Where Are All the Europeans?

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

Moreover, companies enamored of the exchange-rate advantages of a transatlantic transaction may forget the risks inherent in that type of deal. “Cross-border M&A is that much harder to make work,” says Servaes. “Returns are generally lower,” and the transactions are often more complex, while presenting higher regulatory and cultural hurdles. J.P. Morgan Chase & Co. estimates that, taking hedging activities out of the equation, the record of value creation for European acquisitions of U.S. businesses has been even worse than the unenviable performance record of deals within the United States. Perhaps, having been burned before, the Europeans are staying home these days.

Vodafone certainly is—at least for now. The favorable exchange rate wasn’t enough to save the UK-based mobile-phone giant’s recent bid for AT&T Wireless, after a bidding war developed with Cingular Wireless. Vodafone bowed out in February, when Cingular upped its bid to $41 billion. Vodafone had opened the bidding at $30 billion, eventually raising it to $35 billion, which translated into £18.3 billion. (The pound closely tracks the euro against the dollar.)

Illustrating the advantage of the weak dollar for Vodafone, that same $35 billion bid would have cost £21.7 billion just a year earlier. In the end, though, the deal boiled down to strategic fit, and Vodafone’s commitment not to overpay. It made more sense for Cingular and AT&T to combine, putting similar technologies together and creating greater synergies. In order for Vodafone to complete the deal, on the other hand, it would have had to sell its profitable Verizon Wireless stake. That sale would have been in dollars, so Vodafone’s exchange-rate benefit would have been reduced had it used the proceeds toward the AT&T Wireless purchase price.

Over There

For American companies looking overseas for acquisitions, strategy also seems to trump any weak-dollar concerns.

When Reynolds and Reynolds Co. wanted to expand to Europe, CFO Dale Medford says exchange rates weren’t a large factor for the Dayton-based provider of IT systems to automobile retailers. The company paid $7 million for Incadea AG, a privately held software company based in Raubling, Germany, assuming $4 million of debt (in euros). “Had [exchange rates] been in a range that made it overly expensive, it could have made us reconsider,” says Medford. “But the acquisition was very important to us strategically.”

Reynolds and Reynolds plans to build on the Incadea acquisition and roll out products throughout Europe and the rest of the world. The company will not hedge against the cost of the deal, since its business will be conducted in a number of currencies. “We’ll take more of a portfolio approach,” Medford says. And, he adds, since the cost basis in Europe will be in euros, it will “act as a natural hedge against our euro-based revenues.” (Companies that buy distribution networks in Europe to sell products that are made in the States must worry more about exchange rates. That’s because their costs will be in dollars, while revenues will be in euros or pounds.)


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