`Europe’s deal frenzy tends to stop at national borders… blocked by age-old nationalistic sentiments,’ proclaimed the New York Times in March last year.
How times have changed. Not that `nationalistic sentiments’ have been tempered. On the contrary, from Portugal to Norway to Italy to Germany they were very much in evidence last year. But cross-border takeovers – and hostile ones at that – seem to be here to stay in spite of the tangled web of regulations that currently govern deals in Europe.
The change has come about partially as a response to the introduction of the euro. Although it is still too early to tell its full impact, the elimination of currency risk has undoubtedly speeded up cross-border equity investment and M&A activity across the Continent, sometimes to the dismay of companies and governments.
Following the announcement of Vodafone AirTouch’s hostile bid for Mannesmann, Chancellor Schr_der’s comments that `hostile takeovers destroy corporate culture’ did little to impress the company’s shareholders, the majority of whom happened to be domiciled outside of Germany.
Similarly in March last year, when the bid battle between Banque Nationale de Paris, Societe Generale and Paribas broke out, French politicians were shocked to discover that foreign investors owned roughly 40 percent of the equity of each of the banks. `Clearly, national governments do not like their main institutions being taken over by foreigners. When they are owned by them, and therefore they can do nothing to stop it, that’s even worse,’ comments the investor relations officer of a major Spanish bank.
Regulated nationalism
The nationalistic sentiments resonating across corporate Europe in recent months have in many cases been backed up by regulatory obstacles to prevent unwanted cross-border takeovers. According to a new study by law firm White & Case, most EU countries have instituted new merger control regulations over the past decade. `At the same time that mergers, particularly cross-border mergers, are rapidly increasing, so are the number and complexity of merger control laws,’ says Robert Paul, head of White & Case’s competition law group. `Companies are faced with a complex maze of merger notification requirements in a number of jurisdictions, each with its own rules, timeframes, thresholds, substantive standards, policy aims and culture.’
This means that some markets provide much more protection to their listed companies than others. In Germany, for example, there is no provision in company law to force minority shareholders to accept a bid even if the bidder secures 95 percent acceptance. So takeovers can be delayed in the courts for years. Furthermore, German stock market rules do not yet recognize the existence of cross-border takeovers.
The Italian regulatory system is just as behind-the-times. Hostile takeovers are not allowed in certain sectors, such as banking, so bids are contingent on the target company accepting them as friendly. `If you can’t make a bid unless management and the board consider it friendly what does that mean for shareholder value?’ asks Noga Villalon who works for the UK-based Cubitt Consulting, advising companies across Europe on mergers. Villalon says minority shareholders are usually the losers – it doesn’t really matter whether you are a non-domestic or domestic investor.
Yet Italy is certainly not the most protectionist environment in Europe. `If you take the case of Spain’s BSCH banking group bidding for the Champalimaud companies, you had the Portuguese government trying to block the deal and that wasn’t even hostile,’ adds Villalon.
Simeon Vadillo, director of investor and media relations at Spanish oil company, Repsol, is pragmatic about the situation in Spain. `If a company wants to acquire more than 10 percent of another company it needs government approval. That was not a Repsol decision, it was a royal decision so we simply can’t do anything about it. You’ve got to be respectful of the law and find ways of creating value for shareholders within it.’
Testing times
Villalon is sure that the regulatory situation in Europe will change in the near future. `Until recently there has been no need for change because there have been relatively few cross-border takeovers in Europe. But today the regulations are really being put to the test and that’s not a situation that’s going to go on forever. It’s simply not practical.’
Bjorn Westberg, head of IR at the Swedish-Finnish bank Merita-Nordbanken, agrees. `For a company like ours that is a product of a cross-border merger this is a big concern. Currently we have to abide by two sets of regulations but we have made no secret of our wish to expand in the Nordic region and inevitably we are going to become subject to other regulatory environments too. It’s not that it’s a problem to meet these regulations but it’s very expensive and very time consuming.’
Neither Sweden nor Finland in fact present many problems in the area of protection. Both, says Westberg, `are wide open’ but in Norway, a mixture of political and state intervention has tied up Merita-Nordbanken’s latest bid for Christiania Bank for months. `Politicians and central governments have not yet got used to the unavoidable, namely the concentration of industry – especially banking – in Europe,’ explains Westberg.
Value over votes
Nowhere has this gap between economics and politics been more apparent in recent months than in Germany where the nationalistic pronouncements of some leading politicians were greeted with embarrassment by Klaus Esser, Mannesmann’s chief executive. Esser responded to the political remarks by insisting that he would fight Vodafone’s bid on strict shareholder value grounds.
The EU’s competition commissioner Mario Monti also indicated sharply what the response would be to any German attempt to veto the takeover bid. `It is for market forces to determine whether a bid is successful or not,’ he told BBC radio. Earlier in the year the commission had already demonstrated its vigilance on cross-border mergers by beginning legal action against the Portuguese government for trying to block the deal between BSCH and the Champalimaud companies.
But whose responsibility is it to improve, or at least harmonize, the regulatory environment controlling cross-border transactions in Europe? Clearly the European Union, which proposed a common takeover code back in 1989, thinks it is its responsibility.
Again, politics has been getting in the way of its efforts. Explains Jonathan Todd, EU spokesperson for internal markets: `The proposal that is currently on the table isn’t anything like as detailed as the one that came out in the late 1980s. Member states made it clear that they weren’t prepared to accept full regulations so what we have on the table now is a framework proposal. It is not ideal but we feel it will make a major contribution to removing obstacles that currently exist to the pan-European market.’
According to the EU, the aim of the proposed European Takeover Directive `is to provide an equivalent protection throughout the Union for minority shareholders of companies listed on the stock exchange in the event of a change in control and to provide for minimum guidelines for the conduct of takeover bids, particularly as regards the transparency of the procedure.’
This includes obliging companies to make a bid to all shareholders at an equitable price. (In Portugal, for example, under existing legislation, companies are not obliged to extend the bid to all shareholders). It also prevents target companies taking defensive measures in the case of a hostile takeover bid without getting the prior consent of shareholders, something that is currently possible under the Netherlands takeover laws as some Gucci shareholders found out to their dismay last year.
It has taken ten years to reach what is still an uneasy compromise between the EU countries in the form of the takeover directive proposals. Some are very much in favor of it. Repsol’s Simeon Vadillo says that it will be welcomed by Spanish companies whose hands are effectively tied by current regulations. `In the future we need to have more harmony of rules and regulations in Europe to facilitate cross-border deals. Of course, companies are going to keep their different legal frameworks but the fact that Brussels is taking more and more of a role can only be a good thing.’
Others have been extremely skeptical about the proposed directive. While some criticize it for being too vague, giving companies far too much latitude over how it should be implemented, others are concerned that it is too prescriptive.
Hostile environment
Most of the criticism has come from the UK which currently hosts what many consider to be the most favorable environment for takeovers in Europe. Opposition there has centered on companies’ reluctance to accept a statutory takeover regime as opposed to the existing voluntary framework overseen by the the Takeover Panel. `The UK system has worked well for 30 years and it does not need a directive to improve it,’ intones Patrick Drayton, director general of the Takeover Panel. The Panel is particularly concerned that an increase in the legal rights of the parties to a takeover bid could potentially tie deals up in the European courts for years.
Still, one leading UK investor relations officer believes this is simply thinly-veiled Euro-skepticism dressed up as true corporate concern. `What tends to happen in the UK is that you have resistance to anything that the EU tries to do in the business arena.’ And his opinion seems to be backed up by the findings of the Financial Law Panel that, after considering the impact of the directive back in 1996, concluded: `The directive will have little practical effect on the conduct of takeovers in the United Kingdom.’ Furthermore, it declared: `We believe that the Commission has made a case for the directive to be implemented throughout the community, to set a benchmark for takeover regulation and to carry on the process of harmonization of corporate activity.’
Not surprisingly, EU spokesperson Jonathan Todd wholeheartedly agrees with the findings of the Financial Law Panel. `In markets like the UK you’re not going to see much fall-out from this directive because there is already a lot of cross-border activity. But in other countries which currently operate very protectionist environments it’s likely to encourage cross-border activity. The idea is to create a level playing field for takeover activity which in the end can only be good news for the City of London.’
Rock solid
That is presuming that the directive ever gets implemented. Currently it is being held up by a disagreement between the UK and Spain over which country should regulate takeovers in Gibraltar. And according to Rosemary Wall, a spokesperson for the UK government’s Foreign Office, agreement may not be reached for some months to come. `Until Spain recognizes the UK as Gibraltar’s competent authority little headway can be made on this issue.’ Not a lot of negotiation there then.
Even if the dispute is resolved, the directive would take at least six months before being passed and Brussels is also expected to allow member states three years to implement the new legislation. In short, it will have little effect in the immediate future. `I think what is important about it is that it demonstrates acceptance of the need for reform of takeover practice in Europe. In reality, for change to occur more rapidly it is going to have to happen at the national level,’ comments one IR officer.
That is a process already underway in some markets. In Germany, for example, a commission is working on a law to replace its voluntary takeover code which, introduced in 1995 and modelled on the UK’s system, has proved largely ineffective. The new law is likely to lower the level of shareholding at which a general bid is triggered and will make the code mandatory (currently it has relatively little sanction against companies that flout it).
Whether other countries follow Germany’s suit is still to be seen. What is clear is that the capital markets themselves are beginning to create pressure for reform. Says Merita-Nordbanken’s IRO Westberg: `We have to accept the fact that political processes do not move as fast as economics. The market will win but there is some way to go.’
