WITH the euro soaring last week to $1.3383 against the US dollar, some consider that European companies are on the lookout for bargains and are poised to charge into America, snapping up easy acquisitions that may be at a 40 per cent discount compared to valuations of three years ago.
The theory is that European investors could buy cheaply now and watch their investments reap large returns as the dollar rises at some point in the future. However, the figures do not provide support for this theory.
Global Mergers & Acquisitions (M&A) activity stands at about $1.8 trillion in 2004, compared with $1.4 trillion in 2003; which is well down from the peak of $3.5 trillion in 2000. The main buyers today are private equity firms, which are generally the US firms buying in the US and in Europe. So it appears it is actually US and European firms buying in Europe, as opposed to purchasing cheaper targets in the US.
One of the reasons for the lack of interest of European firms to make purchases in the US is because a company bought with cheap dollars brings in revenue in that same weak currency. M&A activity takes into account currency adjusted valuations but is not driven by currency considerations. It is driven by long term strategic value or business reasons.
Put simply, you do not do M&A because of a falling currency; you buy something for strategic or business reasons. CEOs have become very cautious after the boom and excesses of the 1990s. This hesitancy is only starting to decline as we see growth in the M&A world figures. Various EU banks have been very active in acquiring Balkan financial institutions, particularly those in new EU states and prospective ones for 2007.
Despite CEO timidity, there is an increasing need today in the EU of 25 member states for co-operation between companies from different member states. Indeed, such co-operation is an essential part of making Europe more competitive. There is an even greater need in the now enlarged Union. But there are many hindrances. There are still national legal barriers which prevent cross border mergers in EU countries. For example cross-border mergers are quite simply not legal in the Netherlands, Sweden, Ireland, Greece, Germany, Finland, Denmark and Austria.
The 25 EU countries have taken a major step by approving a proposed directive on cross border mergers within the single market. It is an important step which tries to bridge the gaps between national laws and provide trans-national rules. It will mean that acquiring companies will be able to avoid the expensive and inefficient step of having to set up a subsidiary in the target company's home state to take it over.
The EU's grand goal of becoming the world's most competitive and dynamic knowledge-based economy by the end of this decade means that it has to create a framework for cross border mergers. The idea is not just to create a deeper single market, but also to boost the EU's sluggish growth and cut its high unemployment. The proposed directive setting out a single set of rules for mergers of companies across national borders is a step in the rights direction. This initiative has finally come to fruition after 20 years of discussion and debate. Despite that investment of time and effort, and despite the ambitious goals described by the Lisbon Agenda, the resulting directive is less than what was hoped, but at least it is off the ground.
Creating common rules for cross-border mergers may seem like dull stuff, yet it is very crucial and much needed reform. At present, the EU's merger rules are a piecemeal of national laws. In many countries there is no clear legal way to combine one firm with another in a different EU country. Instead, firms use costly legal contortions to do this, putting SMEs at a serious disadvantage. This is one of the main reasons that mergers remain far less common in the EU than in America. A more vigorous market for corporate control will boost EU productivity and create more efficient firms by reallocating excess capacity. Unfortunately, European governments have preferred to artificially create 'national champions' by picking merger partners for their largest firms. Germany and France have been the most active to engage in such inefficient and usually failed practices.
The law that paved the way for compromise and the possible success of the cross border mergers directive was the European Company Statute, which came into effect in October. Under that law, companies or subsidiaries from different EU countries are allowed to combine as a 'Societas Europea,' a new legal form of company. It is aimed at companies which need to re-organise their business on a Europe-wide scale. However, most SMEs wanting to engage in a cross border merger don't wish to create a European Company because they usually don't want to operate in many EU states. Many smaller companies are likely to prefer straightforward cross-border mergers to the hurdle of adopting a new legal status. The new proposed directive will apply to both public and private limited liability companies, catering for the SMEs. The proposal applies to any M&A activity, (irrespective if it an acquisition or a merger and subsequent creation of a new entity), between two or more EU companies provided at least two of them are governed by the laws of different member states.
The basic principle is that each company taking part in a merger will do so in accordance with the laws of its own member state which apply to mergers between companies governed by that law. Each merging company will be required to draw up draft terms of cross-border merger and an expert report, which must be approved at a general meeting. The general meeting may reserve the right to make implementation of the merger conditional on ratification of any arrangements regarding employees. Member states must designate the competent authority which will consider the legality of any merger under its national law to check the proper completion of the merger. Once a cross-border merger has taken effect it cannot thereafter be declared null and void by another authority of another member state.
It was important to persuade Germany to sign the cross border directive by giving in on issues of workers on company boards, which under German law stands at 33 percent of worker representation. Employee participation issues led to deadlock over both the original 1984 proposals for a Regulation establishing a European Company Statute and the earlier proposal for a directive on cross-border mergers. In the specific case of workers' rights, the general principle of the national law of the company created by the merger would apply. If there were no employee participation, this would continue to be the case, but if the merged company were created in a member state that has rules on employee participation, it would be governed by those rules.
The proposed directive will be submitted for adoption by the EU Council of Ministers and the EU Parliament by this coming summer. So at least after 20 years of a stalemate there is some progress in Brussels on this important issue which will allow for consolidation of inefficient industries and boost EU productivity and growth rates.
Nick Peterson has worked for top law firms and bulge bracket investment banks. He currently leads seminars for professionals around the globe, acts as an expert on EU and World Bank programmes and is an investment banking consultant.
He welcomes your emailed comments: regional_economic_compass@yahoo.co.uk
The theory is that European investors could buy cheaply now and watch their investments reap large returns as the dollar rises at some point in the future. However, the figures do not provide support for this theory.
Global Mergers & Acquisitions (M&A) activity stands at about $1.8 trillion in 2004, compared with $1.4 trillion in 2003; which is well down from the peak of $3.5 trillion in 2000. The main buyers today are private equity firms, which are generally the US firms buying in the US and in Europe. So it appears it is actually US and European firms buying in Europe, as opposed to purchasing cheaper targets in the US.
One of the reasons for the lack of interest of European firms to make purchases in the US is because a company bought with cheap dollars brings in revenue in that same weak currency. M&A activity takes into account currency adjusted valuations but is not driven by currency considerations. It is driven by long term strategic value or business reasons.
Put simply, you do not do M&A because of a falling currency; you buy something for strategic or business reasons. CEOs have become very cautious after the boom and excesses of the 1990s. This hesitancy is only starting to decline as we see growth in the M&A world figures. Various EU banks have been very active in acquiring Balkan financial institutions, particularly those in new EU states and prospective ones for 2007.
Despite CEO timidity, there is an increasing need today in the EU of 25 member states for co-operation between companies from different member states. Indeed, such co-operation is an essential part of making Europe more competitive. There is an even greater need in the now enlarged Union. But there are many hindrances. There are still national legal barriers which prevent cross border mergers in EU countries. For example cross-border mergers are quite simply not legal in the Netherlands, Sweden, Ireland, Greece, Germany, Finland, Denmark and Austria.
The 25 EU countries have taken a major step by approving a proposed directive on cross border mergers within the single market. It is an important step which tries to bridge the gaps between national laws and provide trans-national rules. It will mean that acquiring companies will be able to avoid the expensive and inefficient step of having to set up a subsidiary in the target company's home state to take it over.
The EU's grand goal of becoming the world's most competitive and dynamic knowledge-based economy by the end of this decade means that it has to create a framework for cross border mergers. The idea is not just to create a deeper single market, but also to boost the EU's sluggish growth and cut its high unemployment. The proposed directive setting out a single set of rules for mergers of companies across national borders is a step in the rights direction. This initiative has finally come to fruition after 20 years of discussion and debate. Despite that investment of time and effort, and despite the ambitious goals described by the Lisbon Agenda, the resulting directive is less than what was hoped, but at least it is off the ground.
Creating common rules for cross-border mergers may seem like dull stuff, yet it is very crucial and much needed reform. At present, the EU's merger rules are a piecemeal of national laws. In many countries there is no clear legal way to combine one firm with another in a different EU country. Instead, firms use costly legal contortions to do this, putting SMEs at a serious disadvantage. This is one of the main reasons that mergers remain far less common in the EU than in America. A more vigorous market for corporate control will boost EU productivity and create more efficient firms by reallocating excess capacity. Unfortunately, European governments have preferred to artificially create 'national champions' by picking merger partners for their largest firms. Germany and France have been the most active to engage in such inefficient and usually failed practices.
The law that paved the way for compromise and the possible success of the cross border mergers directive was the European Company Statute, which came into effect in October. Under that law, companies or subsidiaries from different EU countries are allowed to combine as a 'Societas Europea,' a new legal form of company. It is aimed at companies which need to re-organise their business on a Europe-wide scale. However, most SMEs wanting to engage in a cross border merger don't wish to create a European Company because they usually don't want to operate in many EU states. Many smaller companies are likely to prefer straightforward cross-border mergers to the hurdle of adopting a new legal status. The new proposed directive will apply to both public and private limited liability companies, catering for the SMEs. The proposal applies to any M&A activity, (irrespective if it an acquisition or a merger and subsequent creation of a new entity), between two or more EU companies provided at least two of them are governed by the laws of different member states.
The basic principle is that each company taking part in a merger will do so in accordance with the laws of its own member state which apply to mergers between companies governed by that law. Each merging company will be required to draw up draft terms of cross-border merger and an expert report, which must be approved at a general meeting. The general meeting may reserve the right to make implementation of the merger conditional on ratification of any arrangements regarding employees. Member states must designate the competent authority which will consider the legality of any merger under its national law to check the proper completion of the merger. Once a cross-border merger has taken effect it cannot thereafter be declared null and void by another authority of another member state.
It was important to persuade Germany to sign the cross border directive by giving in on issues of workers on company boards, which under German law stands at 33 percent of worker representation. Employee participation issues led to deadlock over both the original 1984 proposals for a Regulation establishing a European Company Statute and the earlier proposal for a directive on cross-border mergers. In the specific case of workers' rights, the general principle of the national law of the company created by the merger would apply. If there were no employee participation, this would continue to be the case, but if the merged company were created in a member state that has rules on employee participation, it would be governed by those rules.
The proposed directive will be submitted for adoption by the EU Council of Ministers and the EU Parliament by this coming summer. So at least after 20 years of a stalemate there is some progress in Brussels on this important issue which will allow for consolidation of inefficient industries and boost EU productivity and growth rates.
Nick Peterson has worked for top law firms and bulge bracket investment banks. He currently leads seminars for professionals around the globe, acts as an expert on EU and World Bank programmes and is an investment banking consultant.
He welcomes your emailed comments: regional_economic_compass@yahoo.co.uk
