English Appendix
Cross-border M&As and the changing
economic geography of Europe
Teh number of croos-border mergers and acquisitions (M&As) has
risen significantly since the mid-1980s. Just in the 1990s the total of
corporate takeovers between companies of different national origins grew more than six-fold and cross-border transactions currently
account for around one third of all M&As.The largest proportion of
cross-border M&As has taken place among European countries.
ANDRÉS RODRÍGUEZ-POSE
London School of Economics
HANS-MARTIN ZADEMACH
Ludwig Maximilians Universität, München
Figure 1 displays the evolution of the number and volume of M&As in Europe between 1998 and 2003. It distinguishes between ‘domestic’ transactions, when the firms involved are located in the same country,‘intra-European’ events, involving companies from at least two European nations, and ‘intercontinental’ deals, where one of the firms is from outside Europe. Some general indications can be extracted from Figure 1. First comes the cyclical nature of M&As.The number and volume of M&As reaches its peak precisely at the peak of the economic cycle in 2000, only to decline –especially in volume– in the following years. Second, that, despite the post-2000 deceleration, corporate and industry restructuring in Europe has remained significant.Third, there seems to be a distinct tendency towards an increasing level of crossborder interaction, with the number of international transactions rising more rapidly than domestic ones.The economic downturn since 2001 represented, however, a reversal in the tendency,with firms seeking the greater security of domestic markets.
Figure 1a. Trends in M&A activities involving Eruopean firms (1198-2003, by number of evets).
Figure1b.Trends in M&A acticities involving Eropean firms (1998-2003, by deal volume).
The main aim of this paper is to try to understand how these trends are shaping the economic geography of Europe, by presenting new insights on the geographical dimension and motives of transnational corporate M&As.We also seek to explore the inadequately understood implications of these financial transactions and of the shifts in corporate control for 25 members of the EU and four EFTA countries.
The data source for this study, the Mergermarket
database, records every M&A with a transaction volume
exceeding _ 5 million from 1998 onwards. For the period
of observation between 1998 and 2003, the dataset covers
an overall of 15,452 completed transactions (including
1,763 entries due to the splitting of transactions, see
below) with involvement of a European firm, i.e.M&A events in which either the acquiring or target firm is
located in Europe, or both parties are European. For each
reported event, the information includes the dates of
announcement and completion, the identities of the
acquiring and the target company, their respective
locations (i.e. country), and the value of the transaction
(in million _ and/or GBP and US$), as well as the source
or sources of this information. Furthermore, a brief deal
description sheds light on the nature of the transaction
(e.g. Management Buy Out) and of the stakes held by the
acquirer, i.e. the percentage of shares held.This textual
information proved helpful with regard to the –on first
sight indeed rather ‘thin’– locational record, revealing
that in the case of 1,189 transactions the stakes of one of
the involved companies were shared across a number of
different economies (e.g. in the cases when the bidder
was a transnational joint venture or a company with a
majority of its assets already in the hands of a foreign
corporation). In spatial terms, such events represent more
than one transaction.Assuming that the control over the
target firm is ‘split’ between the acquirers (and thus
between the countries locating them) according to their
respective holdings, each of these cases has been
multiplied in correspondence with the number of
involved economies; the deal values were accordingly
subdivided.
THE CHANGING ECONOMIC GEOGRAPHY OF EUROPE
According to the Mergermarket data, European firms were engaged in 15,452 M&As exceeding a _ 5 million threshold during the period of investigation. With 85.9% and 82.8% on the acquiring and the target side respectively, the bulk of this activity is covered by the member states of the EU25 as well as the four EFTA countries. More than 13,200 firms have been acquired by a company located in one of these 29 countries, and close to 12,800 times one of their firms was a target of a M&A transaction.The remaining countries of Europe –Belarus, Bulgaria, Romania, or the Ukraine for instance– represent minor players in the M&As market during the period of analysis, particularly as hosts of acquiring companies.
Figura 2.Territorial distribution of acquiring firms and M&A targets in Europe, 1998-2003 (by number of events).
Figure 2 offers an indication of the overall involvement of different European economies in the international trade of corporate control and decisionmaking functions, relative to their economic size.
Two features stand out from the Figure. First is the balance between countries with acquiring and target firms. Countries whose firms have a greater propensity to be involved in M&As as acquirers are also more likely to have firms who are the targets of acquisitions than firms in other countries.This fact points to the existence of different national regulatory regimes and firm management cultures that are reflected in the greater or lesser involvement of firms across European countries in M&As.The only exception is represented by the states of central and eastern Europe that joined the EU in 2004. During the period of analysis firms in these countries are more likely to be the targets than the acquirers, indicating both the weakness or lack of capacity of local firms in a transition environment, as well as the attractiveness of central and eastern European markets in the wake of EU membership for foreign firms.
The second fact worth noting is the clear division in the propensity to engage in M&As between firms in northern Europe (Scandinavia, Britain and Ireland and the Netherlands and Luxembourg), on the one hand, and in continental and southern Europe (and fundamentally in France, Germany and Italy), on the other. British firms tend to be roughly four times as prone as firms in France, Germany and Italy to get involved in crossborder M&As, once the size of the economy is controlled for. Only Spain and Switzerland represent exceptions to this rule.
If we consider not just the number of transactions, but also the deal volumes of M&As, the findings of this step of the analysis reveal that –except for the new member states, where external control is clearly increasing– the usual core-periphery division in Europe does not hold in the case of M&As.The gap between countries with firms more and less active in M&As seems to represent more of a regulatory and cultural division than a geographical and economic one. Firms in the relatively small and traditionally peripheral countries, such as the Republic of Ireland or Iceland, are more prone to use M&As as a powerful tool to increase their competitiveness by means of (intra-national) industry consolidation and to access the European core, than some of their counterparts in the core of Europe, such as German, French or Italian firms.
Figure 3. Crossborder interactions in the markets of M&As in Europe.
Figure 3 complements this panorama by displaying the cross-border balance for each country analysed.The cross-border balance by incidence of M&As in every country is presented on the y-axis, while the balance by volume is depicted on the x-axis.The aggregated deal values for firms from each country are indicated by the overall size of the respective circles.
Once more, the Figure highlights the preponderance of UK firms in the European M&As market. British firms not only have the largest overall share of M&As activity, but also have the most positive balance both in number of firms acquired abroad and in the volume of transactions. British firms have been during the period of analysis extremely active in the acquisition of firms based in other European countries and, thus, expanding the degree of corporate control of the UK economy. Firms in France, the Netherlands, Switzerland, Finland, Greece and Iceland –albeit at a significant distance– follow a similar trend of concentration of corporate control.
At the opposite end of the spectrum,we find the largest economy in Europe. German firms are the main target for acquisition by foreign firms, while they are not as active in foreign markets.This implies a significant loss of overall corporate control by German firms. On the one hand, this can be attributed to a struggling German economy over the period of analysis and a related undervaluation of some German firms in international stock markets. On the other hand, the pool of skilled labour and the technological edge of German firms, as well as the lure of the largest and most central market in Europe for foreign corporations also have to be considered as factors behind this trend. Overall losses of corporate control are also observed in the majority of the central and eastern European countries, as well as Norway and Portugal. Many of these countries tend to be located close to a stronger neighbour, such as Germany in the cases of Poland and the Czech Republic, Sweden in that of Norway, or Spain in that of Portugal.
A third group of countries emerges where the balance differs depending on the means of measurement. Two countries stand out in this group for their differing trajectories.These are, on the one hand, Spain, whose firms gain in volume but lose in numbers, and Italy, where the opposite is the case. In the case of Spain these trends signal, on the one hand, the presence of a cluster of aggressive and dynamic large firms which have become in recent years much more active in the acquisition of European firms, after having had a similar experience earlier in the 1990s in Latin America; on the other hand, the observation indicates a weak base of medium size firms, whose capacity to operate in foreign markets is relatively limited and which are more often the target of foreign firms than acquirers in foreign markets. In Italy –as in Austria, Luxembourg and the Republic of Ireland– the opposite seems to be the case: a negative balance in terms of volume is compensated by a greater presence of smaller firms in foreign markets. Belgium, Cyprus, Denmark, Liechtenstein and Malta all have neutral balances, both in terms of numbers and volume (Figure 3).
THE REASONS BEHIND THIS CHANGING GEOGRAPHY
This final section aims to shed some light on the
factors that may explain the detected levels and patterns
in the changing geography of corporate control in
Europe.We aim to do so by means of a regression
analysis, whose main results are reported here.
Cross-border M&As in Europe during the period of analysis indicate that these seem to be driven by two key factors: the size of the market –proxied by total GDP– and the physical distance between the firms involved.The wealth, the technological prowess, the skills of the population, the investment climate or the proxies for cultural and institutional proximity seem to be irrelevant in determining the number of M&As between two countries in Europe, when the size of the market and geographical distance are taken into account.
By and large, market size and geographical proximity also dominate when the volumes of M&As are considered. However, when the volumes of transactions are considered, other factors come to the fore.The wealth of a target country and the technological level of the country also determine why reasons engage in crossborder M&As.As the volume of M&As is greatly biased by the transactions involving large firms, large firms looking to acquire other firms in foreign countries seem to be searching not only better access to markets in neighbouring countries, but also richer customers and access to greater technological capabilities and knowledge. Other factors remain, however, insignificant. Neither language and investment climate, nor the enlargement variable or whether the economy where the target is located is in Euroland or not, emerges as playing a role that is comparable to market power, proximity or, at some distance, prosperity and localised sources of knowledge.
The combination of the analysis of the factors behind the number and the volume of M&As highlights that, while smaller firms seeking to acquire a foreign firm seem to be driven first and foremost by market access to neighbouring countries, as the size of the firms involved in the M&A increases, other factors, such as access to customers with higher purchasing power or to higher knowledge and technological potential also come into consideration. Institutional factors, in contrast, appear subordinated to the gravity of the market and the attractiveness of a location’s innovative capabilities.
CONCLUSIONS
The aim of this paper has been to analyse how the recent wave of M&As is reshaping the economic geography of corporate decision-making in Europe and what are the key contextual factors driving these changes.The main findings of the analysis highlight the uneven level of involvement of firms in Europe in M&As.Whereas northern European firms –fundamentally from Scandinavia and the British Isles– have been actively engaged in cross-border activity and have, especially in the case of UK firms, gained corporate control over economic activities in other parts of Europe, continental and southern European firms have been more reluctant to engage in cross-border takeovers and, in many cases, have ended being the targets of acquisitions by foreign firms.The contrasting cross-border balances in the UK and Germany highlight how M&As are transforming the economic geography of Europe and heralding a shift in corporate decision making power from continental European economies –and fundamentally from Germany, Italy and central and eastern European countries to the UK, the Netherlands, Switzerland and Scandinavian countries. France seems to be the only exception to the rule, as, although French firms are much less active than their UK counterparts in takeovers, they tend generally to be the acquirers rather than the targets of M&As.
Contrary to what may be expected in advanced, knowledge-based economies, the key drivers of the whole process are not the desire or need to access new technology or pools of more skilled labour. Oldfashioned motives such as access to markets and physical proximity still appear as the main contextual determinants taken into account by firms when engaging in cross-border takeovers in Europe. Structural, cultural and institutional factors, such as different endowments in human capital and technology, speaking the same language or belonging to the same economic and political block are either irrelevant, when both the size of the target market and the distance are taken into account, or play a supporting role to the former factors in the whole process.The only exception is related to the size of the merger or the acquisition.The relative wealth of the target country and its innovative capacity matter in determining M&As for large firms, but hardly matter for smaller firms engaging in takeovers.
Overall, the analysis has improved our understanding of the behaviours of firms engaged in corporate takeovers and mergers. However, our results also open many doors for new research, especially regarding the role of institutional factors and European integration. In a context of increasing European integration, marked by the implementation of the Single Market and the adoption by many of the countries considered in the analysis of a single currency, these factors play second fiddle to more traditional factors, such as market size and geographical proximity. Hence, our results seem to imply that – apart from a potential impact on the overall number and volume of M&As – European integration has not altered the drivers of takeovers in recent years and that the factors that prevail are the same that existed before the deepening of the process of integration.These results may indicate the presence of a still very imperfect level of integration of European economies, raising questions about the existence of alternative institutional, cultural and/or psychological barriers that prevent other factors for developing their full potential in the geography of M&As in Europe.