M&A Commentary: From one high to another

Merger and acquisition activity across Europe continued uninterrupted into 2000. No sooner had Thomson Financial Securities Data released its record-breaking statistics, than AOL announced the world’s largest ever takeover with its $64.7 billion offer for US media company Time-Warner. The transaction will inevitably spawn imitators. “Where a deal involves the convergence of two industries, almost anything can happen. The business logic of combining an ISP with a content provider is compelling,” says one technology analyst.

As the ink was drying on this merger agreement, SmithKline Beecham and Glaxo-Wellcome announced that, almost two years after their first stalled attempt, they were merging in a transaction worth $76 billion. The cultural issues’ – press conference patter for ego clashes – which dogged the proposed tie-up in February 1998 were resolved when Jan Leschly, blamed for scuppering the first deal, was paid off.

The merger leaves Glaxo firmly in charge and puts a question mark over the next move for companies such as Bayer. Bankers are also bracing themselves for activity in the chemicals sector, where BTP and Clariant are mulling the prospect of a merger. In retail, there are clear signs that further consolidation is approaching. Marks and Spencer continues to captivate a number of suitors, among them Tesco and Sainsbury, which appointed Peter Davis as its new chairman in January. Davis steered Prudential through a number of acquisitions and will make his mark with a big deal soon. Meanwhile Kingfisher, which famously missed out on Asda last year, is exploring the possibility of forging Europe’s first cross-border retail merger with Metro, its German competitor.

Given the record levels of M&A in 1999, bankers may have expected a quiet month. According to TFSD, between January and December, 13,687 deals with a value of $1.3 trillion were announced in Europe. Of these, 9,550 were completed within the calendar year, representing a value of $764 billion. This outstripped the previous record, established in 1998, which saw the completion of 7,217 deals worth $517.8 billion.

In Europe, telecoms transactions accounted for 15 per cent of total activity. Last year was the most memorable for the sector. Olivetti’s bid for Telecom Italia opened the floodgates, and forced a scramble for scale and coverage within the deregulated mobile communications market. After missing out on TI, Deutsche Telecom paid $13 billion for the UK’s One-to-One; France Telecom invested in NTL; while Mannesmann paid $30 billion for Orange in a deal which completed at the end of the year and settled TFSD’s advisory league tables.

The level of activity in financial services accounted for 12 per cent of total European M&A in 1999. Headline deals included BNP’s hostile bid for Paribas, which succeeded, and SocGen, which failed; and the completion of domestic consolidation in Spain where Banco Santander paid $11 billion for Banco Central Hispanoamericano in January 1999. Ten months later, its main rival Argentaria finally responded with a stock-swap merger with BBV. In Italy, cross-shareholdings and political intervention reined in hostility, while NatWest’s fight for independence will end on February 7th, when shareholders will vote on conflicting bids from Bank of Scotland and Royal Bank of Scotland. Europe’s first cross-border European retail banking merger did not happen last year, and with hostile approaches facing censure, many expect 2000 to be the year of the international alliance.

The NatWest bid will count in this year’s advisory league tables, and involves JP Morgan, Dresdner Kleinwort Benson, Morgan Stanley, Goldman Sachs and Merrill Lynch. Seven days after they collect their fees, many of these banks will cash in again when the fate of Vodafone’s hostile bid for Mannesmann is sealed. Despite Mannesmann’s efforts to disqualify them, Goldman Sachs is lead adviser to Vodafone, with Warburg Dillon Read supporting. Merrill Lynch and Morgan Stanley are advising Mannesmann.

In 1999, the advisory Palme d’Or went to Goldman Sachs, which dominated the European M&A rankings. In those deals completed involving a European target or acquiror, Goldman executed 120 transactions worth $398 billion. Morgan Stanley came a close second with 155 deals at $348 billion while Merrill Lynch, Europe’s most improved bank last year, advised on the completion of 129 mandates with a total value of $226 billion. This ranking may continue into the first quarter. Morgan and Goldman are working on both the Time Warner-AOL deal, and SmithKline’s merger with GlaxoWellcome.

European banks were ecplised, although there were strong performances from Dresdner Kleinwort Benson and Lazards, which finished sixth with 108 completions worth $145 billion. Lazard was denied a strong start to the year when it was dumped as GlaxoWellcome’s adviser. “Someone had to be held responsible for the deal’s failure first time around,” says one source close to Lazards, “and it happened to be us.” For Lazards, 1999 was a year of reorganisation as the firm sought to achieve corporate unity. Its announcement to that effect was long overdue. By contrast, the GBP1.4 billion sale by Schroders of its investment banking activities to Salomon Smith Barney was rapid. While Schroders was facing tough challenges and was slated as an acquisition target, few predicted how quickly it would be taken over. Either way, corporate Europe has one less bank to choose from this year, while recruitment consultants hover above Schroders, hoping to match their client’s demands for quality investment bankers with which to see through another record year for M&A.