On a fairly typical day in April, Mergerstat, a Los Angeles-based compaq that tracks mergers and acquisitions (M&As), updated its daily postings to reflect 42 new M&A deals with values ore than $100 million per deal.All were announced in one 24-hour period, pushing the second quarter of 2000 closer to the $1.166 trillion in mergers and acquisitions announced worldwide during the first quarter.Among the day's announcements: Chase Manhattan Corp. agreed to pay $7.7 billion for Robert Fleming Goldings, Ltd., a UK merchant bank; Microsoft acquired a 60 percent interest in Titus Communications, the second largest broadband provider in Japan; and Cisco Systems Inc. acquired Pentacom Ltd., an Israeli high-tech firm.
Although most of the global action on that particular day involved U.S. companies acquiring new foreign holdings, foreign firms also increased their holdings in the United States.Via Technologies Inc., a Taiwan-based chipset and microprocessor designer, purchased the graphic-chip unit of S3 Inc., a California company, in one of several transactions involving U.S. companies as targets. Global M&A announcements in the first five months of this year indicate that 2000 will surpass the new record set in 1999, which topped the record set in 1998. Among the blockbuster megadeals involving U.S. firms, a growing number are cross-border transactions. Of the five largest mergers involving U.S. firms in 1999, two involved global mergers of British and American companies. Roughly half of all mergers and acquisitions are now cross-border deals.
All of these mergers and acquisitions trigger competitive realignments and force corporate executives to move up their timetables for global growth.The continuing wave of cross-border mergers and acquisitions also underscores the importance of moving credit managers to higher levels of expertise in global credit and risk management. In addition, more credit professionals will be drawn into the early stages of M&A transactions for assistance with financial analyses of potential targets and credit-related factors in valuations. Credit managers should prepare now to take on a broader advisory role in senior management as global M&As heat up.
Although M&A experts believed that nothing could top 1998's record of $2.52 trillion in global M&A activity, 1999 topped it by 36 percent, with total worldwide transactions announced in 1999 hitting $3.43 trillion, a new all-time record.According to Thomson Financial Securities Data's analysis of merger and acquisition activity in the first quarter of 2000, the global M&A market is still hot and may top the 1999 record despite a slight cooling of M&A activity in Europe. Global M&A activity in the first quarter of this year, valued at $1.166 trillion, easily surpassed the $1.086 trillion reported for the fourth quarter of 1999 and was substantially higher than the first quarter a year ago. For the first quarter of 2000, the United States accounted for $600 billion or about half of all mergers and acquisitions, followed by Europe, the second largest market, with $351 billion in mergers and acquisitions, about 30 percent of the total.
Mergers and acquisitions in the telecommunications sector almost doubled in volume to become the hottest industry sector for M&As in 1999 and the first quarter of 2000, followed by commercial banking.The forecast for the rest of this year calls for continued record-breaking M&A activity in telecom, particularly in the wireless communications field. Experts also anticipate strong M&A activity in the banking sector stemming from financial deregulation in the United States that will spur consolidations among banks, brokerage firms and insurance companies.
While M&A activity in the United States hit $1.75 trillion in 1999, up slightly from $1.63 trillion in 1998, M&A activity in Europe more than doubled last year. European M&As totaled $1.2 trillion in 1999, boosted by the UK's Vodafone Airtouch PLC's $203 billion offer for Germany's Mannesmann AG, the largest M&A deal ever. Although many of the megadeals in Europe involved telecommunications, utilities and banking, MSrA activities spread into a larger range of industries, including the difficult retail sector.
At the end of last year, two of France's largest retailers merged to form Europe's biggest supermarket chain and the world's largest retail group after Wal-Mart. The marriage of Carrefour and Promodes into a $ 52.3 billion giant, partly motivated by Wal-Mart's move into Europe, is expected to set off a new wave of global consolidation in retailing. Earlier in 1999, Wal-Mart acquired the British ASDA Group PLC for $10.8 billion, signaling the U.S. retailer's new global reach. Both Carrefour and Promodes are already major players in the Latin American and pan-European retailing markets, and are now positioned to square off against Wal-Mart on the Continent.
The European first quarter 2000 M&A total of $351 billion was well below the record-breaking $468 billion reported for the final quarter of 1999, but still the second highest quarter of announced deals ever reported in Europe. The last quarter of 1999 saw an extraordinary boost from the massive Vodafone AirTouch/Mannesmann deal. Two of the five largest deals announced in the first quarter of 2000 involved European companies, with the SmithKline Beecham and Glaxo Wellcome merger ($78 billion) and the Seat Pagine Gialle and Tin.it merger ($29 billion) representing the two biggest deals in Europe and two of the five largest deals worldwide.
In several industries in Europe, the M&A wave is part of a huge land-grab by companies intent on buying up market share. In banking, utilities, media and telecommunications, a handful of leading companies in each sector is determined to expand their geographic reach and rapidly increase their customer base through acquisitions, with many of these companies completing a dozen acquisitions or more during a 12month period. The real test for their M&A strategy and for European unification at the level of the company will come as these companies attempt to integrate their acquisitions.
Latin America and Asia
Latin America closed 1999 with $68.9 billion in announced M&As, down 20 percent from its record level of $86.1 billion in 1998. The 1999 level was lower than 1998 in part because 1998 saw the privatization of Brazilian telecommunications giant Telecomunicacoes Brasileiras. Privatization volume in Brazil slipped to just $3 billion in 1999 but should see a rise this year. In 1999, Latin American transactions moved away from privatization deals and toward private mergers and acquisitions, with the energy sector accounting for almost half of all Latin M&A transactions.
Argentina led the region as the home of most takeover targets, attracting a total of $26.2 billion, followed by Brazil with $17.9 billion and Chile with $13.7 billion. The biggest buyers in Latin American M&As were Spanish companies, accounting for 39 percent of all Latin M&As, followed by U.S. companies, representing 20 percent of the total.Although telecommunications M&As dominated transactions globally in Latin America telecommunications deals were dwarfed by deals in the oil and gas industries. Forecasts indicate stronger M&A activity in 2000, particularly in Brazil, Peru and Mexico where new privatizations are underway.
Although cross-border Latin American mergers and acquisitions most frequently involve foreign companies purchasing assets in the region, Latin American-based companies are increasingly targeting foreign companies for mergers and acquisitions, with deals valued at $4.4 billion reported in 1999. U.S. and Spanish companies lead the list of targets for Latin American acquirers. Mexico leads in cross-border deals involving the acquisition of foreign companies outside Latin America, with 18 transactions announced last year, including the $2 billion acquisition by Grupo Mexicano de Desarrollo of U.S: based Asarco Inc.
Announced merger volume involving Asian targets topped $238 billion in 1999, a new record for Asian M&A activity and more than triple 1998's $77 billion. Excluding Japan, merger and acquisition activity in Asia jumped by 58.6 percent in 1999 as the 1998 financial crisis subsided, and investors resumed heavy deal-making in the region. Telecom led all industry sectors in
Asian M&A activity, with more than $14 billion in announced transactions, and South Korea led the list of preferred target nations, with more than $23 billion in M&A deals announced there, followed by Hong Kong with $14.6 billion and China with $13.7 billion.Top foreign investors in Asia came from U.S. companies, followed by companies from the UK and Japan. U.S. acquirers spent $10.9 billion in Asia excluding Japan, up 30 percent from 1998.
The explosion of cross-border deals is accelerating the already rapid pace of regulatory change worldwide as governments increasingly recognize the need to remove barriers to globalization and economic growth. The launch of the euro and other vehicles for integration paved the way for the merger wave in Europe, creating the truly European entities envisioned by the architects for European unification. Heavy merger and acquisition activity is forcing many European governments to rethink their business and labor laws, led by Germany which is considering eliminating taxes on sales of industrials.The tax break, which should become effective next January, will create a new surge of corporate restructuring and heighten M&A activity in Germany.
The rash of workforce reductions set off by mergers in Europe, however, may stimulate new labor laws limiting restructurings in the wake of mergers.Although these changes may make valuations more difficult and the merger process more cumbersome, they are unlikely to slow the overwhelming trend toward consolidation in Europe. In Latin America and in Asia, cross-border deals are also increasing the demand for fewer restrictions on capital flows and freer foreign currency exchange.
Recent global M&A growth has been marked by an extraordinary rise in the number of hostile transactions. 1999 was the year of the hostile merger, with more than 14 percent of the value of all deals worldwide derived from hostile transactions-those where the target's board of directors reject outright the acquirer's offer. The mother of all hostile takeovers was the Vodefone bid for Mannesmann, which pushed the value of the hostile deals in 1999 up to $487 billion, substantially higher than the $108 billion in hostile transactions reported for 1998. Hostile mergers and acquisitions are tough going, with only one in five companies engaged in a hostile transaction actually achieving control of their target.
Even in friendly transactions, cross-border mergers present far more difficult valuation and due diligence problems than domestic deals. According to John Nigh, a principal at Tillinghast-Towers Perrin and an expert in international mergers and acquisitions, key issues relevant to the valuation of foreign entities include the following:
Regulatory and local GAAP financials are usually different from comparable U.S. financials.
Stock prices tend to be more volatile.
Recent instability or significant changes in governments make it difficult to project the financial impact of possible government actions.
Current or recent economic uncertainty such as a devaluation or high inflation, creates additional uncertainties.
The lack of meaningful and credible industry or company statistics complicates the valuation process.
"Obviously these do not apply in all cases and none may apply to a specific case, but I have personally encountered each of the issues listed," says Nigh.
The explosion of cross-border deals has given rise to new online multi-jurisdictional transaction management technology that gives all parties secure sites for receiving and responding to documents. A related development involves the use of software programs to convert a target's financials into the acquirer's own terms and accounting systems. In all cases, however, experts agree that advisors play a crucial role in foreign acquisition valuations and due diligence.
Beyond the valuation and due diligence stage, cross-border mergers and acquisitions are subject to the same problems that beset domestic deals but with additional complications. Experts estimate that more than half of all mergers and acquisitions fall to produce any benefits for shareholders and may actually destroy value. According to a study by management consultants A.T Kearney, the first 100 days after the merger are the most critical for success.The study which examined multibillion dollar mergers throughout the world and across major industries, found that mergers are often derailed in the implementation phase by lack of speed in appointing top management, lack of specific goals for the company's future and poor communications. The study also discovered that companies involved in mergers commonly failed to integrate their sales teams and take advantage of cross selling.
All of these potential problems are compounded in crossborder transactions, where differences in reporting and accounting systems, corporate culture and business practices are more profound.The A.T Kearney study revealed that companies with successful mergers moved forward with a clear vision, quickly determined management responsibility, developed synergies realistically, aimed for early"wins," limited their risks and minimized cultural barriers and communications problems. For credit managers, the key is to remember that behind every deal is an implementation process that means establishing new ways of doing business that are congruent with the strategic intent of the merger.
Fay Hansen is a business and finance writer based in Cresskill, NJ
Global M&As 1999-$ billions
United States: $1,754
Latin America: $69
Asia (excluding Japan): $92
Source: Thomson Financial Securities Data Corp.
Global M&As Qi 2000-$ billions
United States: $600
Source: Thomson Financial Securities Data Corp.
Global M&As 1999 By Sector-$ billions
Commercial banking: $364
Radio and television broadcasting: $245
Source: Thomson Financial Securities Data Corp.…