| ||||
The introduction of the Euro and further integration of European markets and industries continue to transform Europe's business landscape. What do these and other changes mean for investment banking in Europe? That was the question before a panel representing four major I-banks at the Europe Business Conference.
Glen Earle, managing director and co-head of the European Advisory Group at Goldman Sachs, opened the discussion with a review of how trends in industry and capital are creating opportunities for investment banks in Europe.
"We are reaching the latter phases of domestic consolidation. Companies are anxious to go outside their boundaries both within Europe and outside, while at the same time the competition is globalizing," said Earle. "So from an industrial perspective, companies have increasingly realized just the massive amounts of synergies that they can realize from some of these international transactions. It is not uncommon to see 740 million to over a billion dollars in annual synergies."
At the same time, said Earle, "on the capital market side, you see harmonization across Europe, pension reform, and increased equitization, which is really driving shareholders to be more focused on performance. This is giving companies the incentive to consolidate, but also clearly punishing companies that don't make those sorts of strategic moves."
Stephan L. Schweich, managing director of European Operations at Robertson Stephens, spoke from his perspective in technology and life sciences at that firm. "I'd say there are two very big changes that occurred since I arrived in London in '96. One is the creation of new growth stock exchanges around Europe… Now every country has its own stock exchange. Now there is a place to go for technology companies to go public, to do financings—and for investors to go find investment opportunities. And that's a big change.
"I would estimate that there has been something like 700-800 companies that have gone public over the last three years. Three years before that it was less than 100. Now that's opportunity."
Schweich also spoke about the influx of venture capital firms. "Companies like 3I in England that, three or four years ago, were almost exclusively focused on the U.K., today have made acquisitions in Germany and Finland and have substantial offices in the U.S. to help companies globalize. Those factors are driving the opportunities for Robertson Stephens in Europe."
Are multiple markets a problem?
Multiple markets were widely viewed by the panel as one of the major challenges of investment banking in Europe. "It's a big problem," said Schweich. "The concept, at least on the retail level, of pan-European investing is talked about, but doesn't exist."
Schweich went on to discuss his attempt to correct this. "I happened to get involved in the EASDAQ [a pan-European stock market focused on high-growth, internationally oriented companies] in the beginning as a board member. I think it was the right idea and, despite lots of powerful sources trying to create that pan-European stock exchange, it was very difficult."
There was a huge competitive response from markets in Frankfurt and Paris, he said. "The big advantage that those stock exchanges had was retail. The local commercial banks figured out it's a nice business. They got behind their local stock exchanges and did very well by them. So we are really more fragmented today then we might have been three years ago."
"What makes working in Europe interesting," added Schwiech, "is that it's not like a NASDAQ IPO with one law firm, another law firm, a key manager, knowledge of the gross spread, and it's set. When you come to Europe, every deal has to be negotiated and you have all these choices of different stock exchanges."
"I think in the interim, companies will go to their individual markets and of course look at NASDAQ," said Jeff Montana, managing director and head of the technology investing banking group at Deutsche Bank. "You see a big trend this year of people doing dual listings and multiple dual listings, and I think that will work in the meantime. What's happened is the big banks now have the capability to work in all the different markets across Europe.
"There is no cookie cutter approach." Montana said. "I think there's still room to do a lot different combinations of first listings. We have to work out the clearance issues. These are real issues that need to get worked out and a lot of the regulations are still changing, so there is a lot of opportunity."
The M&A scene in Europe today
Dieter Turowski, co-head of the technology group at Morgan Stanley Dean Witter, reviewed the evolving M&A scene in Europe.
"1999 was a watershed year for the M&A business in Europe," said Turowski. "If you look at the volume of announced deals as percent of market cap in Europe, it was 20% in 1999, which is an amazing number when you think about 20% of the European market cap trading hands. The number for the U.S. was 14%. 1999 was also a year of incredible hostility. So it was really the year that the M&A business in Europe came into its own. That continued for the first few months of 2000, and then began to peter out a little bit. So I would say the U.S. is seeing more of a relative resurgence in M&A.
"Thinking about what might drive the M&A business going forward, I continue to think that Europe is the area where we will see the growth, despite the last few months of more modest volumes," Turowski added. "M&A activity is fundamentally driven by CEO confidence. Economic growth in Europe next year is going to drop a little bit. We expect it to drop by about a half a point. Whereas in the U.S., it is going to drop pretty significantly, about 2 percentage points, and that is going to have an impact on the mindset of CEOs and how aggressive they get.
"I think that will mean that you will see European CEOs looking at big deals in Europe, but also big deals in the U.S. So we continue to be very bullish in the M&A business, despite the softness of the equity market."
Hostile deals
The panel also took up the question of the growing number of hostile deals in Europe, especially relative to the U.S. Earle began with the estimate that 20% of the deals in 1999 were hostile, while in the early ‘90s, these figures were more like 3-5%. The greatest hostility, he said, was still in the ‘80s when, at times, the percentage of hostile deals reached 30-40%.
Earle believes deals are emerging that simply make too much sense not to pursue. "Companies had identified targets that they really felt they ought to get together with, and they really felt it rather strongly. You have a case where the strategic fit is fantastic and you had an investment base that was pretty sophisticated, and they could understand the financial and strategic rationale.
"Ultimately," continued Earle, "the investors will buy the logical transaction and will put pressure on the company to do the right thing. So you find that the calculations that are made for these hostile transactions are pretty sophisticated probability announcements. People generally don't get involved in these things unless they've thought it over pretty carefully and are sure that they are going to be successful."
Montana noted that information and financial mechanisms have spurred on the aggression. "The markets have become much more transparent of late in Europe," he said. "You see changes, as well, with regard to being able to free up cross shareholding and making targets more available that might have been closely held conglomerates before.
"And now," continued Montana, "you've also got a lot of technology companies in Europe who have a currency and a valuation where they can look at doing cross-border M&As. For example, you have seen some pretty high-visibility transactions for Europe in the tech sector which just didn't occur before. So it started to create a new mindset in terms of world attitude to using M&A. I think as the equitization continues to press forward in Europe, you will see a high velocity of M&A transactions."
Turowski agreed. "It is the change in mindset that is driving this new kind of activity, including the hostile activity," he said. "It is certainly true that 18 months ago, hostile activity in Europe was more rare. There were more impediments. Targets had more options available to them, but it's my argument that they still do have options available to them."
Turowski gave Mannesmann as an example. "Certainly, Mannesmann could have resorted to a defense against Vodafone that would have been based on technicalities, but chose a shareholder value and information case defense. Ultimately they created, between the time that the bid came in and the time the deal was realized, 150 million Euros of shareholder value. So, win-win for everyone. Goldman and Vodafone are happy that they succeeded, and Morgan Stanley and Mannesmann are happy that so much value was created.
"And you don't only see such transactions in Germany," said Turowski. "Things are changing, even in countries like Sweden that are very consensus oriented. There is a recognition that achieving strategic objectives and appealing directly to shareholders is a strategy that is increasingly possible and is working."
A growth market?
All the panelists were very encouraging about investment banking in Europe as a growth market, with many challenging opportunities for the banks as well as for the people working in them. "There are a lot of green fields in Europe," said Montana. "People who have been on the ground even for a few years are seeing a lot of business, and they need people to help them push along these double-digit growth rates."
"I'd like to echo our view of the long-term attractiveness of Europe as a market for investment banking services," said Turwoski. "There is a chance that next year could be a tough year. One of our economists indicated that he is ‘on maximum alert for a hard landing.' That doesn't mean he is predicting a hard landing, and it is somewhat more U.S.-oriented than a comment towards Europe, but there is a probability that we may go through a tough market next year.
"Not everything is rosy," Turowski continued, "but I think the question is, ‘Do you fundamentally believe that the European investment banking story is a good one?' We believe it and are prepared to take a long-term perspective. There have been previous hiccups in Europe, in 1994 and 1998, where some firms have laid off, whereas we've always found that if we invest during difficult times, that's when we make the biggest strides from the point of view of developing the franchise. So we are very bullish, but that does not mean there may not be some bumps in the road."
· · · ·