard’s partners aren’t discounting another year of French fireworks.
Marcus Walker
In power plays, size matters
For Merrill Lynch’s European energy and power group, size matters. This is partially in the nature of the industry: it is not, after all, the internet sector, in which a dialogue with today’s minnows can develop into lucrative relationships with the industry giants of next year. In the energy sector, in contrast, consolidation is transferring control over sizeable chunks of some economies’ GDP from company to company – often across borders. The most obvious example of this trend is in Latin America, where Merrill Lynch advised Repsol on its $15.4 billion acquisition of YPF in Argentina and Endesa on its fiercely contested $1.4 billion struggle for control over Chile’s Enersis. If Spanish companies are behaving like modern-day corporate conquistadores in Latin America, Merrill has played a pivotal role in the invaders’ operations room.
The dynamics of the energy sector are such that the deals that Merrill had advised on aren’t just big, but pipe-burstingly big. On top of the Spanish-Latin American deals, Merrill Lynch has recently advised BP on its $61.7 billion merger with Amoco, Total on its $13 billion acquisition of PetroFina and on the merged group’s subsequent $57.5 billion all-stock offer for Elf Aquitaine. In transatlantic deals bringing together US and UK operators, Merrill’s portfolio has included advising Texas Energy on its $10.5 billion bid for The Energy Group, and Scottish Power on its $12.6 billion purchase of PacifiCorp.
Record breakers
Lewis Lee, head of Merrill’s European energy and power group, boasts: “The Texas Utilities acquisition of The Energy Group was the largest ever acquisition of a foreign company by a US acquirer. Repsol’s acquisition of YPF was the largest ever by a Spanish company in Latin America and Elf-Total was the biggest transaction ever completed in France. Enel’s IPO [in which Merrill had a lead role] was the largest ever in the western world.”
Merrill Lynch’s advice has at times extended to telling clients that a proposed deal was ill-advised. This is important in the utilities sector, for example, where growth-hungry companies have already made mistakes in abundance. “I have a rule about advising clients against doing a deal,” says Lee. “Tell them three times and then it’s up to them. It is important to remember that it is their company, not ours. But it is also important to be honest about what you think, not just in the context of an individual transaction but for the sake of the future relationship with the client. We also refuse proposed mandates, generally because a deal is too small.” Once again, size matters.
Phillip Moore
Morgan takes the chequered flag
JP Morgan finished laps ahead of its rivals in 1999, as far as automotive deals in Europe were concerned. The blue-chip US investment bank advised on deals worth over $22 billion and gained 63.3% of the market. DaimlerChrysler, LucasVarity, Volvo and Nissan all took its advice.
| Larry Slaughter | ||||||
Automotive industry consolidation is driving some very large cross-border deals, and JP Morgan’s 20-strong autos team has been involved in most of them. For example, the deal it engineered for Volvo to sell its passenger car business to Ford showed not just global reach, but also the bank’s toughness at the negotiating table. Analysts say that $6.5 billion was seen at the time as a high price for Volvo’s car business, although the price included rights to the Volvo brand for application in cars, mini-vans and light trucks.
JP Morgan’s European experience also enabled it to help Nissan deal with a serious debt problem. The Japanese car maker needed a capital injection, and Morgan suggested it link with a strategic partner. Morgan put Nissan in touch with a number of companies, including DaimlerChrysler, Ford and Renault. DaimlerChrysler and Ford did not last the course, but Renault was persistent and ended up paying $5.4 billion for a 36.8% stake in Nissan Motors plus 19.2% in Nissan Diesel. It put Nissan into the number-four position by volume in the car industry, behind Toyota but ahead of VW and DaimlerChrysler.
The deal had important implications for the original equipment manufacturers (OEM) industry. It was the first Euro-Japanese combination of companies and was of such a scale that a number of French equipment suppliers decided to follow the Renault lead and set up or acquire businesses in Japan. JP Morgan’s contribution to Nissan was two-fold, says Larry Slaughter, the senior member of the bank’s automotive team. The first was “financial rigour”, and the second was a long history of working in Europe. This meant that it could provide “a tactical perspective on what the French were thinking,” says Slaughter.
Clients want advice on strategic issues as well as tactics. For example, every auto industry player wants to benefit from e-commerce, for example by reducing the time it takes to access parts, so that more cars are made to order rather than sitting unsold. “There’s an enormous amount of costs buried there,” says Slaughter. Clients are now approaching the bank with a view to taking investments in e-commerce companies.
While Morgan can claim dominance of the automotive sector, one salutary fact may come to haunt it. Consolidation will result in a very small number of companies surviving in the industry. “There are far too many automotive manufacturers right now. Many are not earning a sufficient return on their capital and there’s the likelihood of globalization and consolidation.” Slaughter is not prepared to put a number on the likely survivors in ten years’ time. While five vast global concerns may be too few, eight survivors sounds a reasonable possibility, he says.
Nick Kochan
Britain’s bank battle
A highly unusual takeover contest ended on Friday February 11 when the long-mismanaged National Westminster Bank succumbed to a £21 billion hostile takeover by Royal Bank of Scotland (RBS).
The unusual aspect was that NatWest came under two extremely similar offers from two rather similar bidders – RBS, and Bank of Scotland (BOS) — while NatWest itself offered a stand-alone defence based on disposals and cost-cutting that resembled both bidders’ plans. The danger arose that when NatWest shareholders decided whom to support, there would be a three-way split, leaving both bids defeated, NatWest discredited, and shareholders baffled.
It was a nail-biting finish, as bidders lobbied institutions for support. When Phillips&Drew came out for Bank of Scotland, it appeared decisive. Royal Bank’s share price started to rise, meaning that the market thought it was going to lose the contest and become a takeover target itself.
But Royal Bank’s advisers at Goldman Sachs and Merrill Lynch had prepared a clever scheme to snatch victory from BOS. They persuaded a number of shareholders owning around 0.5% to 1% of NatWest, who were unwilling to show their hand in public, to sign up for Royal Bank as a group and in private. The press release on February 8 saying that Royal Bank had 13% support (it became 18% overnight) stole the momentum from BOS. After a few days of dithering while the RBS share price fell back, NatWest’s directors finally gave in.
What would NatWest have done in the event of a three-way split? Both Scottish bidders and their advisers thought NatWest was hoping for this outcome as a way to get off the hook. But NatWest’s adviser Terry Eccles, co-head of JP Morgan’s global financial institutions group, says the bank had long decided against such a shameless tactic. “It would have depended what the three-way split was,” says Eccles. “If there was overwhelming support for NatWest to lose its independence, we could have pulled the two Scots into a room and asked them to increase their bids. The board would have recommended the better of the two.”
In fact, says Eccles, the board had kept an open mind from the very beginning about which outcome it preferred. From the start, NatWest’s advisers did three things: they attacked the credibility of BOS’s bid, drew up a possible stand-alone defence strategy, and scoured the banking world to see who might play white knight.
The latter option proved tricky: European and US banks aren’t looking at island Britain for their expansion strategies. NatWest received only three serious expressions of interest. The first came from one of Britain’s major banks – the name remains secret, but it was probably the predatory Lloyds TSB, or perhaps HSBC. It came to nothing because the deal would certainly end up mired in an antitrust investigation.
The second, which has never been made public before, came from Abbey National Bank, which could have offered a better bid than Bank of Scotland because it had more overlap with NatWest’s network in England, and therefore could achieve more synergies. If Abbey had made an offer, the NatWest board would have recommended it. But Abbey was nervous about involvement in a contested takeover, and feared rumours that someone else out there was eyeing Abbey up as prey.
The third inquirer had stronger nerves: Royal Bank of Scotland made an offer to NatWest on November 26 and told NatWest to respond the next morning. The target’s board said no, but encouraged RBS to raise its bid. Eccles says: “We wanted the Royal Bank to enter the frame, because we knew institutions were unhappy with NatWest and in the event that we were to lose independence, you’re going to get the best price for shareholders with two bidders.”
RBS had decided to go for NatWest after pondering whether to let BOS take over NatWest, and itself take a pop at Barclays Bank, another English-based underperformer. RBS had tried to open merger talks with Barclays months earlier but got nowhere. The feeling of RBS chief executive Sir George Mathewson, however, was that if you initiate a hostile takeover contest, you tend not to win. Instead, Mathewson tried hard to win NatWest’s endorsement.
NatWest’s advisers presented the board with a method for evaluating the two bids and a stand-alone option that bore in mind the weakness of UK banking stocks. If NatWest were to recommend an RBS takeover, the value of RBS paper would probably plummet. RBS found itself in precisely the hostile shoot-out it had hoped to avoid. It was only the nimbleness of its advisers in the final days that allowed it to pip its Edinburgh rival BOS.
But victory came at a high cost to the RBS share price. By February 23, RBS shares were 47% lower than on November 27 when it went public with its NatWest offer. That’s a large underperformance of the FTSE bank index, which fell 28% in the same period. The worst that NatWest, sick-man of the sector, has underperformed the bank index was 13% in early September. By winning the battle, has RBS caught the NatWest disease?
Marcus Walker
