Sun, Feb 19, 2006 page12

• Hostile takeovers the order of the day in corporate Europe

  European companies, after taking a few years of rest to get their own houses in order, have embarked on a new round of aggressive mergers and acquisitions

  • NY TIMES NEWS SERVICE
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  Hostile takeover offers are expensive, attract public criticism and historically fail more than half of the time.

  So why are they suddenly on the upswing in Europe?

  In scenes more reminiscent of the heyday of corporate raiders in the US, a number of European companies have been lobbing hostile offers against rivals in recent months, often setting off widespread public outcry.

  The US$23 billion unsolicited offer for Arcelor of Luxembourg by Mittal Steel, a company with headquarters in Rotterdam but run by the Indian-born Lakshmi Mittal, incensed European politicians. The move provoked a response from the chief executive of Arcelor, Guy Dolle, who referred to the offer in language that the Indian government and others considered racist.

  A US$50 billion unsolicited bid from Gas Natural of Spain goaded executives from Endesa to call their rivals everything from mistaken to liars. Executives at Endesa contended that after they turned the offer down, they were followed by private detectives.

  The normally staid industry of plasterboard manufacturing was thrown into turmoil when Compagnie de Saint-Gobain of France bid US$6.7 billion for the UK's BPB.

  After BPB mounted a defense that included reporting what it called "stunning" first-half results, Saint-Gobain management accused the company of "exaggerating its prospects," and insinuated that the company would miss its growth goals.

  Dealmakers, who by and large leave most of the public trash-talking to the company executives, say that Europe's newfound aggression stems in part from a growing sense of unrest among shareholders.

  "Shareholders are saying, `We want more,'" said Paul Gibbs, head of European merger research at J.P. Morgan. Many European companies reined themselves in after the spending boom of the late 1990s, but not all of them did so.

  "There are companies that haven't changed," Gibbs said, companies whose attitude toward investors is "We're XYZ Corporation, we know what we're doing, we're giving you dividends, so what more do you want?"

  Those types of companies trade at a discount, Gibbs said, because they have not become more efficient or improved their corporate governance.

  The growing number of hedge funds can be good friends during these deals -- they often bid up shares of a company, driving up the stock price and making it nearly impossible for the company to remain independent.

  BPB ultimately fell to Saint-Gobain for US$6.8 billion, even though management wanted more, in part because hedge funds that wanted to see the deal go through had amassed as much as a quarter of BPB's stock.

  Of course, hedge funds can also be opponents of a takeover campaign. The hostile bid by the Deutsche Borse for the London Stock Exchange was scrapped last year because hedge funds that held shares of the German exchange thought it was too expensive.

  Friendly merger opportunities are dwindling. Private equity funds, fat with cash, are also prowling Europe for takeovers and have already swept up some of the most likely targets.

  "Some people would be more comfortable on the sidelines, but they can't stay there," said a lawyer in London who is advising on several hostile deals.

  And, to complete the picture, macroeconomic factors are playing a part.

  "There is just a lot of inefficiency in the European economy," said Eric Cafritz, a partner with the law firm of Fried, Frank, Harris, Shriver & Jacobson in Paris.

  "The EU and the euro have created opportunities for consolidation that companies in Europe never dreamed of," he said.

  This is not the first time that European companies have indulged in hostile takeover attempts. Indeed, Europe had US$537 billion worth of unsolicited bids in 1999, according to research by J.P. Morgan. That was led by the biggest of all deals -- European, cross-border and otherwise -- Vodafone of Britain's ultimately friendly and ultimately successful US$183 billion acquisition of Mannesmann of Germany in early 2000.

  Bloated companies, created in part by the merger mania of the late 1990s, and lagging stock prices had forced executives to curb their appetite for acquisitions. Hostile deal attempts in Europe fell as low as US$14 billion in 2002, according to J.P. Morgan.

  Now, after years of putting their houses back in order, European executives can look outside again for growth.

  Some chief executives are doing these deals for "good corporate strategy reasons, and some for slightly less good reasons," said Neil Austin, a partner with KPMG in London who specializes in mergers and acquisitions. Sometimes, Austin notes, after long years of reorganizing and cutting costs, company "boards and CEOs get a bit bored," and turn to deal-making.

  The pace of these offers has accelerated this year. So far, Europe has seen US$60.9 billion in hostile or unsolicited bids, compared with US$92.3 billion in the whole of last year (which included the giant Endesa offer.)

  The first few months of this year may pale in comparison to the rest, some merger specialists say.

  "If Mittal succeeds, that will unleash a wave of hostile deals," Cafritz said.

  Mittal's success would prove that "total outsiders can make aggressive bids that everyone dislikes except shareholders, and get them done," he said.
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