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ArchiveFebruary 1 2000

Stop, go, full ahead on deals

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Peter Shearlock looks back at the major M&A deals of 1999, and finds few surprises.

So excited were they by the record-breaking $300 bn America Online/Time Warner merger announcement (advisers: Salomon Smith Barney and Morgan Stanley Dean Witter) last month, that investment bankers vied with one another to invent ever sillier corporate combinations.

Among the e-mails circulating with details of imaginary deals was one announcing the three-way merger of Honeywell, Imasco and Home Oil. The resultant group was to be named Honey I'm Home. But in the real world, life was getting tougher. A change of tack by the US Federal Trade Commission over BP Amoco's proposed $27bn acquisition of Atlantic Richfield spoiled the New Year celebrations for at least four groups of investment bankers.

Coming in the same week that the European Commission signalled its determination to be tough over the three-way liquid gas tie-up between Air Liquide, Air Products and BOC - and to go on looking at the competing takeover of Germany's Linde by Sweden's Aga - it raised question marks over how much further global consolidation can go without reaching a limit of sorts. Mega-mergers are often unwieldy affairs, but BP Amoco looks to have been dealt with harshly given the readiness of the FTC to approve the Exxon/Mobil merger in December. Now BP Amoco must reconcile itself to a lengthy, and possibly futile, legal process in its attempts to salvage anything from the past year's work.

It has already secured the approval of the State of Alaska by offering to sell off part of its Alaskan production. The FTC, however, has clearly decided that enough is enough of oil industry consolidation. Goldman Sachs and Morgan Stanley Dean Witter, the perennial leaders of The Banker's M&A advisory league tables, figure in both the BP Amoco/Arco and Air Liquide/Air Products/BOC deals. Since credit is given only for completed deals, both firms have missed out in 1999.

The gases deal, structured as a break-up of BOC between France's Air Liquide and America's Air Products, is likely to go ahead after major disposals in the UK and France. Goldman was also among a clutch of investment banks that lost out when the proposed $50 bn merger of Sweden's telecoms utility, Telia, with its Norwegian counterpart, Telenor, fell apart in December. After a couple of years in the making, the merger had supposedly completed six weeks earlier.

The final stumbling block was a disputed board decision to site the headquarters of the mobile division in Stockholm. Completion of the deal would have added $16bn to the tally of Goldman, Merrill Lynch, JP Morgan and HSBC. Inevitably, Goldman is also in the $3.5bn Linde/Aga deal, which is still being investigated by the European Commission, and was one of the four advisers acting in the $4.3 bn takeover of Britain's National Provident Institution by the big Australian insurer, AMP.

That deal became effective on January 1, 2000 - just a day too late to qualify for The Banker's league table count. None of which has stopped Goldman from topping our tables yet again, and this in a year that set new records for M&A activity right around the globe. According to figures from Thomson Financial Securities Data, European M&A activity (measured by deals announced) more than doubled in 1999 to more than $1,200bn, with 21 deals valued at more than $10bn. There was clearly a qualitative shift as well as a quantitative one in Europe - as the emergence of a hostile $148bn cross-border bid in Germany (Vodafone/Mannesmann) and a reverse takeover of the telecoms utility in Italy (Olivetti/Telecom Italia) both testify.

While the UK remained the largest single market for M&A activity in Europe, it accounted for only about 30% of the European total. The German market, ranked second, continues to bubble away. In recent weeks, the chemicals group, Degussa-Huls, has appointed Morgan Stanley to find a partner for its Asta Medica business, thought to be worth $2bn, and private equity specialist Kohlberg Kravis Roberts (KKR) has bought the private telecoms network business of Robert Bosch - a business with $1.1bn revenues. It was advised by Salomon Smith Barney, advising America Online in its planned $180bn merger with Time Warner.

That deal was just one of a clutch of large acquisitions led by US-based financial sponsors, most of whom have upped their presence in Europe and are likely to be an increasing force in the leverage buy-out market in the year ahead. For example, KKR hired the well-respected Johannes Huth from Investcorp, while Carlyle Group has been adding to its team in the UK, France and Germany. Hicks Muse, which struggled to get its $1.3bn Hillsdown Holdings takeover financed, is back in the action in the battle for Britain's United Biscuits - a deal that, if successful, will represent the biggest-ever leveraged buy-out in Europe. That is only one of the challenges facing the syndicated loan market, which is becoming an increasingly important feature in the M&A landscape.

After Olivetti's landmark E25bn loan package (assembled by Chase, Lehman, DLJ and Mediobanca), Morgan Stanley and Goldman Sachs put together a E18bn facility for Elf which, though never activated, helped the oil company win significantly better terms out of Total. Now Vodafone is looking for E30bn to refinance Mannesmann's debt if it manages to win control of the German telecoms group. Elsewhere, the consolidation of the Italian banking and insurance sectors continues apace. In recent days, UniCredito Italiano has been linked with San Paolo-IMI, a string of new savings bank mergers has been announced, and Assicurazione Generali (adviser Warburg Dillon Read) has won European Union approval for its $12.5bn takeover of domestic competitor INA on condition it sells various stakes in other banks and insurers.

One winner from the frenzy of takeover activity in Italy is clearly Lehman Brothers, buoyed no doubt on its success in winning Telecom Italia for its client, Olivetti. Finmeccanica proved a good client, and Lehman advised it in its $7.6bn merger with Microelettronica and its role in the defence electronics joint venture with British Aerospace and Aerospatiale. Lehman's biggest pending deal is the Banca Intesa takeover of Banca Commerciale Italiana (for $14bn), in which it is advising the target. It is also involved in the $1.8bn takeover of Casse del Terreno by Banca Popolare di Lodi, announced in December.

France also provided its fair share of activity, which gave Lazard Frères Paris, and hence the newly integrated Lazard houses, a massive leg-up in our tables - despite a couple of high-profile client losses at Lazard Brothers in London. In total, the Lazard houses more than doubled their year's tally of completed deals in the fourth quarter - thanks mainly to LFP's role in the TotalFina/Elf deal (worth $48bn) and the Rhône Poulenc/Hoechst merger ($26bn). Among the bigger pending deals, it is acting for Air Liquide in the BOC takeover. The buoyancy of the French M&A market explains the first appearance in our global top 10 deals of BNP (cum Paribas).

If rumours that BNP, with former bid target Société Générale, may yet bid for Crédit Lyonnais have any vestige of truth, the French connection is likely to remain valuable. The "new" growth market for M&A activity, however, is unquestionably Japan, where Thomson tracked just short of $80bn's worth of announced deals last year. Two banks - Goldman and Merrill Lynch - shared the honours with a combined market share for Japanese target deals of around 75%. The largest completed deal was Japan Tobacco's $7.8bn acquisition of RJR Nabisco's international tobacco interests.

Salomon acted for Japan Tobacco, Merrill and Morgan Stanley for RJR. But that is going to be dwarfed this year. There are two big three-way mergers under way. One is the $24bn telecoms merger of DDI, KDD and IDO, where Goldman and Merrill are the principal advisers. The other is the planned merger of Industrial Bank of Japan, Fuji Bank and Dai-Ichi Kangyo Bank, put at around $60bn. Merrill is acting for Fuji. Two big names dropped out of the "all international deals" top 10 in 1999 - Deutsche Bank (seventh in 1998) and Warburg Dillon Read (ninth in 1998). As for 2000, both feature in the Vodafone/Mannesmann battle, of course, while Warburg is also in the $12.5bn Generali/INA deal and the $7.2bn Volvo/Scania transaction.

The firm was the undisputed leader in Australian M&A last year, with a 34% market share, according to Thomson. Deutsche lost out when France Telecom withdrew its $8bn bid for E-Plus Mobilfunk (BellSouth, advised by Merrill Lynch and JP Morgan, looks like coming out the winner with a $9.4bn bid). It is also represented in the Volvo/Scania deal and is one of two firms advising BOC in its sale to Air Liquide and Air Products. Among the boutiques, Wasserstein Perella has slipped a long way down our tables.

Though it bagged at least one elephant - acting for Wal-Mart in its $11bn takeover of Asda - its only big pending deals outside the US are the NTL acquisitions of Cable & Wireless's cable TV business (worth $13bn) and Swiss company, Cablecom, for $3.8bn. Greenhill & Co, by contrast, finished a creditable fifteenth in our cross-border deals list with 11 completed transactions worth $28.39bn. It is also in the C&W/NTL deal. Perhaps the biggest feather in Greenhill's cap is its being retained by the US Department of Justice to advise its "on the financial implications of the full range of potential remedies in the Miscrosoft anti-trust case".

That won't win it many friends in Silicon Valley.

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