BASF's hostile bid for New Jersey chemical maker Engelhard ( EC - Get Report) woke up Wall Street on the first trading day of 2006. But it was no surprise to investment bankers, who have watched for a year as Europe's appetite for mergers has grown rapacious. BASF's $4.9 billion offer ranks as the largest-ever hostile bid by a German company for an American one and is fourth-largest ever in the history of the continent. It's also part of a buyout craze that saw merger volume, as tracked by Thomson Financial, rise 40% in Europe last year to $1.0 trillion, a level not seen since 2000. To be sure, U.S. firms were also acquisitive in 2005, with total M&A volume surging 33% to $1.1 trillion. But the trend lines look poised to diverge in 2006, as European companies seek growth through scale while U.S. companies -- though flush with cash -- rethink the conglomerate model. Many believe BASF's takeover bid for Engelhard could be the first of many across-the-pond overtures. "It certainly seems that European companies are branching out overseas for growth opportunities, as well as looking in their own backyards," said Brian Hicks, co-manager of the global resources fund at U.S. Global Investors. European companies seem to be moving toward consolidated models just as U.S. companies begin to turn away from them, Hicks says. Last year marked a record year for cross-border deals, with European countries, most notably Germany, leading the charge. German deal volume, as measured in dollars, almost doubled last year, while the number of transactions rose by almost 20%, according to Dealogic. Other countries also saw gains. German companies made a string of bids for U.S. firms in 2005, including Adidas AG's acquisition of Reebok for $3.0 billion and three U.S. buyouts by Siemens. Meanwhile, on their own turf, Europe-based companies were responsible for some of the biggest mergers of the year. Spain's Gas Natural launched an unsolicited tender offer for Endesa for $51.2 billion, and Spain's Telefonica ( TEF - Get Report) planned a $31.8 billion offer for the U.K.'s O2.
For the most part, the cross-border attraction wasn't reciprocated, according to Dealogic. U.S. companies acquiring European targets only increased 1%, compared with the 33% increase overall U.S. merger activity. U.S. interest in German companies dropped by more than 20%. To some, Europe's merger mania can be likened to the consolidation craze that gripped U.S. companies in the 1980s. European markets across all industries are segmented, and growing companies, such as BASF, "desperately seek growth opportunities outside of its own market," says one investment banker. While BASF had its own characteristics that fueled its launch of the unsolicited bid -- most notably, a stash of cash generated from global growth -- it also had capital markets conditions that provide a perfect opportunity for high hostile takeover bids. Global interest rates remain very low, giving companies the ability to incur massive amounts of debt -- more so than previous years. Meanwhile, global equity markets, such as the Frankfurt-based DAX, continue to thrive. In 2005, for example, the DAX Index rose almost 28%, a move similar to the runup in BASF's German-listed shares. "It's been a bonanza of cheap credit and cheap equity markets," said the investment banker. "Companies have a means to get enough capital to make these types of bids." Investment bankers don't expect to see U.S. companies match the acquisition volume of their European counterparts, considering the mature landscape of many U.S. industries. "There is this concept of corporate clarity in the U.S., or becoming a pure-play company," says the banker. "Over the last decade, American companies have consolidated. The era is over." While some U.S. industries may still be ripe for consolidation -- financial services, smaller tech and materials -- in 2006, the potential buyers will increasingly speak with an accent.