Europe Is a New, Rich Playing Field for Risk Arbs

With fewer defenses against hostile takeovers, European companies appear ripe for U.S.-style arbitrage investing.
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The merger and acquisition environment in Europe is beginning to look a lot like the U.S. -- circa 1985. Hostile transactions are breaking out all over the place. Leading the list are Vodafone AirTouch's (VOD) - Get Report $129 billion-plus bid for Mannesmann (MNNSY) , the two competing $38 billion bids for National Westminster Bank (NW) and Carnival's (CCL) - Get Report bid for NCL Holding (NRW) , the parent company of Norwegian Cruise Lines. American-style takeover tactics have changed the genteel world of European dealmaking forever, with no end in sight to the deals.

The introduction of the euro last year, as well as the repeal of trade barriers, has opened all of Europe to the cross-border deals that are driving this trend. The relaxation of trade constraints has unleashed pent-up consolidation trends in a host of industries, and U.S. dealmakers are happily instructing their new European clients in the nuances of American-style deal culture.

Just as the in the U.S. 10 years ago, distaste for hostile bids is quickly fading. Corporate managers are realizing such bids the only method to ensure they reach their goals and control their own destiny. Even

Goldman Sachs

, who for so long made a show of their unwillingness to advise on a hostile raid, has enthusiastically embraced assignments to put into play some of Europe's most venerable companies, including Mannesmann.

I hope that no backlash occurs that would cause regulators in Europe to allow companies to install the potent antitakeover defenses that have developed in the last 15 years in the U.S. These defenses, such as poison pills and staggered board-of-directors terms, are still unheard of in Europe.

In the United States, a strong political backlash against the excesses and abuses of the golden age of hostile deals -- 1982 through 1989 -- ushered in legislative and judicial initiatives to arm companies with as many defenses as lawyers could dream up.

Shareholders in general get a much fairer shake in Europe when a company is the subject of a bid. It is significantly harder to run and hide from a bid -- the target needs to develop an economically competitive alternative. With the full arsenal of takeover defenses most U.S. companies have installed, however, target companies here are frequently able to stall for as long as two years before having to confront a bid.

Better rules and a fairer takeover process are driving many arbitrageurs (myself included) to focus more of our time and resources on European deals. Until recently, there weren't enough deals to make it worth the effort -- we'd look at the larger deals, but made no systematic effort to follow deals in Europe.

All that has changed now. Which leads to the obvious question: Where is the action likely to be concentrated? The recently privatized state telephone companies are eyeing acquisitions as a way of gaining both market heft and entering high-growth industries. Last week's bid by


(a Scandinavian telecom recently formed through a Swedish-Norwegian merger), for Irish long-distance and cellular player

Esat Telecom

is just the latest example of this trend. The wireless sector, sparked as it has been by Vodafone's land-grab of Airtouch, first, and now an attempted run on Mannesmann (which just recently absorbed U.K. wireless stand-out



), will represent another big source of deals in coming months.

Perhaps the biggest change will occur in banking. Long coddled by their host governments, European banks are facing increasing merger pressures to rationalize cost structures and to gain the critical mass to take advantage of cross-border marketing opportunities.

Continued consolidation in the global pharmaceuticals business can only be accelerated by some of the recently announced deals, such as the battle for



, although this activity is certainly not limited to Europe. Also look for a step-up in deal flow from the retail sector, which has only seen a spate of smaller deals to date. All this means that European deals will provide both investors and arbs plenty of action in the year to come.

David Brail is the president and portfolio manager of Palestra Capital, a Manhattan-based hedge fund that focuses on risk arbitrage. Prior to founding Palestra, he was director of research at hedge fund Dickstein Partners for eight years. At the time of publication, Palestra Capital was long National Westminster Bank and Mannesmann, and was short Vodafone, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Brail appreciates your feedback at