Weighing The Risks & Rewards of Doing M&A In Europe

Wednesday, May 21, 2003

Profs. Stephen Goldberg, Bruce Benet, and David Cannon, Journal of Corporate Accounting & Finance, http://

Weighing The Risks & Rewards of Doing M&A In Europe

Abstracted from: The Euro And Mergers: What Are The Opportunities And Risks?

By: Profs. Stephen Goldberg, Bruce Benet, and David Cannon Grand Valley State University (SG and DC) and Central Michigan (BB)
Journal of Corporate Accounting & Finance - Vol. 14, No. 2, Pgs. 25-30

Taking advantage of Continental opportunity. The disintegration of trade and financing barriers made possible by the European Union and the introduction of a common European currency present both challenges and opportunities for American investment bankers investigating merger and acquisitions abroad. Profs. Stephen Goldberg, Bruce Benet, and David Cannon write that Europe's lower currency conversion costs, greater pricing transparency, more standardized financial reporting, and integrated financial markets have laid a groundwork for successful cross-border M&A. Today, many Continental companies are replacing traditional bank financing with euro-denominated bonds boasting a lower interest rate. European investment funds, once restricted by currency concerns to domestic markets, now invest by industry rather than country. The factors that provide incentive for European companies to merge also motivate US firms wishing to grow on a global scale.

Yet challenges remain. Cross-border mergers nevertheless remain more difficult to navigate than a strictly domestic deal. Acquirors from the United States often must pay cash, the authors point out, because Europe lacks the equivalent of the American depositary receipt, which European companies often use to finance their US acquisitions. Incompatible cultures, government resistance, language differences, and an underdeveloped market for depositary receipts serve as additional obstacles. Staff cutbacks, a big source of cost savings for companies in the US, meet strong resistance in European countries with strong labor unions and tough labor laws. Increased opportunities in hostile takeovers, a relatively new phenomenon in Europe, may help to offset some of these drawbacks. With the threat of hostile bids looming, European companies could become more transparent, as managers take steps to get their houses in order before an outsider peeks in.

Antitrust concerns. As in America, acquirors must be aware of European antitrust concerns and regulations, remind the authors. Consider whether a deal could bring higher consumer prices and which companies hold a dominant position. To define a market under European law, look at what alternative sources of supply consumers have for a product, estimate the production capacity needed to produce these alternatives, and consider the availability of alternatives from competitors. Approval from an EU competition commissioner could take as little as a month if the potential acquiror provides sufficient data and information, but the time frame could stretch to four months or more if the commissioner deems the information insufficient or if competition issues arise.

Abstracted from Journal of Corporate Accounting & Finance, published by John Wiley & Sons, 111 River Street, Hoboken, NJ 07030.

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