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M&A: Cross-border M&A - Europe leads the way

SPECIAL REPORT: M&A

Giovanni Amodeo is the editor of wealthmonitor.

Cross-border deals are on the rise and nowhere is this more clear than in Europe. Giovanni Amodeo looks at family businesses, both public and private, to see how they coped with the multiple challenges this particular M&A trend generates

While the increase in the last 12 months in global M&A activity has been well documented, it is also interesting to note the rise in cross-border deals within this trend. Data from mergermarket shows that European cross-border M&A transactions, with a value of over €100 million ($136.6 million), increased by 21% from 84 to 107 between the first half of 2006 and the first half of 2007. Meanwhile, the total volume of transactions over €100 million (including domestic and private equity deals) rose by only 14%, from 279 to 324, across the same period.

Executives of family-owned businesses are increasingly looking to make acquisitions abroad. There are many reasons for this, including gaining a foothold in a country where they have a marginal presence; getting access to new clients; taking advantage of the target's distribution network; and adding a new brand to an existing one.

Throughout the two periods, the hottest sectors, according to mergermarket data, were industrials (including automotive and chemicals), the service industry, telecommunication and media. One of the reasons for this trend in the industrial sector is that many companies that have reached at least the second generation of ownership are now facing succession issues. In Europe, this is especially true in the UK, the Germanic area and the Nordic region where companies have descendants that are either unwilling or unable to run the business. Alternatively, the companies could be too small to operate in a market dominated by large players.

In the service industry, telecommunication and media, it is more a consequence of sectors being fragmented and in need of consolidation. In addition, executives at companies operating in these areas are likely to be younger, more open-minded, have a background in M&A or finance and therefore more inclined to do a deal.

Deal of steel
The majority of the cross-border transactions see listed companies taking over smaller private players. One major exception is the €16.17 billion purchase of listed European steel giant Arcelor by family-owned rival Mittal Steel in June 2006. At the time, the merger raised many concerns among Arcelor's investors and local politicians who feared the Mittal family would have too much influence on the combined entity. This, together with opposition from Arcelor's minority shareholders, who claimed the new exchange ratio would have seen a less suitable condition for Arcelor's shareholders than the one originally agreed, delayed the closing.

Speaking at the time, Mittal chairman and CEO Lakshmi Mittal commented: "We have said from the beginning that we would like to enter into a friendly dialogue with Arcelor. With this in mind we have made various efforts to initiate discussions and have indicated that … we would be willing to revise our offer and make significant changes to our corporate governance."

Mittal consequently issued a more favourable ratio and statements relating to the corporate governance of the firm. However, despite the deal being agreed over a year ago, shareholders only voted to approve the first-step of the merger this August.

A merger of convenience
At the other end of the spectrum, privately-owned family businesses face similar challenges, despite not needing to placate shareholders. Italian family-owned Angelantoni, an environmental testing and biomedical lab equipment company, has been looking for acquisition targets for the last few years.

In 2004, Angelantoni acquired Tira, a private German company. The main problem management faced was convincing Tira's management to sell. Angelantoni met Tira's executives the year before at a trade fair, and talks continued over the following months. General manager Adolfo Caldarelli says that the main argument used to convince Tira was the opportunity for them to become part of a larger group. Angelantoni's aim was to acquire complementary companies in a new field, and Germany, alongside Italy, is the country where the main producers are located.

Caldarelli says that CEO and founder Umberto Angelantoni still outlines their overall strategy. The management supports him at operational level and works closely with him
"contributing professionally and methodically," Caldarelli adds.

An advisory tale
While there has long been a consolidation practice in Anglo-Saxon business culture, other privately-owned European businesses are increasingly looking to external management for support when making acquisitions. Lorenzo Gatti, partner at German M&A advisory firm Drueker, says that "in a cross-border acquisition, the advisor has to be able to capture the signals from the vendor and transport them to the buyer. Communication, or lack of, is a key issue," he adds. "Language skills and an ability to establish a level of trust with the
vendor can be of great value in a cross-border deal."

The same needs also arise when advising the vendor. "In a sell-side transaction with international buyers, it is important to structure the process in the most efficient way to accomplish different requirements, such as availability of key people and holiday periods. This is to avoid the risk of losing attractive prospective buyers during the process."

The role of legal advisor also has a strategic nature.  "Often vendors are not assisted by experienced legal or M&A advisors," says David Raifer, managing partner at Raifer law firm in Frankfurt. "This might lead to misunderstandings during the process and put the whole transaction at risk. To avoid this, it is crucial to retain an experienced advisor, especially if buyer and seller are located in different countries with different legal and cultural environments."

Lack of transparency might also jeopardise cross-border deals. "In sell-side transactions, family businesses often find it difficult to fully disclose the necessary financial and legal information or are not able to provide it according to usual standards," Raifer adds. "Buyers have become more and more sophisticated and tend to walk away when the vendor does not approach the transaction professionally."

Once the deal is done, it is common for some of the family members stay in the business for a number of years to ensure continuity. Thilo Sautter, partner at Investcorp in London, says "it is key for a transition period to have the family managers involved and sufficiently motivated. It really depends on the circumstances and the availability of internal or external talent to replace the family shareholders in case of retirement plans, for example."

Solving human M&A issues
Family members
Various family members often have different opinions on the sale or on the potential buyer. "This is a typical situation that arises in a deal sooner or later," says Marco Termini, partner at private equity firm 3i. "When we are lucky to find someone in the company interested in listening to us and mediating with the other shareholders, we will then try to communicate to everybody how we see their situation. We also bring examples of similar cases from the past where our presence has solved diverging agendas between shareholders. Alternatively, we bring cases where we did not close a deal and ultimately the internal frictions led a company to get worse and worse and the shareholders closed a less favourable deal later in time."

Management
"While the vendor's main aim is the maximisation of the net proceeds from the sale, the management might prefer certain bidders for different reasons (eg, chemistry, job security, career prospects, and (potential) economic rewards," says Lorenzo Gatti, partner at German M&A advisory firm Drueker. "Conflicts might arise when management fears being replaced by the owner. In this case, it is not unusual for the vendor to offer a financial incentive to management."

Customers and clients
"The vendor does not usually want to inform his clients of M&A activity, in order not to be limited in his choice of buyer," says Gatti. "For instance, in the automotive components sector, concerns from one major client could prevent a deal from completing."

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