Record number of corporate deals in Europe this year

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By Juha-Pekka Raeste
     
      So many corporate purchases have taken place in Europe in the early part of the autumn that an all-time record could be set in monetary terms by the end of the year.
     The previous record was set in 1999, at the time of the big dot-com frenzy.
     A Finnish manifestation of this came last week, when the dairy company Ingman, Sampo Bank, and the food producer HK Ruokatalo announced major transactions.
     Typical for this year's corporate purchases has been that the transactions involve cash more than before.
     In Europe, corporate deals worth more than EUR 800 billion have been announced so far this year. According to the Financial Times newspaper, this is 40 percent more than had taken place in the same period last year. In the United States, growth has been 12 percent, and in Southeast Asia, excluding Japan, the figure was 26 percent.
     
Favourite targets of purchase in Europe have been British, French, and Spanish companies, notes Thomson Financial in a recent report.
     "In Scandinavia, the end of the year will be very busy, but Finland's situation is more difficult to evaluate", says Heikki Westerlund, CEO of the capital investment company CapMan.
     
Capital investment groups have increasingly been buying holdings in companies.
     However, there were three exceptions to this trend last week: in deals involving Sampo, Ingman, and HK, the buyers were companies operating in the same line of business.
     In recent times, industrial companies have often lost to capital investors in takeover bids. This might be seen as surprising, because industrial companies operating in the same field should benefit from the synergy that arises from buying out a competitor, and should therefore be able to offer a higher price.
     The ability of capital investors to fork out huge prices for companies results from leverage that they can apply in the form of loans. Capital investors generally seek to finance their deals largely with borrowed money, thus improving the return on invested capital.
     Listed industrial companies cannot resort to borrowed money to the same degree, because they are committed to the investors - the owners - to maintain a high degree of solvency - generally at about 40 percent.
     
Another rule that applies to corporate purchases, including the ones made in Finland last week, is that a significant proportion of deals are made at the peak of the business cycle, when prices are high.
     This does not mean that the buyers are foolish. Owners do not want to let go of healthy companies when times are bad - unless they have to.
     
This year the largest capital investment funds have each taken in tens of billions of euros with the purpose of focusing on large corporate purchases executed with the help of borrowed money.
     The buying power of these finds is many times greater than the money that they have collected, because the financing is mostly done with borrowed money.
     These funds have so much money available to them that there are few alternatives to their offers. In such a case it is the opinion and will of the buyer that is the deciding factor.
     
On a global scale, about EUR 2 trillion in corporate deals have been made public this year, calculates Thomson Financial. The value of the average deal has grown in a year by 11 percent to EUR 150 million.
     In January-September this year 34 transactions were worth more than 10 billion US dollars (EUR 7.8 billion). The value of these major transactions amounted to 29 percent of all corporate deals.
     Capital investors have dominated transactions in the USA this year.
     The largest purchase was an offer by the HCA hospital chain that was worth EUR 16.5 billion. If HCA's EUR 9.1 billion in outstanding loans are factored into the equation, the total value of the deal slightly exceeds even the RJR Nabisco deal of 1988.
     Soon after the HCA deal was made public, another group of capital investors announced the purchase of the Texas-based technology company Freescale Semiconductor for EUR 13.8 billion.
     
The number of hostile takeover bids is also increasing sharply.
     The statistics company Dealogic reports that in January-September, there had been 132 bids that were not supported by the management of the company that was targeted. This is more than twice as high as in the same period last year.
     
Helsingin Sanomat / First published in print 15.11.2006

More on this subject:
 The return of the industrial buyer

Previously in HS International Edition:
  Finnish HK Ruokatalo to purchase Swedish Meats for EUR 113 million (10.11.2006)
  Sampo Bank´s rivals expect intense competiton over large clients (10.11.2006)
  Finnish Sampo Bank Group to be sold to Danish Danske Bank for EUR 4.05 billion (9.11.2006)
  Finland´s Ingman sells dairies to Swedish Danish giant Arla (9.11.2006)

JUHA-PEKKA RAESTE / Helsingin Sanomat
juha-pekka.raeste@hs.fi