BERLIN -- The recent
merger has prompted speculation of an onslaught of consolidation across Europe. That, in turn, has caused contemplation of a dramatic restructuring of Germany's corporate landscape.
Inherent in the talk is a dollop of hyperbole. After all, merger mania -- remember last year's
Banque Nationale de Paris
banking contretemps? -- has been under way for some time in Europe. While the Vodafone deal should stoke the telecom and technology sectors, the modernization of corporate Germany is a massive undertaking. One hostile-takeover-cum-friendly-merger can't immediately affect decades of financial, social and political thinking.
What Vodafone's successful bid does demonstrate, however, is that the nature of the continuing consolidation in Germany and continental Europe may be changing. Some observers think that means there might not only be more hostile bids on the way, but also a deviation from straight equity-and-cash deals to leveraged buyouts, both friendly and hostile. In an LBO, the target company's asset value is used to finance the debt taken on by the acquiring company.
That could give the average U.S. and German investor reason to support any new rush to leveraged buyouts -- if for no other reason than expectations that the takeovers will help the benchmark
to record highs. Such a movement could help German mutual funds, like
Fidelity Investment Trust's
German Fund, up 15.7% this year, and funds with significant German exposure, like the
Europe Fund, up 17.7%. By comparison, the Dax, while rising pleasantly, is up an underwhelming 9.6%.
In a recent research report, Mark Howdle, portfolio strategist for
Salomon Smith Barney
in London, argues that all of the conditions in Germany are right for a surge in leveraged buyouts. Besides plenty of companies with underperforming equity ripe for the picking, political and corporate reluctance to the necessary restructuring that comes with leveraged bids appears to be fading fast.
"The rules of engagement are changing," claims Howdle. "The first few large-scale leveraged bids will undoubtedly be controversial, but will serve to break down the old European taboo and could open the floodgates for many similar deals over the following years."
That's not to say leveraged buyouts will be anything but a mere trickle compared to overall merger activity for the next couple of years in continental Europe. At the top end of estimates, LBOs would likely only make up between 10% to 15% of all M&A action. And hostile bids aren't likely to be greeted with overwhelming enthusiasm in Germany, where the public still harbors a deep distrust of painful, if sometimes necessary, restructuring. That distrust even led Chancellor
to chime in on the hostile nature of the Vodafone bid, even though it had nothing of the unpleasant tinge of a leveraged bid to it.
But interestingly, Howdle also believes an upsurge in leveraged buyouts could increase the upward bias of European stock prices in the coming years, as such takeovers typically reduce the market's overall equity levels. He estimates leveraged buyouts in Europe could reach $150 billion per year within five years, which would more than offset last year's gross equity supply of roughly $130 billion.
Helping leveraged buyouts will be the release of a huge chunk of underperforming equity if the German parliament passes a law later this year that repeals or at least lowers the 50% to 60% tax corporations pay when they liquidate large stakes in other companies.
The prohibitively high tax rate has kept banks and financial companies from dumping shares. This made any amassing of shares for a leveraged buyout that much more difficult. If the tax law is repealed, corporations are expected to begin unloading not only shares of their competitors, but also the stocks of the less glamorous construction, engineering and chemical sectors, making these companies potential targets for leveraged buyout firms.
That means as
are preparing to unload shares of their rivals, engineering company
are almost certainly already on the radar screens of an LBO firm, or financial buyer.
Karl Debenham, a construction industry analyst for
in London, agrees his sector could see some LBO action at some point. "They certainly have bits that could be spun off," he says. "Historically they've been owned by passive shareholders. Since '97 they've known they would have to change."
But Debenham explains a leveraged buyout is only one possible route for construction companies to continue their necessary restructuring, and that's a point easily extrapolated to all of Germany.
That the restructuring and further consolidation will come appears to be conventional wisdom these days, making it more a question of how -- leveraged buyout or otherwise -- rather than if.