The Anglo File: European Mergers Surging, but Barriers Persist

Archaic and complex shareholder regulations and layers of bureaucracy have had a hand in limiting M&A activity in Europe.
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Theodore Roszak

, the U.S. social critic, once wrote that the almost nonexistent popular control over the

European Commission

makes the

European Union

"the most effective suave technocracy in the world." How else, he concluded, would Europe be able to "compete with the dynamism of the American corporate establishment?"

On the surface of it, these technocrats have indeed been effective in shepherding Europe toward a more competitive and investor-friendly position to rival the U.S. The U.K.'s

Vodafone AirTouch

(VOD) - Get Report

may actually succeed in its hostile bid for Germany's



and figures show European mergers surging toward U.S. levels. In the first half of 1999, European deals were worth $346 billion, compared with $541 billion for the whole of 1998. Deals in the U.S. during the first half of this year were worth $528 billion.

Look a little closer, however, and one will see that the continent is still a graveyard filled with the remains of failed or aborted corporate schemes that were killed by political expediency, archaic and complex shareholder regulations, and layers of bureaucracy.

Pot Calls the Kettle Black

While British Prime Minister

Tony Blair

last weekend lectured a summit of center-left leaders on the need to have a "European market where European companies are taking over other European companies, are taking over British companies, and vice versa," he would do well to remember that only two weeks ago his government referred a pair of mergers to the U.K.'s competition authorities, even though the

Office of Fair Trading

indicated it had no objection to either of them.

Blair's actions illustrate how even the most liberal of economies, whatever governments say to the contrary, remain subject to political considerations. The furor over one of the deals, the French company



purchase of a 25% stake in Rupert Murdoch's

British Sky Broadcasting


, prompted the Parisian press to claim simple British xenophobia -- distinct, as it is, from the French sort.

It is notable that Murdoch, who owns several influential newspapers in the U.K., dislikes the idea of Vivendi owning such a large stake in his company. Some have speculated the government would not have referred the deal to the authorities had Murdoch indicated he didn't care a jot.

Earlier this year, the

European Court of Justice

ruled that Europe's

Competition Commission

could take into account the social impact of a merger, but only if the merger could also be criticized on the basis of competition. Social aspects alone, the court said, were not enough to block a merger. In reality, however, political lobbying by unions and other interested parties have squashed several banking mergers in France and Italy this year that threatened the closure of many branches and job losses.

Some Shareholders More Equal Than Others

Complicated and antiquated shareholder structures of European companies are also an obstacle to mergers. In addition to so-called golden shares that European governments hold in a number of nominally independent companies, such as the German government's majority stake in

Deutsche Telekom

(DTE) - Get Report

, many European companies have complicated shareholder structures that are designed to entrench management's hold over the company.

For example, Mannesmann restricts any one shareholder to 5% of total voting rights and some British football clubs have shareholder regulations that make a hostile takeover all but impossible. After a long battle,

Telecom Italia's


"savings shareholders," a class of minority shareholders, have managed to force



, which bought the telco, to award them the same dividends as ordinary shareholders.

"These shareholder regulations aren't exactly poison pills, but more shark repellents," describes Tim Frazer, an M&A lawyer for the multinational law firm

Arnold & Porter

, referring to actions that companies take to discourage takeovers.

An easy target for criticism is the Competition Commission. However, the commission, despite its perilous position as the institution with perhaps the most controversial jurisdiction, has remained largely free of political machinations and won praise from most quarters -- except those it is investigating. Rather than the commission itself, it is the framework it operates within that causes problems.

A merger is referred to the commission when the combined turnover of a target and its acquirer breach specified levels in the world and the community as a whole. Yet determining total turnover is complex.

For example, if a venture capital firm is involved in one of the firms and has some control within the corporate structure to protect its investment, such as the right to veto a business plan, then its turnover also is added to the total.

Even if the merger doesn't meet the commission's criteria, the competition authorities of member states can still investigate. Some countries, like Ireland, have absurdly low thresholds of revenue to trigger an investigation by the authorities.

Finally, there is culture. New Yorkers may be different from San Franciscans, but as Arnold & Porter's Frazer notes, that is nothing compared with the chasm that seems to divide the French and British.

In negotiations for an acquisition in the financial services sector between firms from either country, Frazer, who was appointed to advise both sides on issues of competition, was struck by differences in corporate culture that caused a lot of unnecessary suspicions.

"I could see the misunderstandings that could easily occur, with regards to language, culture and the speeds at which they operate, which would quickly cause the negotiations to break down," Frazer says.

Perhaps Roszak's suave, effective technocrats could help.