BERLIN --With the incidence of divorce rising around the world, it's perhaps unsurprising to see the corporate world echoing the social development with a correspondingly large number of failed mergers.
The coming of the euro and the creation of a single market were supposed to herald a slew of cross-border mergers, as well as domestic consolidation across Europe. But as shown in the breakdown of a proposed merger of Germany's
and the demise of the telco union of Holland's
due to government meddling, theory hasn't quite yet morphed into practice.
Despite the difficulties and failures, however, the urge to merge is so overwhelming in industries like financials and telecommunications that new deals are constantly being sought out. Even mergers that floundered in the past are being resurrected and tried again. Witness Dresdner Bank's acknowledgement Monday that it was in talks with
about cooperation and a potential merger. Or KPN's and Telefonica's recent demand that the Dutch and Spanish governments clarify their positions on a possible merger between the two former state-run telecoms.
While such on-again-off-again wheeling and dealing is probably enough to rattle even the most hardened investment banker, the action also likely presents chances for investors willing to keep up with the daily corporate merger soap opera. Though the shares or ADRs of the companies involved offer the most direct way into the action, bank- and tech-heavy European mutual funds, like the
JP Morgan European Equity fund and the
Brandes Investment Partners International Equity fund, may also feel the effects as one merger sets off a chain reaction of deals and alliances. Over the past 52 weeks, a period that has seen much speculation over Continental mergers, European equity funds have risen 31.3%, according to
Lipper Analytical Services
, a fund-tracking company. By comparison, U.S. diversified equity funds have returned 22.6% over the same period.
But selectivity is the name of the game. Although sectors as a whole may profit from the general expectation of mergers, "you definitely have to be somewhat choosy," says Reinhard Pfingsten, a fund manager for
in Frankfurt. "Even though everybody knows banks in Europe need to consolidate, it would certainly be the wrong strategy to simply buy up a lot of bank shares."
Complicating matters further, once a suitable merger or takeover candidate has been found it doesn't mean investors can simply buy into it and become complacent. As speculation grew over a linkup between Deutsche and Dresdner, shares of both banks surged. After they officially announced their merger, however, the stocks promptly sold off as investors digested the true implications of the deal. Even worse, immediately after the merger failed Deutsche and Dresdner shares sank further as both institutions tried to pick up the pieces. Deutsche has since rebounded, Dresdner still has ways to go.
Heads rolled there, causing the bank's leaders to take pains to point out -- after the Deutsche debacle -- any deal with Commerzbank won't be rushed. Taking time to make sure a merger will work certainly sounds sensible, but it's unclear how much it can alleviate another concern for investors: Even if a merger doesn't fail outright, will it extract the synergies and cost-reductions to provide real results?
According to a recent study by
, a full "83% of mergers were unsuccessful in producing any business benefits
to shareholder value." Another survey by the
Organization for Economic Cooperation and Development
stressed that while mergers were on the rise, they often failed to increase profitability.
Part of the problem can likely be traced back to companies' reticence toward cross-border and cross-cultural mergers. "It's typical for Europe: They're sticking at home first, so we get mergers between two French banks and two German banks instead of a French-German bank
deal that makes more sense," says Jerry Evans, an equity strategist for
in London. "From the perspective of the American investor there is still the perception you cannot get your full dollar" out of a European merger.
Despite all the pitfalls, the consolidation in Europe "has to be done," says Evans. The difficulties involved might mean one has to be slightly more selective "but it's still good; there are opportunities out there."
With the pressure to consolidate so great in some industries, one can only hope more of Europe's companies will aim for value and a long-term union, instead of simply giving in to a shotgun wedding.