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European merger and acquisition (M&A) activity has been booming. Not only are buyouts dominating the headlines daily – from Gaz de France and Suez to Eon and Endesa – but the figures show that the “pace of private equity spending is relentless”, says Robert Lamb in Unquote, the private equity newsletter. In the last quarter of 2005, the top seven buyout deals were worth more than €1bn each, and the total of European private equity deals “comfortably exceeded e30bn” for the quarter, which was “high by historical standards”.
“Europe is undoubtedly enjoying an M&A boom at the moment,” says Philip Coggan in the FT, and this is “generally deemed to be good for equity markets”.
This has certainly been true in the last year – the German Dax is up 36% and the French CAC up 26% – but is it the case when it is government, rather than the private sector, that is driving the deals? The Gaz de France merger with Suez seems to have been put together to head off a bid from Italy’s Enel. And the Spanish are threatening to veto a deal between German utility Eon and Spanish Endesa in order to push forward a domestic merger with Gas Natural.
Normally, M&As tend to boom when interest rates are low (it’s easier to borrow money) and when companies are undervalued (they can be split up and resold at a profit). But the current wave of European deals “seem to be more about industry consolidation and the political desire to create national champions in sectors such as energy”. And “if companies are getting together for reasons other than valuation or financial consideration, I suppose that isn’t quite such a good sign,” Ian Scott of Lehman Brothers told Coggan.
Even so, some M&A activity is better for the market than none. But thanks to the interference of various European governments – Spain and France are both being accused of protectionism – M&A activity in Europe could well be stifled. Although from governments’ points of view, ‘economic patriotism’ might gain votes, says The Daily Telegraph, it might also mean that the record number of cross-border mergers within the EU last year was “the high-water mark of economic liberalism”. So don’t expect M&A activity to continue helping the equity markets.
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Annunziata Rees-Mogg
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