Mergers and acquisitions shrink the world

US corporations and their credit departments will face larger competitors in Europe, Latin America and Asia as global merger and acquisition activity steams ahead at near record-breaking levels. Worldwide merger and acquisition activity reached $2.9 trillion in the first eleven months of 2000 despite

The continued high level of M&A activity in 2000 is notable, but perhaps more important is the fact that one third of all mergers and acquisitions in 2000 were cross-border deals. In addition, M&A activity in Europe and Latin America grew at a faster pace than in the US, and activity in Asia accelerated sharply. For the second year in a row, the telecommunications industry remained a hot industry for M&A worldwide and accounted for a significant portion of the deals in both Europe and Latin America. Credit professionals should prepare now for tougher competition from European competitors and a growing challenge from Latin and Asian companies (Chart 1).

US Activity Slows

The first half of 2000 showed record-setting worldwide M&A activity despite a noticeable slump in the second quarter. In the first half of 2000, announced M&A volume stood at $1.88 trillion on 17,777 deals, with only $753 billion of this activity occurring during the second quarter, according to Thomson Financial Securities Data. In the US, the number of deals announced in the first half of 2000 was down nearly 15 percent from a year earlier, but heightened M&A activity in Europe more than compensated for the slowdown in the US.

Heavy European M&A activity continued into the third quarter of 2000, with European firms continuing to buy up US companies. European acquisitions of US firms accounted for one fourth of all US M&A activity for the period. The largest third quarter 2000 deal worldwide was Deutsche Telekom's $55 billion bid for VoiceStream Wireless. Deutsche Telekom has been involved in more than 20 acquisitions over the past year. Volume in cross border transactions-mergers or acquisitions involving targets and acquirers from different nations-exceeded $616 billion in the first half of 2000. Cross-border deals involving a foreign acquirer and a US target company totaled more than $154 billion (Chart 2).

Overall, third quarter 2000 worldwide M&A volume hit $787 billion, bringing the first three quarters total to $2.68 trillion, up from the $2.28 trillion reported for the first three quarters of 1999. Telecommunications dominated all industries for M&A activity, with more than $339 billion in transactions, followed by the motion picture industry with $241 billion.

Through mid-November 2000, there were $1.6 trillion in deals involving US companies as targets, up from $1.4 billion for the same period in 1999, but America Online Inc.'s merger with Time

Warner Inc. accounted for 11 percent of the US total for 2000. Without that megadeal, the numbers for 2000 would show a slowing of merger and acquisition activity in the US.

BuIking Up

Recent M&A deals listed by Mergerstat, a Los Angeles-based company that tracks M&A activity, reveal the truly transnational nature of M&A activity and the various motivations at work in these deals. These recent deals also underscore the fact that in many cross-border M&As, already large companies are buying up midsize and other large firms to bulk up their holdings and grab market share.

For example, in one recent transaction, Shire Pharmaceutical Group Plc, a Hampshire, UK-based specialist in prescription medicines, agreed to buy BioChem Pharma Inc., a Quebec-based international biopharmaceutical company, for $3.6 billion in stock. The deal will create one of the largest specialty pharmaceutical companies in the world. In another cross-border deal, Thomson Multimedia SA, a French company that is a leading manufacturer of consumer electronics, agreed to buy Technicolor, a world leader in services to the media and content industries, from Carlton Communications Plc, a UK company that is one of the largest operators of independent television in the UK.

Sasol Ltd, the largest oil company in South Africa, agreed to buy Condea, the Hamburg, Germany-based chemicals unit of RWE AG, for $1.1 billion in cash. Sasol, fearing that it may lose government subsidies that help it guard against declines in oil prices, plans to beef up its chemicals business and fuel production outside of South Africa. Robert Bosch GmbH, a privately held German company that is one of the largest makers of automobile components, agreed to buy Detection Systems Inc., a New York company that manufactures electronic detection and communications equipment. Bosch says that it plans to use Detection Systems as a foothold for its US security business. All these recent transaclions and many others like them foreshadow a future in which larger and larger corporations-many of them based in Europe-- control substantial portions of their industries (Chart 3).

European Growth

Transactions targeting European-based companies boomed in 1999 and showed considerable strength through the first three quarters of 2000, but slowed at the end of the year. Announced deals totaled $883.3 billion through mid-November, down from $1.2 trillion for all of 1999. Most of the slowing in Europe stemmed from a decline in telecommunications mergers, which fell to half the level recorded in 1999.

In addition to the sputter in telecommunications mergers, however, the slowing of M&A activity in Europe reflects growing concern about the regulatory environment. In December, the European Parliament's Committee on Legal Affairs initiated controversial changes in a draft European takeover directive, which many argue will make takeovers more difficult and costly. Europe's ongoing attempt to create one set of regulations governing mergers and acquisitions may dampen enthusiasm for large deals that skirt shareholder consent. The long-term outlook, however, is for strong merger and acquisition activity in Europe for the foreseeable future in many industries, particularly where restructuring is incomplete.

According to Watson Wyatt's Mergers & Acquisitions 2000 survey of 300 global companies, including 123 European companies, increased sector consolidation will be a continuing trend. European survey respondents indicated that their M&A activity is spurred primarily by the desire to achieve greater competitive size and larger market share. Respondents also cited operational synergy and cost reduction as frequent motivations for European M&A activity. The survey respondents, drawn from senior positions at a range of European companies, had recently completed or were in the post-deal stages of a merger or acquisition.

According to the survey respondents, the main problems experienced by acquirers during the due diligence phase were a lack of proper documentation in the target company and reluctance on the part of the target to volunteer information. This situation was further compounded by a lack of efficient data collection processes in the acquiring organization and the lack of time in which to gather information.

The survey also found that, on average, European companies take anywhere from one to two years to complete the whole merger process, with the due diligence phase lasting anywhere from a few days to about three months. Watson Wyatt found that companies with more M&A experience tended to report longer time frames, which is possibly a reflection of their more comprehensive and realistic view of the process and the elements involved.

The Watson Wyatt survey also found that there is universal consensus around the idea that leadership and well-planned communication are the most important factors in M&A success. Beyond that, however, a sense of which factors contribute to successful deals appears as varied as the deals themselves. Among all global survey respondents, shareholder value, profits and return on capital were cited as the top three success measures in Europe and North America, although North American respondents reversed the order of the top two to put profits first. The Asia Pacific respondents listed their top three measures as return on capital, market share and shareholder value, in that order.

Latin America and Asia

The volume of announced M&As involving Latin American-based target companies reached a new record high of $56 billion during the first half of 2000, up 33 percent from the same period in 1999. Telecommunications led as the industry with the greatest volume of announced M&As, accounting for almost half of all Latin American activity for the first half of 2000. The electric, gas and water distribution industry claimed second place with 43 transactions totaling $7.7 billion.

During the first half of 2000, Spanish telecommunications giant Telefonica spent $22.7 billion in the telecommunications sector in Latin America, including $10 billion for Brazil's Telecommunicacoes de Sao Paulo. Other notable deals included Mexican banking acquisitions totaling nearly $3.5 billion.

Brazil not only led in Latin American M&A transactions in the first half of 2000, with Brazilian companies accounting for $30 billion and 180 deals, but also ranked ninth worldwide, up from 20th position during the same period in 1999. Argentina dropped to second place in Latin American announced M&A activity in the first half of 2000, and fell to 16th worldwide from 11th place in the first half of 1999. The largest acquisition in Argentina for the first half of 2000 was the Spanish Telefonica's $4 billion acquisition of Telefonica de Argentina.

Mexican M&A activity exploded in the first half of 2000 to $5.3 billion, a 55 percent increase over the first half of 1999, pushing Mexico into third position for Latin America and 21 St place worldwide. The largest deal was the $1.5 billion acquisition by Spain's largest bank, Banco Santander Central Hispano, of the Mexican Grupo Financiero Serfin SA de CV.

With a record $3.6 billion from 10 deals in the first half of 2000, Peru's M&A activity rose 386 percent from the same period for 1999 and put Peru in fourth place for Latin America and 27th place worldwide. Chile dropped back to fifth place in Latin America with $1.9 billion in announced deals in the first half of 2000, a 79 percent decrease from the first half of 1999. Some of the uptake in M&A activity in Latin America reflects the continuing recovery there after the financial crisis that spread to Latin America from Asia in 1997 and 1998 (Chart 4).

In Asia itself, M&A activity accelerated in several sectors after years of decline. Mergers and acquisitions in Japan picked up in the first half of 2000 and shifted from cross-border deals to mergers between Japanese companies. Transactions announced in the first half of the year totaled $34.7 billion, up 6 percent from the same period in 1999, according to Thomson Financial Securities Data. Telecommunications led all industries with nearly $8 billion spent in mergers and acquisitions, followed by the paper products industry. The value of cross-border transactions fell to $7.5 billion from nearly $16 billion for the same period in 1999.

M&A experts expect both domestic and cross-border activity to increase as Japanese companies continue to push for greater competitiveness. In other Asian nations, industry consolidation in the wake of the financial crisis and an easing of credit are propelling M&A activity. In South Korea, mergers and acquisitions are rolling through the Internet industry as that sector enters into a major shakeout period. Analysts expect heavy M&A activity to continue in South Korea for the foreseeable future.

Lawyers, Bankers, and Disappointments

For 2000, Goldman Sachs & Co. held on to its lead position as the top dealmaker for mergers and acquisitions, followed by Morgan Stanley Dean Witter, Merrill Lynch & Co., and Salomon Smith Barney, according to Thomson Financial Securities Data. The largest law firms continued to benefit from the ongoing merger and acquisition boom, led worldwide by Sullivan & Cromwell, which handled $754 billion in M&A deals for the first nine months of 2000, followed by Simpson Thacher & Bartlett with $553 billion and Cleary Gottlieb Steen & Bartlett with $541 billion.

Tapping the biggest law firms and brokers, however, does not ensure success. Although a number of recent deals have produced the sought-after results for acquirers and shareholders, a number of the largest mergers completed in recent years have proved disappointing. Poor post-deal integration dampened the Daimler's acquisition of Chrysler; overpayment for acquisitions plagued AT&T and First Union. Overall, however, experts still agree that mergers generally create value beyond the combined value of both targets and acquirers. Success, however, depends on adequate predeal due diligence and post-deal integration. The growing number of cross-border deals complicates the picture. Credit professionals will increasingly need to be deeply involved at both ends of the deal.