Where Are All the Europeans?

Conditions seem ripe for a transatlantic M&A invasion. There are good reasons it isn't happening.

From across the pond, American assets look downright cheap these days. Weakened by huge U.S. trade deficits and low interest rates, the dollar has plunged 32 percent since its October 2000 peak. And with merger-and-acquisition activity heating up on both sides of the Atlantic, one might expect a “European invasion” like the 1998-2000 spree that led to BP-Amoco-Arco, Vodafone-AirTouch, Daimler-Chrysler, and numerous other combinations.

So why did European companies strike only 97 first-quarter deals in the United States this year, down from 133 in a year-earlier period when overall global M&A activity was far weaker? “It’s surprising,” says Scott Adelson, senior managing director at Houlihan Lokey Howard & Zukin, a Los Angeles-based investment bank and M&A advisory firm. “Effectively, everything in the U.S. is on sale.”

At the same time, the exchange rate would seem to dictate that U.S. companies will shun European acquisitions. Home Depot Inc. CEO Robert Nardelli scotched January rumors of a possible British deal earlier this year by calling the idea “dumb,” and arguing that “there couldn’t be a worse time to do an international acquisition, with the euro at $1.25 to $1.28.”

So why do other American companies now seem to be growing hungrier for transatlantic acquisitions? They have moved to snap up 160 European businesses in the latest quarter—most of them in small or midsize deals—including Yahoo Inc.’s $574 million (475 million euro) offer for France-based Internet company Kelkoo SA. Indeed, in dollar-value terms, American buying of European assets is an emerging trend, building on last year’s doubling of announced U.S. cross-border deal-making from $36.3 billion to $74.8 billion—led by General Electric Co.’s $9.5 billion plan to buy British medical-diagnostics company Amersham Plc.

The reasons for this seeming flip-flop of European and American roles start with an old M&A adage: acquisition decisions are based far more on strategy and fit than on currency values. But with the increasing earnings health of many U.S. companies marking them as prime targets for strategic buyers anywhere, another look is warranted. And that deeper explanation reflects more on the unclear economic outlook in Europe.

“While the economy is improving, continental Europe still has some concerns going forward,” suggests Henri Servaes, professor of finance at London Business School. “The sentiment about economic growth is not as strong as it is in the U.S.” It is unlikely, he adds, that Europeans will stage another push for American acquisitions until they get their own houses in order. Amid slow growth, many European companies, especially those in the euro-zone, are still restructuring to cut costs.

“Cross-Border Is Harder”

This counterintuitive relationship between deal flow and currency values surprises few experts in the M&A field. One problem with buying American assets to take advantage of the weak dollar, observes Servaes, is that the cash flows eventually coming from the purchase must be repatriated at the future exchange rate, which is difficult to predict, but could well be less advantageous. That point isn’t lost on European companies that are now watching profits from their American subsidiaries dwindle due to the weak dollar. “If a deal makes sense only on the assumptions of future exchange rates, then you should not do the deal,” the professor says. Instead, he advises, don’t let decisions be governed by exchange rates, and concentrate on the value of the asset. If your company thinks the dollar will recover, buy dollars instead.

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