Corporate Finance: US Funds Turn Attention to Europe; Chris Hawkley, Head of Arthur Andersen Corporate Finance, and Paul Finlan, Corporate and Senior Partner at Garretts in Birmingham, Look at the Increase in Cross-Border Deals and the Factors Behind Them

Article excerpt

Globalisation has been recognised as the driving force behind international business activity for several years.

Companies are no longer content with dominating regional or national markets - their ambition is to become a player on the international stage.

This has prompted massive consolidation in several sectors - including pharmaceuticals, automotive manufacturing, engineering, banking and financial services - creating a dynamic market for international mergers and acquisitions.

Increasingly, Midlands-based businesses are both the target and instigators of these cross-border transactions.

The traffic is very much a two-way flow.

A key trend over recent months is the involvement of US corporates and venture capitalists in driving UK and European deals.

US private equity funds have huge war chests seeking a good home.

With prices remaining high in the States, and tough competition for quality deals, they have turned their sights to Europe, and the UK in particular.

Active US players include Kohlberg Kravis Roberts, which bought UK insurer Willis Corroon for pounds 950 million in 1998, and Hicks, Muse, Tate & Furst which won the battle for Hillsdown Holdings against Candover earlier this year, paying over pounds 800 million for the business.

It is not just VCs who are looking for opportunities in Europe.

Major US corporates seeking growth have also shifted their focus from the domestic front and embarked on acquisition strategies in the UK and beyond.

Whenever a bid for a quality UK or European business is announced, our phone lines tend to get very busy with calls from other interested parties keen to assess the options for a counter bid.

The interest in Allied Carpets from both UK and French bidders is a current example.

The UK is a particular favourite with US investors and corporates for a number of reasons.

There are no language or major cultural barriers for a start.

The stock market is awash with smaller quoted companies (SQCs) struggling to deliver shareholder returns amid a general lack of interest in the small cap sector.

Fund managers and private investors continue to pile into FTSE 100 stocks, leaving many SQCs looking for a lifeline in the form of a takeover or a take-private.

A recent Arthur Andersen report on SQCs indicated that these small companies have consistently underperformed their larger counterparts over the last five years.

The FTSE small cap index trades at a 39 per cent discount to the FTSE100 and a 34 per cent discount to the FTSE all-share on historic earnings.

Therefore, SQCs have become attractive takeover targets, leading to a surge in small company corporate activity and recent outperformance in the small cap index.

Typical of the companies well placed to benefit from this trend is Michigan-based Masco Corporation.

The $8,000 million market cap company has been making between three and ten acquisitions a year, taking over quality companies with a strong track record and excellent management.

Its strategy is to give these acquisitions autonomy under their existing management, by building strong relationships with the chief executives and imposing light reporting systems.

Masco acquired UK company Heritage Bathrooms in December 1998, and followed this with the purchase of A & J Gummers, the Tyseley-based shower equipment manufacturer.

An integrated Arthur Andersen and Garretts team advised on this deal, leading it from Birmingham but working with the Andersen Worldwide network.

The acquisition was a significant addition to Masco's plumbing activities, which total $1,000 million sales in Europe.

A & J Gummers realised that joining forces with a larger group would provide the company with access to new markets and products, helping the business to develop further. …