Continental Divide
After nearly two decades of taking a back seat to the U.S., Eurobankers finally reclaim their place at the head of the global M&A deal table. Will they be able to hold onto their newfound title?
by Leah McGrath Goodman
Forty-six-year-old Gordon Dyal has something in common with such historical figures as Paraguay’s El Supremo, celebrated 1940s French screenwriter and Nazi resister Jean Aurenche and even Fidel Castro.
No, it’s not that he considers himself to be an especially political creature — it’s that he knows what it’s like to sleep in a different bed every night. As the global head of M&A for Goldman Sachs, he is, de facto, the world’s top Eurobanker, jetting anywhere from Asia to South America. He’s always in motion.
Americans are still smarting from last year’s revelation that European deal values had outstripped those of the U.S. by $50 billion as of April 2007, amplified by the strength of leading European currencies over the dollar. But Europe’s players knew full well what was coming. Hailing from a smattering of Old World countries, they were trouncing their Wall Street brethren as leveraged buyouts, hostile bids and cross-border consolidations prompted M&A volumes to soar throughout last year.
“The reality is that the merger business is no longer the exclusive domain of Wall Street,” says Dyal, an American who now lives in London. “The largest deals are not done by ‘American’ companies anymore, but by global companies. They may be based in certain cities in the U.S., Europe or Asia, but they’re really looking at transacting on a global scale.”
Privately, some U.S. bankers scoffed at the idea that Europe could reclaim its throne after nearly 20 years of New World dominance (after all, the last time Europe bested Wall Street was in 1990 — the first full year of German reunification). But as subprime woes deepened and Europe’s lead over the U.S. swelled to $150 billion by the end of 2007 on $2.1 trillion of new deals, it appeared that Europe was undeniably back on top.
The dawn of a new year brings both hindsight and clarity. And it’s now clear that the credit crunch is not only squeezing the States worse than the Continent, but that Europe is poised to build on its newfound supremacy by capitalizing on the sizable gains it realized in 2007, led by a skilled cadre of multilingual, multicultural bankers ready to tackle deals that continue to emerge in the EMEA region.
While the subprime fiasco has slowed things down significantly, announced European transactions are still topping those in the U.S. (by 230 deals and $119.6 billion as of mid-March, according to Bloomberg data), and many bankers stationed overseas are predicting an uptick in international M&A for the second half. Already in 2008, Europe has produced a respectable haul of $303.2 billion in deals, against the U.S.’s paltry $183.6 billion (also as of mid-March), proving that, at least for now, megatransactions have trended east.
Dyal, along with a handful of other top European M&A stalwarts (who, for the most part, use London as their main base of operations), stands at the forefront of this trend. Key executives leading the charge for the choicest pieces of this market include U.K. native Gavin MacDonald, global head of M&A for Morgan Stanley; Piero Novelli, global head of M&A for UBS; and Carlo Calabria, head of European M&A for Merrill Lynch. Novelli and Calabria are both Italian; Dyal, a New Mexico native, was raised in California.
Last year, Morgan Stanley, Goldman and UBS (in that order) reaped the lion’s share of European M&A business, representing nearly 90 percent of the market, up from about 74 percent a year ago. But that’s only one indication of how quickly the major players are shoring up their market share. The next three firms in that pecking order — JPMorgan, Merrill and Citigroup — had a photo finish in 2007, with only a $3 billion difference in overall deal values among them, according to Bloomberg.
Out of the gate this year, UBS raced to the front of the pack near the end of the first quarter, with Citigroup and Deutsche Bank on its heels close behind. Since the next five dealmakers in that ranking led the field last year, bankers expect to see another white-knuckle round of league-table competition in 2008.
With most of the world’s gargantuan transactions still emerging from Europe — remember, last year’s biggest headline grabbers were the $187 billion bid by BHP Billiton for London-listed mining company Rio Tinto (led by Dyal) and the $102 billion buyout of Dutch bank ABN Amro (advised by Novelli) — competing firms are teaming up increasingly often to get deals done.
As those deals grow larger and more complex, investment banks have invited a burgeoning number of competitors to lend a hand to share the financing risk — and the profit.
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This burst of activity hardly happened overnight, says MacDonald, 46, the banker behind Morgan Stanley’s successful drive to win the most European deal business of any bank in both 2006 and 2007. (Last year, it completed $626.7 billion of deals, up about 36 percent from the year before.)
He also points out that Europe’s leadership position last year hinged on just a few megadeals, suggesting that without them, the race between the United States and Europe would probably be closer. No small amount is at stake: The total global deal market has now reached about $4 trillion annually.
“It was very gradual, progressing steadily since 2000,” says MacDonald, recalling the maturation of the EMEA market. Now that Europe has scampered into the lead, MacDonald — a banking veteran of more than 20 years and one of the founding members of Morgan Stanley’s European M&A department — reckons the momentum will remain on the Continent’s side, even with the challenge of intensifying credit bottlenecks. In fact, the seizing up of credit markets may have the ironic effect of preserving Europe’s edge, as the resulting difficulties seem mostly to be hampering the U.S.
“The European economy remains strong,” MacDonald says, speculating that only an outright recession to rival one in the U.S. would likely be enough to ruin Europe’s M&A advantage. “The euro has proven itself to be an excellent currency, and there’s a great deal of confidence to do transformational deals.”
That’s a good sign for any European transactions in 2008 that make strategic sense and offer the most value to investors, says Merrill’s Calabria, 47, who specializes in corporate defense strategies. Last year, he helped Spanish electricity company Endesa fight off a hostile bid from Germany’s E.ON before the company was acquired by Acciona and Enel for a superior $58 billion, one of the largest deals of the year.
“Credit for the right transaction is still available,” he says. That, in addition to falling benchmark interest rates in both Europe and the U.S., should bode well for deal standings in 2008.
Europe’s deal flow has been curbed by credit-market volatility, but in a recent survey of bankers by Grant Thornton and Latham & Watkins, a majority of respondents predicted that the rate of growth would probably shrink by as little as 10 percent and no more than 50 percent. Growth will continue, in other words — a situation that stands in marked contrast to the U.S., where investment banks are warning of a possible drop in M&A activity of up to 30 percent or more this year — something that hasn’t happened since 2002.
Ongoing credit turbulence notwithstanding, a host of other reasons help explain why M&A in Europe — and throughout the EMEA region as a whole — has enormous staying power. Crucially, corporations are showing an increased willingness to merge with peers abroad to create dominant global powerhouses, Calabria says. This has resulted in a 58 percent jump in global cross-border activity, with three-quarters of deals involving a European company, according to statistics from Goldman Sachs.
“Corporations that have gone through domestic consolidation are now looking toward the endgame globally,” says Calabria, who conducts business in both English and Italian. “They’re looking at the deals that will make them the most relevant in their industry and in their market.”
Scorecard
Gavin MacDonald
Age 46
City London
Firm Morgan Stanley
Position Global head of M&A
Education Law degree from Cambridge University, 1983
Career Arc Joined Morgan Stanley in 1983; was named managing director of European M&A in 1997. In 2004, he was named vice chairman of investment banking. In 2006, he became head of Europe and Asia M&A; in 2007, he was appointed global head of M&A.
Really Big Deal Led Punch Taverns’ acquisition of Allied Domecq’s 3,500 pubs and a share of its off-license business for £2.8 billion in 1999.
Gordon Dyal
Age 46
City London
Firm Goldman Sachs
Position Global head of M&A
Education MBA from Dartmouth, 1987
Career Arc Was a financial analyst in Merrill’s public-finance division from 1983 to 1985. After graduate school, returned to Merrill in 1987 as an associate in its M&A department. Joined Morgan Stanley’s M&A team as an associate in 1990 and left in 1998 as managing director to become partner at Goldman’s M&A department in New York. Headed to London in 1999 after being named co-head of European M&A. In 2001, was appointed co-head of investment banking in Europe. In 2004, became global head of M&A.
Really Big Deal Led the team behind BHP Billiton’s $187 billion bid for Rio Tinto.
Carlo Calabria
Age 47
City London
Firm Merrill Lynch
Position Head of European M&A
Education M.A. in business studies and economics from Università di Roma, 1983
Career Arc Began as a banker for Morgan Grenfell, where he held various positions in London and Milan. Joined CSFB (Europe) in 1990, where he was managing director in its investment-banking division, co-chairman of M&A in Europe and chairman of CSFB Italy. Named head of European M&A and vice chairman of investment banking by Merrill in 2005.
Really Big Deal Assisted Endesa in scuttling a hostile bid to nab a superior one totaling $58 billion in one of the biggest deals of 2007.
Piero Novelli
Age 42
City London
Firm UBS
Position Global head of M&A
Education MSc in mechanical engineering from Università di Roma, 1989; MSc in finance from MIT, 1993
Career Arc Joined Merrill as an associate in 1993 and ascended to head of European M&A before leaving in 2004 to become co-head of global M&A for UBS. In 2007, was named managing director of investment banking and sole global head of M&A.
Really Big Deal Advised Enel, Italy’s biggest power company, in its $58 billion acquisition of Endesa in 2007.
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European bankers observe that this situation is not entirely unlike the land grab seen in U.S. territories in 1848, as governments, financial institutions and insurers with hefty ownership stakes in national companies — some of them going back to the post–World War II reconstruction era — switch up holdings to find new ways to cash in.
Ample funding for these types of transactions from equity issuance in the EMEA region, which has outpaced the U.S. since 2004, has stoked those fires. Last year, EMEA equity issuance shot to a record high of $276 billion, more than double that of the U.S., according to Dyal.
In turn, deal flow in Europe and the EMEA region in 2007 rose 41 percent and 38 percent respectively, according to Goldman, compared with just 10 percent growth in the U.S.
Beyond that, fresh financing has come from private-equity firms and, in particular, sovereign-wealth funds funneling cash into Europe — the latter of which invested more than $20 billion in Western companies in the fourth quarter and have plenty left to spend of an estimated $3 trillion in assets this year. European GDP, which topped that of the United States for the first time in five years in the final quarter of 2007, also is expected to stay well ahead, as the subprime mess continues to hammer its host nation the hardest.
These auspicious trends have been buttressed by changing attitudes in Europe about how dealmaking should be done. The once-frowned-upon maneuvers of stake building, hostile bidding and shareholder/hedge-fund activism are increasingly becoming accepted standards, says UBS’s Novelli, 42, whose firm advised ABN Amro last year on dueling bids that ultimately led to the largest bank deal in history. Last year, 80 percent of global hostile activity involved a European target or acquirer, resulting in an increase in hostile bids of 23 percent.
“This is a secular trend we’ve been seeing over the past months,” says Novelli, who, in addition to his native Italian and English, also speaks Spanish and French. “Deal techniques once seen as rather aggressive and not often used are now becoming market practice.”
Many of the jurisdictional, regulatory, monetary and legal barriers that once discouraged cross-border deals have also been dismantled — though acquirers still encounter protectionist hurdles from politicians looking to defend national assets from foreign buyers. In Italy, for example, where Air France–KLM was attempting to buy a large stake in Alitalia earlier this year, the Franco-Dutch airline encountered severe resistance from politicians and unions favoring a competing deal with a private Italian airline, Air One.
There are inevitable cultural hurdles as well. “Imagine trying to do a deal in any global industry,” says Dyal, who has brokered deals on both sides of the Atlantic. “In Europe, there are these global companies with headquarters and primary listings in various European countries with attendant cultural differences — but in the U.S., they’re often listed on the NYSE and the differences are much less.”
No wonder London, once regarded as a lonely outpost for bankers who couldn’t cut it on Wall Street, is suddenly experiencing an influx of rainmakers looking to prove their mettle overseas. “We’re seeing more expats come over here,” confirms Dyal, who decamped for Europe in 1999, during an earlier Wall Street exodus. Even with credit concerns afoot, bankers remain sanguine about the M&A prospects in still-hot sectors such as utilities (power, electricity), financial services (banking), natural resources (energy, mining) and health care (retirement, elder-care facilities). While each area represents a unique opportunity, European bankers note that businesses that tend to run counter-cyclical to prevailing macroeconomic indicators present the best opportunities in 2008.
Topping the list of regional hotspots across the Atlantic are Eastern Europe, which bankers say presents immense value, and Russia, which ranks lower mainly because of the high risk inherent to investing there. Elsewhere, the Middle East’s petrodollars are an ideal source for deal funding, but many deal pros don’t yet consider the region’s businesses ripe for investment.
The seizing up of credit markets may have the ironic effect of preserving Europe’s edge, according to Morgan Stanley’s Gavin MacDonald.
Further east, China and India will continue to be popular. “Acquirers will be very active in China and India — they are playing a critical role — but they’re not yet mature markets,” Novelli says, adding that in both countries, the government’s ownership of most big firms, plus currency-conversion issues, have created some sticking points. “A full-blown merger between a Chinese company and a European or U.S. company has never taken place,” he points out.
So how are Europe’s top dealmakers holding up? Well, maybe a slight pullback in M&A growth this year wouldn’t be the worst thing in the world.
“I’m still not getting much sleep these days,” Novelli says with a laugh. “But I suppose that’s part and parcel of the everlasting damage done to me when I was a junior banker.”
The Eurobanker Cheat Sheet
Our insiders point out five differences in dealmaking across the Atlantic.
Forget the Commitment Letter.
In most European jurisdictions — unlike in the United States — having a piece of paper that says you can fund a deal isn’t worth, well, the paper it’s printed on. Before you can even launch a bid, you need to raise the dough in what’s known as “cash confirmation.”
National Pride Is No Small Obstacle.
Imagine nearly derailed presidential elections, widespread public chest-beating and fire-and-brimstone protectionist speeches by politicians every time a company in one state decided to buy a company in another — now you know what it’s like to do virtually any cross-border deal in Europe. You Try It, You Buy It.
In most European nations, buying just one-third of any company means you had better be prepared to make a compulsory tender offer for the rest of it. Even more so than in the U.S., shareholders greatly dislike being bullied by big stakeholders without being given the option to cash out lucratively.
This Medicine Cabinet Lacks Poison Pills.
Because Europeans have historically disdained hostile deals as uncouth, they have rarely occurred — and anti-takeover defenses used in the U.S. don’t really exist there. However, with hostile bids becoming more common, bankers say that is soon likely to change.
Security Loves Company.
As a rule, European high-yield investors generally turn up their noses at the prospect of buying unsecured debt — as opposed to their counterparts in America, who happily bought bonds without recourse to underlying assets . . . well, until recently, that is.