European Unions

BRUSSELS —  Heard the watchword driving Europe Inc. as this continent and the entire world segue into one global marketplace? It’s “merge”--or risk being submerged.

In 1997, more big businesses in Europe got hitched than ever before. The Continent, one Paris-based newspaper said, came down with “merger madness.” On one day, five mega-marriages worth a total of more than $40 billion were announced.

Why the rush? As global competitors get bigger and meaner, nobody in the Old World relishes the idea of being the last link in the food chain.

“We want to be in the top third of the top 30 global banks, because we’re convinced that the bottom third is going to disappear,” Swiss banker Marcel Ospel said last month.

Among the businesses that have joined forces are Ospel’s Swiss Bank and longtime domestic competitor Union Bank of Switzerland; banks in Sweden and Finland; the German maker of Adidas sneakers and a French ski manufacturer; German and French insurers; and the British owners of Guinness ale and the parent of Burger King restaurants. And the wedding march keeps playing.

“There is a lot of consolidation going on,” said Izzet

Sinan, an attorney in the Brussels office of the U.S. legal firm Morgan, Lewis & Bockius, which has handled some of Western Europe’s mergers and acquisitions. “Part of the trend is that people want to be able to fight in the global economy.”

True enough, but companies in Europe also are clearing the decks for the Continent’s new single currency, the euro, which should start coming on stream at the start of 1999. With just one money to conduct business in, there will be no exchange rate risks, and it will be easier than ever to buy and sell throughout the 15-nation European Union.

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Simultaneously, efforts to construct a single European market have led to the progressive dismantling of many of the legal and regulatory barriers that companies once could find shelter behind. Until now, for instance, most Western European nations had outlawed competition in telephone service to protect national monopolies. But as of Jan. 1, the bans on competition have been lifted, and foreign firms--including American ones--have been free to canvass for customers.

“The international market is forcing companies to expand,” said Dieter Wolf, president of the German Federal Cartel Office, the government agency that approves mergers in Europe’s single biggest economy. In such conditions, the antitrust regulator maintained, German companies must be free to bulk up to world-class weight.

“Mergers must be approved to strengthen global position, as long as they do not hurt the competition,” Wolf said.

Of course, non-Europeans are also getting ready to do business in tomorrow’s Europe, increasing the pressure on the locals.

On Dec. 9, cash-rich Toyota Motor announced it would build a plant at Valenciennes in northern France to make a new small-model car designed specifically for Europe--planting the Japanese auto industry’s dreaded flag squarely in the future euro zone.

On Dec. 22, Coca-Cola said it would buy the makers of Orangina, a carbonated orange-flavored beverage that is France’s most famous brand of soft drink, for $841.9 million to build European beverage sales.

In the meantime, Wall Street’s own merger mania in the financial services industry is pushing European banks and others to follow suit or risk being marginalized or swallowed whole.

“It’s all-out globalization--everyone’s buying everything up in pharmaceuticals, chemicals, banks, insurance, telecom,” said Philip Healey, editor of Acquisitions Monthly, a British business publication. “You’ve got to be No. 1, 2 or 3 in your market, or forget about it and sell out.”

In the last 12 months, there have been $1.356 trillion worth of mergers and acquisitions worldwide, according to Acquisitions Monthly. Europe’s share was a record $363 billion from 6,000 company fusions or takeovers.

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Many of those operations await approval by national, European or U.S. regulators and could be rejected or modified to safeguard competition. The European Strategy Group in the London offices of Morgan Stanley, the U.S. investment bank, calculates that Europe’s figure for 1997 is actually higher, at approximately $400 billion, or more than three times the 1993-94 level.

“Clearly, companies want to reach critical mass before the new euro zone comes into being,” one Morgan Stanley analyst said, speaking on the condition he not be identified.

The greatest pressures for continental consolidation have been in the banking, pharmaceutical, insurance, food and beverage, and retail sectors. And there seems to be plenty of opportunities: A Morgan Stanley study found the average European retail and consumer goods firm to be only 63% as big as its U.S. counterpart (and eventual competitor).

Europe’s latest trend, which began about three years ago, has been for large companies to merge, rather than for one to buy another outright. That, some business strategists say, leads to better value for shareholders.

Often the companies uniting nowadays are from the same country and are driven by the desire to protect domestic turf from outside poaching.

The planned merger of Swiss Bank and Union Bank of Switzerland, announced last month, would create the world’s second-largest bank, with $592 billion in assets--just behind Japan’s Bank of Tokyo-Mitsubishi.

The union won’t be painless: The two banks plan to eliminate 7,000 jobs in Switzerland alone, an unprecedented layoff in a country whose economy has been in the doldrums throughout the ‘90s. But financial analysts say it is precisely the Swiss banks’ ability to cut payrolls and pool other costs that makes this a business marriage made in heaven.

“This merger is another sign of consolidation in the financial sector, and there should be more and more in the future,” said Massimo Buonomo, a European banking analyst for the London brokerage Credit Lyonnais Laing.

Though Europe’s labor unions have opposed some mergers because they mean even more layoffs for a continent bedeviled by high unemployment, labor leaders express surprising support for the process as a whole, believing bigger, stronger companies will be better able to protect existing jobs and create new ones.

“We can’t stop this particular world and get off,” said Peter Coldrick, chief economist of the Brussels-based European Trade Union Confederation, which represents 57 million unionized workers. “Where would we be now if we had tried to save horse-and-cart jobs 100 years ago?”

In another single-country merger, British conglomerates Guinness and Grand Metropolitan teamed up last fall to form a multinational food and drink group with such well-known brands as Johnnie Walker scotch, Smirnoff vodka, Burger King and Pillsbury. Projected annual sales are $21.5 billion.

In Germany, Thyssen and Krupp, two Ruhr-based steel and engineering groups, gave in to the charms of wedlock (among them, estimated “synergies” of $259 million a year) despite a bruising ego battle between their chairmen and Krupp’s ill-regarded attempt to stage a debt-financed hostile takeover of its bigger rival.

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The merger, which would create Germany’s sixth-largest industrial company in terms of sales, would almost certainly generate others, as competitors move to counter Krupp/Thyssen’s planetary clout and sales networks.

There are also plenty of cross-border alliances. In these times of slow economic expansion, such deals often provide the quickest way for a “Eurocompany” to grow, as well as a sign that after years of downsizing and restructuring, many of the Continent’s biggest businesses think recovery is here to stay.

To become the largest insurer in the world, Germany’s Allianz agreed last month to pay more than $51 billion for a controlling interest in Assurances Generales de France after making concessions to defuse a hostile bid from Italy’s Assicurazioni Generali. “We want to be represented in all important markets,” an Allianz spokesman said.

Adidas, the German-based sporting goods maker, which has factories in France, Britain, Ireland, Spain, the United States and Eastern Europe, recently bought a controlling interest in Salomon, a ski, golf club and bicycle manufacturer headquartered in Annecy in the French Alps. The combination created Europe’s biggest sporting goods supplier and the world’s second-biggest. The goal, said Adidas CEO Robert Louis-Dreyfus, is to create “the best sports label portfolio in the world.”

At the roof of Europe, Nordbanken, Sweden’s third-largest bank, and Merita, Finland’s largest, joined to form Scandinavia’s largest bank, with assets of $103 billion.

“The financial services industry today is totally open, and there are no boundaries between countries,” said Hans Dalborg, Nordbanken’s chief executive.

And on Friday, two British pharmaceutical giants--Glaxo Wellcome and SmithKline Beecham--said they are in talks to form the world’s largest drug company in what would be the biggest merger ever--creating a company with a market capitalization of more than $160 billion.

As with Coca-Cola’s purchase of Orangina, some of the recent expansion operations span the Atlantic. In November, Munich-based Siemens, a world leader in electrical engineering and electronics, announced it would pay more than $1.5 billion to buy the fossil fuel power-plant division of Westinghouse.

The deal, which still must be approved by U.S. antitrust regulators, should help Siemens compete more effectively in the giant American market.

“All of these transactions have been driven by a trend toward international cross-border consolidation within particular industries,” Charles Packshaw, head of corporate finance at Lazard Freres, told Bloomberg News last fall. “I think we’ll see a continuation of this trend.”

Financial experts, however, caution that just as in true-life marriages, wedlock in the business world must serve each side’s interests and not be spur-of-the-moment. For that reason, many question the logic of some recent deals, such as the Nordbanken-Merita merger, in which two neighboring banking networks are being welded together without the cost-cutting savings of the Swiss Bank-United Bank consolidation.

“In 10 years, there will be a de-merger cycle,” predicted Healey of Acquisitions Monthly. “And it will be the same lawyers and consultants who pocket the fees.” Last year, his publication calculates, investment banks in the city of London earned nearly $2.2 billion on business takeovers in Britain alone.

One area in which Europe increasingly feels like the Lilliputians alongside America’s Gulliver is defense, where the market has shrunk since the collapse of the Soviet bloc. Airbus Industrie, a four-nation European consortium, has mounted a credible and potent challenge to Boeing and grabbed 30% of the civilian airliner market. On the military side, however, it’s a totally different story.

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Europe’s defense companies, fragmented along national lines, must go head-to-head with the enormous American firms--Lockheed Martin, Hughes Raytheon and Boeing--that have resulted from recent U.S. mergers. “Time is not on our side,” French Defense Minister Alain Richard warned last month.

On Dec. 10, British Prime Minister Tony Blair, French President Jacques Chirac and Prime Minister Lionel Jospin, and German Chancellor Helmut Kohl, the leaders of Europe’s three top aerospace-manufacturing countries, issued an urgent appeal to consolidate the industry into a combined civil-defense complex to be able to compete more effectively with the Americans.

Already there is modest collaboration. Aerospatiale of France and Daimler-Benz of Germany have merged their helicopter activities to create Eurocopter. Another French company, Matra, and British Aerospace formed a joint company to produce missiles.

As with the defense realm, Europe’s airline and utility sectors remain fragmented along national lines. According to Morgan Stanley’s study, only in petroleum and insurance do European companies outweigh their U.S. counterparts.

The forecast, then, is for Europe’s merger madness to continue and even accelerate in the next few years. Morgan Stanley predicts $500 billion in deals in both 1998 and 1999.

“Companies that want to benefit from the introduction of the euro must move fast,” Pierre Richard, chief executive of Dexia, a French-Belgian bank, warned last fall. “Only companies that act before the introduction of the euro can succeed in the long term.”

Reane Oppl of The Times’ Bonn bureau and Petra Falkenberg and Christian Retzlaff of the Berlin bureau contributed to this report.

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European Deals

The dollar value of European mergers* has nearly quadrupled since 1993. In billions:

1997: $362.8 billion

* Includes Europe and Britain

Source: Acquisitions Monthly

Researched by JENNIFER OLDHAM / Los Angeles Times