The Takeover Cowboys

By Charles P. Wallace/Milan

Olivetti, a failed Italian typewriter maker reincarnated as a communications firm, stuns Europe's stock markets with a dramatic, $65 billion offer to take over Telecom Italia, a telephone behemoth seven times its size. A cozy merger between Societe Generale and Paribas, two of France's leading banks, is thrown into disarray when a rival Paris financial house proposes to swallow them both. A battle for control of Italian fashion giant Gucci turns venomous when a French billionaire proclaims that he has snatched the company from the clutches of a rival French raider.

For Americans who have long since grown used to the dog-eat-dog world of hostile corporate takeovers, none of this sounds new. But for Europeans, the ground is shaking. A bare three months into 1999, the first year of Europe's single currency, the pace of deal making is already fevered. According to statistics compiled by Securities Data/Thomson Financial by the end of the first quarter of 1999, merger activity involving European companies has reached $345 billion, up from $145 billion in the same period last year.

To be sure, many of the takeovers could be considered friendly, such as British Aerospace's $12.8 billion purchase of the Marconi defense business from General Electric Co. of Britain. But European business also seems to be playing by a set of new and bloodthirsty rules. In a clean break with the clubby, amicable deal making of the past, a new breed of European corporate strategist is talking the North American lingo of hostile takeovers, poison pills and white knights, and behaving accordingly. Even some of the friendlier activity reflects the dominance of America's hardball tactics.

It's not surprising that many of the new deals have an American feel: Europe's latest merger boom is being shaped by armies of pinstriped investment bankers jetting in from Wall Street. In fact, two banks based in New York City, Morgan Stanley and Goldman Sachs, overtook their European rivals for the first time in 1998 and became the top two advisers for takeovers in Europe in terms of the value of deals they helped bring about, according to Securities Data/Thomson Financial. "I believe there's going to be a lot more hostile activity," predicts Wilder Fulford, a managing director for mergers and acquisitions at U.S. investment bank Salomon Smith Barney in London. "You have a fair number of corporate cowboys out there in the European landscape, and I think there is going to be quite a roundup."

The driving forces of the merger wave are globalization and Europe's new single currency. Globalization has forced companies to compare their performance with other firms, in their business worldwide. Drug companies, for example, have to compare development and production costs whether they are based in Sweden, France or the U.S. The result: executives slash costs, by combining overlapping operations.

The advent of the euro has further heightened competition by eliminating the currency risk for investors, so that French mutual funds can safely invest, for example, in German companies for the first time. But another important effect of the same development is that European companies are all coming under increased pressure to improve their share performance for international shareholders regardless of local circumstances--even those that don't face global competition. "There's tremendous pressure from institutional investors who have seen the positive effects of shareholder power in the U.S. and are demanding similar moves in Europe," says Manfred Kets de Vries, a management specialist at the INSEAD business school outside Paris.

The promise of increased savings to shareholders plays a key role in the precedent-setting battle between Olivetti and Telecom Italia. Franco Bernabe, who took over as chief executive of the recently privatized Telecom only last November, promised to cut costs $560 million a year, including a staff cut of 40,000 employees, nearly a third of the company's total, if shareholders reject the Olivetti bid. Olivetti in turn promised to cut the staff by 12,000 and to spin off noncore operations if its $58 billion plan, among the largest hostile takeovers in history, is accepted. It's easy to forget that the most famous takeover battle of all time, R.J. Reynolds' 1988 bloody leveraged buyout of Nabisco, was valued at a paltry $25 billion. (The biggest merger of all time, to put things in perspective, is still in the process of creation: the announced marriage between Mobil and Exxon, which is estimated to be worth at least $80 billion.)

Indeed, this pace of dealing has not been seen since the 1980s. "Even years down the road, we shall look back on the first quarter of 1999 as the turning point in Italian finance, when we started on the road to change and moved much closer to the American model," says Giovanni Grimaldi, fund manager at investment company Primegest in Milan.

Italy is hardly the only place where this is happening. The consolidation wave in banking began on Jan. 15 when Spain's Banco de Santander announced an $11.3 billion merger with crosstown rival Banco Central Hispano. This was followed by the $18 billion bid by Societe Generale, one of France's largest retail banks, with Paribas, the country's leading investment bank. During a sleepy Italian weekend in March, Unicredito, based in Milan, launched a $16 billion bid to buy northern rival Banca Commerciale Italiana, perhaps Italy's most prestigious banking brand. Only a few hours later, San Paulo-IMI, which had become the country's largest commercial bank through an earlier merger, announced a $9.7 billion offer for Banca di Roma, which has a strong retail network in Italy's central region.

An important aspect of the recent shuffling is that nearly all the mergers have been domestic corporate marriages rather than cross-border European takeovers, which had been expected to proliferate when the euro was introduced in financial transactions in January. The main reason is efficiency: it is becoming obvious that domestic mergers offer big commercial banks a fast way to reduce expenses before they take the more uncharted jump outside national borders. "There's a preference to start with domestic mergers first because they offer the quickest way to reduce excess capacity by cutting jobs," says Hendrikus Blommestein, acting head of the financial markets division of the Organization for Economic Cooperation and Development in Paris. Jean-Pierre Danthine, a professor at the University of Lausanne, suggests an additional motive for the at-home trend in corporate behavior: domestic mergers have the advantage of eliminating local competition. "If there's excess capacity, you can reap a lot of benefits by buying your competitor and closing him down," he says.

A third reason for bulking up, according to Francesco Giavazzi, a professor at Milan's prestigious Bocconi business school, is that corporate size really does matter in banking, especially since the biggest banks are turning into one-stop service centers. According to Giavazzi, European banks are starting to follow another American model by replacing their traditional business of lending money with such financial services as asset management. "Being good is not good enough in asset management," Giavazzi says. "A bank has to be the best to attract customers, and that requires technology and highly trained personnel, which all cost money."

Size is so important that the prospect of creating a "champion of the European banking sector" prompted Banque Nationale de Paris to attempt to outmaneuver its rivals with a dramatic $37.6 billion offer to buy both Societe Generale and Paribas once their intended merger was announced, further jolting the French markets. If the BNP takeover ever goes through, it will create a bank with nearly $1 trillion in assets--Europe's largest--and give it an edge over the top U.S. bank, Citigroup, which currently has assets of $668.6 billion.

BNP chairman Michel Pebereau, who is regarded as a maverick in the clubby world of French banking, hailed his plan as "the best possible for the French banking system," but Societe Generale and Paribas rejected the offer as unfriendly. Fighting to save their original merger, the two takeover targets promised an additional $280 million in savings to their shareholders, bringing the total to $1 billion, closer to Pebereau's pledge of $1.4 billion in "synergies" at the new bank.

Jean-Hugues de Lamaze, who follows French companies for the Credit Suisse First Boston bank in London, says the BNP offer was "more aggressive than we are used to in France." But he also notes that the French government, which until recently took an active role in overseeing takeover deals in the financial sector, has remained silent at the outburst of cannibalism. "France is eager to remain in the race, and there's an overall feeling that [its institutions] have to be a bit more Anglo-Saxon, more market oriented," De Lamaze says.

After banking, next in line for the takeover fever are automobiles, chemicals and pharmaceuticals. Who benefits most from this? One sector that surely is not suffering is the overseas branches of American investment banks, which have vaulted ahead of their European financial rivals in advising European companies on mergers and acquisitions. In 1998 Morgan Stanley ranked first as the leading financial adviser of completed transactions in Europe, followed by Goldman Sachs. Warburg Dillon Read, an adviser based in Britain, had held the top spot for the two previous years.

The other great winners are Europe's shareholders. As one analyst pointed out, no matter whether Olivetti or Telecom Italia's management prevails in their battle, Telecom's shareholders have already earned a nice premium. Europe's cosseted work force, on the other hand, has not yet fully come to grips with what those investment banking euphemisms like "synergies" and "restructuring" can mean. As their American union counterparts discovered a decade ago, mergers will make Europe's largest firms more efficient and competitive, but they will do so by shedding thousands of jobs. And in Europe, where unemployment levels are more than twice as high as in the U.S., that could give new intensity to the term hostile takeover.