Case 4.14
Merger Activity
A European and worldwide perspective
What have been the trends, patterns and driving factors in mergers and acquisitions (M&A)
around the world? An overview of mergers1 worldwide from 1995 to 2005 is given in Figure
(a). It shows the number of mergers and the value by region (by target company).
40
4000
35
3500
30
3000
25
2500
20
2000
15
1500
Number of deals (000s)
4500
€ billions
45
Value: rest of world
Value: USA
Value: EU-25
Number worldwide
5000
10
1000
500
5
0
0
1995
1996
1997
1998 1999
2000
2001 2002
2003
2004
2005
Source: Mergers &Acquisitions Note (European Commission, DG ECFIN, April 2006)
(a) Mergers and acquisitions by target (deals valued at over $1 million)
The 1990s saw a rapid growth in M&A as the world economy boomed. Then with a slowing
down in economic growth after 2000, M&A activity declined, both in value and in the
number of deals.
Mergers in Europe
Mergers, both within Europe and worldwide, have been predominantly horizontal rather than
vertical or conglomerate. This has led to an increase in concentration within a wide range of
manufacturing and service-sector industries in a number of European countries, especially in
the UK, France, Germany, Holland and Sweden. Research suggests that such merger activity
has led to few gains in efficiency and only minimal improvements in competitiveness.
Pre single market (1993)
The table on the next page shows the main motives given for industrial mergers and
acquisitions in the EU between 1988/9 and 1991/2. Clearly the desire to gain greater market
power and market share was the driving force behind mergers in the EU.
Main motives for mergers and joint ventures in the EC: 1988/9–1991/2
Strengthening of market position
Expansion
Restructuring (including rationalisation and synergy)
Complementarity
Diversification
Co-operation
Research and development
Other
Total cases specifying reasons
648
419
158
72
55
13
3
73
1441
Source: Reports on Competition Policy (Commission of the European Communities, various years).
For most of the 1980s, the majority of mergers occurring in Europe were within national
boundaries. But as inter-EU trade grew and as Europe was increasingly seen by business as a
‘single market’, so an increasing proportion of mergers were ‘cross-border’. The proportion
of total EU mergers that were between companies in different member states grew from 8.3
per cent in 1987/8 to 20.5 per cent in 1992/3.
An important factor explaining the increase in inter-EU mergers was the process of
dismantling barriers to trade to create a true ‘common market’ by 1993 (see section 11.5).
Firms took the opportunity to establish a European network and restructure their operations as
well as to expand productive capacity.
A notable feature of European merger activity was the large size of many of the firms
involved. The larger the firms, the more likely they are to be involved in cross-border mergers
rather than purely domestic ones. The implication of these trends is that markets are
becoming increasingly concentrated.
Since 1993
When the single market came into being in January 1993, many commentators predicted that
there would be a new wave of merger activity as companies, faced with new competition,
would be forced to rationalise, or would take the opportunity to expand their operations in
other EU countries.
As it turned out, the recession gripping Europe caused merger activity initially to decline
(see the diagram). The main determinant of merger activity in the short run remains the
overall state of the economy. When an economy moves into recession, so merger activity also
declines.
After 1994 the growth in mergers in the EU resumed. There were several explanations for
this:





A recovery in growth throughout the EU.
A growing process of ‘globalisation’. With the dismantling of trade barriers around
the world and increasing financial deregulation, so international competition has
increased. Companies have felt the need to become bigger in order to compete more
effectively.
Falling interest rates, making investment in the stock-market more attractive than
saving in a bank.
A deepening of the single market, making Europe-wide operation by companies
easier.
An increasing conviction that there would be a successful move to a single currency,
making it easier for companies to operate on an EU-wide basis.
2
As 1999 approached, and with it the arrival of the euro, so merger activity reached fever
1000
18000
900
EU/non-EU
800
Inter-EU
14000
Total number of mergers
12000
€ billions
600
10000
500
8000
400
Number of deals
700
16000
6000
300
200
4000
100
2000
0
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Source: European Economy, Supplement A , No 12 - December 2001 (European Commission): based on Table 1 and Graphs 7 and 10
(b) Mergers and acquisitions involving an EU company
pitch, stimulated also by the strong growth experienced throughout the EU (see Figure (b)).
Then, with the worldwide economic slowdown in 2001, there was a fall in all types of
merger in the EU: between companies in a single EU country, in two or more EU countries,
and in an EU and a non-EU country.
Mergers worldwide
The 1990s
The early years of the 1990s saw relatively low M&A activity as the world was in recession,
but as world economic growth picked up, so world-wide M&A activity increased. Economic
growth was particularly rapid in the USA, which became the major target for acquisitions.
There was also an acceleration in the process of ‘globalisation’. With the dismantling of
trade barriers around the world and increasing financial deregulation, so international
competition increased. Companies felt the need to become bigger in order to compete more
effectively.
By the end of the 1990s, annual worldwide M&A activity was three times the level of the
beginning of the decade. At this time there were some very large mergers indeed. These
included a €29.4 billion marriage of pharmaceutical companies Zeneca of the UK and Astra
of Sweden in 1998, a €205 billion takeover of telecoms giant Mannesmann of Germany by
Vodafone of the UK in 1999 and a €50.8 billion takeover of Orange of the UK by France
Telecom in 2000.
Other sectors in which merger activity was rife included financial services and the
privatised utilities sector. In the UK, in particular, most of the privatised water and electricity
3
companies were been taken over, with buyers attracted by the sector’s monopoly profits.
French and US buyers were prominent.
The early 2000s
Then, with a worldwide economic slowdown after 2000, there was a fall in both the number
and value of mergers throughout most of the world. What is more, the worldwide pattern of
M&A activity was changing. Increasingly both European and US companies were looking to
other parts of the world to expand their activities. This is illustrated in Figure (c).
60
1990-3
Percentage of total
50
2000-3
40
30
20
10
0
N. America
EU-15
Rest of Europe
Asia
Rest of world
Source: Mergers &Acquisitions Note (European Commission, DG ECFIN, October 2004)
(c) Mergers and acquisitions by target region (% of total number)
The two major target regions have been (a) the rest of Europe, especially the ten countries
joining the EU in 2004 plus Russia, and (b) Asian countries, especially India and China.
These new markets have the twin attractions of rapidly growing demand and low costs,
including cheap skilled labour and low tax rates.
Companies from the EU-15 countries have focused especially on the rest of Europe, with
a 65 per cent share of inward M&A in this region between 2000 and 2003. By contrast, the
EU-15 countries had only a 17 per cent share of inward M&A in Asia, compared with a 29
per cent share for North America and 47 per cent share for Asia itself.
The small share of inward investment in Asia by EU companies is worrying for EU
ministers, given that China and India are the world’s two fastest growing markets. Those
companies which have already invested in these countries are likely to have gained a ‘firstmover’ advantage through establishing sources of supply and building relationships.
4
Inter-EU
€
2001
1999
1998
1997
1996
1995
1994
1993
1992
1991
1000
900
800
700
600
500
400
300
200
100
Number
18000
16000
14000
12000
10000
8000
6000
4000
2000
0
EU/nonTotal
billionsof
deals of
EU
number
mergers
Types of M&A activity
Many M&A deals are ‘hostile’. In other words, the company being taken over does not want
to be. The deals are often concluded after prolonged boardroom battles, with bosses of the
acquiring company seeking opportunities to build empires, and bosses of the target company
attempting all sorts of manoeuvres to avoid being taken over. This may involve them seeking
deals with alternative, more ‘friendly’ companies. Generally companies are increasingly using
the services of investment banks to help them in the process of making or warding off deals.
Despite the growing number of horizontal mergers, there has also been a tendency for
companies to become more focused, by selling off parts of their business which are not seen
as ‘core activities’. For example, not long after its takeover of Wellcome, Glaxo decided to
concentrate on the production of prescription drugs, and as a consequence to sell its share of
Warner Wellcome, which produced non-prescription drugs. Another example was Volvo.
After unsuccessfully attempting to merge with Renault in 1993, it subsequently divested itself
of several companies that it owned in a variety of industries, ranging from banking and
finance to food, matches and pharmaceuticals.
This trend of horizontal mergers and conglomerate and vertical de-mergers has allowed
companies to increase their market power in those specific sectors where they have expertise.
Consumers may gain from lower costs, but the motives of the companies are largely to gain
increased market power – something of dubious benefit to consumers.
Question
Are the motives for merger likely to be different in a recession from in a period of rapid
economic growth?
1
When we refer to ‘mergers’ this also includes acquisitions (i.e. takeovers).
5