European Buyers Cross Atlantic in $87 Billion U.S. Deal Spree

By Manuel Baigorri and Dinesh Nair

European companies are snapping up U.S. targets at the fastest pace since 2008 as they use cheap financing and record cash levels to seek growth outside of the continent.
From German drugmaker Merck KGaA to British American Tobacco Plc (BATS), European acquirers announced $87 billion of deals in the U.S. in the third quarter, more than the previous 12 months combined, according to data compiled by Bloomberg. That spending helped drive global deal volume to $886.7 billion, a 29 percent jump from the year-earlier quarter, the data show.
While dealmaking within Europe’s borders picked up earlier this year, the leap across the Atlantic reflects an appetite for opportunities that can’t be
found in the region. Added to an already robust flow of dollars from the U.S. to Europe, the increase means “cross-border deals have become the norm rather than the exception,” said Gilberto Pozzi, head of mergers and acquisitions at Goldman Sachs Group Inc. in Europe, the Middle East and Africa.
“European companies are keen to look outside Europe for the right strategic deal,” Pozzi said. “The U.S. remains a very attractive market for European businesses that want to boost growth and market share overseas given its size and structure.”
Cash at European companies rose 58 percent to $1.31 trillion in the latest fiscal year, from $829 billion five years earlier, data compiled by Bloomberg show. That amount excludes cash held by financial companies.

Spending Overseas

Merck, based in Darmstadt, Germany, agreed Sept. 22 to acquire St. Louis-based medical-equipment manufacturer Sigma-Aldrich Corp. for more than $16 billion, in what would be the biggest acquisition in its 346-year history. In August, Switzerland’s Roche Holding AG (ROG) agreed to buy InterMune Inc. (ITMN) of Brisbane, California, for about $8 billion in cash, its largest purchase since 2009.
The Europeans aren’t alone in spending overseas. The largest deal of the quarter was Chicago-based AbbVie Inc. (ABBV)’s $55 billion bid for Shire Plc, in a move to take a foreign address and lower its rates. Including AbbVie, U.S. acquirers spent $120.5 billion in Europe in the three months through September, and another $336 billion everywhere else.
U.S. Treasury Secretary Jacob J. Lew announced new rules Sept. 22 to make it harder for U.S. companies to pursue deals like AbbVie’s, known as tax inversions. Still, businesses including Pfizer Inc. (PFE) will probably continue with their plans to make acquisitions, people with knowledge of the matter have said.

U.S.-Asia

While companies can also look for deals in Asia, the U.S. still presents European buyers the biggest opportunity, according to Dirk Albersmeier, head of German M&A at JPMorgan Chase & Co.
“In Asia, there is not much you can buy and you have to grow organically,” Albersmeier said.
Meanwhile, for Asian acquirers, Europe is proving a favored destination as they look for brands that can be imported to their growing home markets.
In July, Chinese private equity-firm Hony Capital Ltd. said it agreed to buy British restaurant chain PizzaExpress Ltd. for about $1.5 billion, and plans to expand sites in China and Hong Kong. Asian companies announced $13.4 billion of acquisitions in Europe, the same amount they spent in the U.S. and compared with $49.7 billion spent on cross-border deals in Asia.

Electrolux-GE

A more stable European economy, higher levels of confidence among chief executives and healthier corporate balance sheets with less debt are helping drive deals. Also encouraging dealmakers is the fact that investors are reacting positively to announcements.
When Electrolux AB said it would buy General Electric Co.’s century-old appliances unit for $3.3 billion, shares of the the company rose to the highest close since at least 1989. The acquisition of a predominantly U.S. business will add to Electrolux earnings starting in the first year.
The availability of financing is also a major driver for M&A activity, with debt underwriters pitching the potential to raise large sums as investors clamor for high-yielding assets and before interest rates go up on either side of the Atlantic.
“I really see the whole thing firing from all cylinders now,” said Wilhelm Schulz, head of EMEA M&A at Citigroup Inc. “You have corporates who are keen for growth, cheap financing available and reasonable valuations to facilitate large-ticket M&A.”

Inflated Values

Schulz said the biggest risk to large-ticket transactions would be a spike in the valuation of businesses. The pickup could also find itself cut short if borrowing costs rise, or by the emergence of weaker-than-expected economic growth.
“Geopolitical shocks could have the potential of chilling M&A activity,” said Vikas Seth, head of EMEA and global emerging markets M&A at Credit Suisse Group AG in London. “With political turmoil being mostly confined to the periphery of Europe, boardroom appetite to support large transactions does not appear to have diminished.”
For now, deals are viewed by investors as reasoned bets; a way to ramp up growth and become global leaders rather than taking unreasonable risks. In some cases, the transactions have been contemplated for years while corporate boards waited for the right backdrop, said Henrik Aslaksen, head of M&A at Deutsche Bank AG in London.
In July, Reynolds American Inc. agreed to buy rival Lorillard Inc. for more than $27 billion including debt in a deal in which U.K.-based British American Tobacco would keep a 42 percent stake in Reynolds. The combination was the culmination of months of on-again, off-again talks and the end of an investment agreement with BAT dating back to 2003.
“We haven’t seen the large deals based on hubris yet,” Aslaksen said. “The trend of cross-border deals from Europe into the U.S. will continue based on the significant number of opportunities in the U.S. and the ability to actually complete deals.”