January 6, 2020 / 9:08 AM / 17 days ago

Breakingviews - Europe will emulate Japan’s foreign takeover binge

LONDON (Reuters Breakingviews) - European companies are limbering up for a Japanese-style foreign takeover binge. A shrinking domestic market and super-low borrowing costs spurred firms in Asia’s second-largest economy to pursue ever-bigger overseas targets. Now their European Union counterparts, facing similar challenges at home, are poised to follow suit. Expect the likes of Germany’s Siemens, Italy’s Eni and banks such as BNP Paribas and ING to push further into faster-growing markets as 2020 kicks off.

A European Union flag flies outside the European Commission headquarters in Brussels, Belgium, December 19, 2019.

For Japanese chief executives, the incentives to buy abroad are clear. Despite Prime Minister Shinzo Abe’s efforts to revive the economy, growth remains sluggish. The shrinking population is partly to blame. The National Institute of Population and Social Security Research expects inhabitants to shrivel from 127 million in 2015 to below 100 million by around 2050. Meanwhile, negative interest rates mean Japanese banks are eager to finance foreign corporate adventures.

Over the last five years, Japan’s corporate titans have spent an average of more than $100 billion a year on outbound mergers and acquisitions, according to Refinitiv data, up from $59 billion annually in the first half of the decade.

Active buyers include brewer Asahi, which in July splashed out $11 billion on Anheuser-Busch InBev’s Australian arm and drugmaker Takeda Pharmaceutical, which last year completed the country’s biggest outbound deal: the takeover of UK rival Shire for $77 billion including debt. Masayoshi Son’s SoftBank Group has also kept investment bankers busy with takeovers of U.S. telecom operator Sprint and Arm, the British chipmaker, not to mention investments in cash-burning startups.

Conditions in the European Union are similarly unappealing. The European Commission expects the bloc’s economy to expand by just 1.4% next year. And while its 2018 population of 513 million (including the UK) is still expanding, Eurostat reckons it will peak by 2045. Thanks to the European Central Bank, credit is similarly cheap.

EU companies have already been cranking up overseas purchases. Over the last five years they have spent $273 billion a year on targets outside the bloc, up from an average of $176 billion in the decade’s first half, Refinitiv calculates. Transactions like luxury giant LVMH’s $16 billion takeover of American jeweller Tiffany & Co underscore an eagerness to tap into growth in the United States and Asia. Even seemingly regional deals often have an overseas angle: Peugeot’s planned merger with Fiat Chrysler Automobiles is in part motivated by the latter’s success with Jeep in the United States.

Yet some European companies remain relative homebodies. Industrial giant Siemens earned more than half of its 87 billion euro revenue from Europe, the former Soviet Union, Africa and the Middle East in the year to September 2019. Around two-thirds of Eni’s top line originated in Europe in 2018, making the Italian group something of an outlier among global energy peers. Both look primed to pursue geographic diversification.

Europe’s biggest banks are also set to turn their attention beyond the euro zone, where negative interest rates are squeezing returns. BNP Paribas could beef up its operations in the United States, while Société Générale might push further into Africa. Dutch lender ING, meanwhile, will use its online platforms to challenge incumbent lenders outside the single currency area. Drugmakers like Switzerland’s Roche and consumer giants like Diageo, which already have global footprints, will use dealmaking to reach further into faster-growing regions.

Large EU companies are already more multinational than their Japanese counterparts. About half of the 300 constituents of the Euro Stoxx index generate a “substantial proportion” of their revenue outside the single currency area. That should ensure deals yield more cost savings, which will please shareholders and potentially keep activists at bay.

Even so, foreign adventures can be dangerous. Japan’s takeover boom has produced its share of disasters, such as Kirin’s botched acquisition of Brazilian brewer Schincariol, which it sold at a hefty loss after just six years. Europeans can also make big mistakes. Bayer’s mega-takeover of rival Monsanto in 2016 has left the German chemicals group on the hook for legal claims asserting that the American company’s weed killer causes cancer.

With the U.S. stock market trading close to all-time highs, there’s also the risk of overpaying. Fortunately, shareholders in European companies tend to be less docile than their Japanese counterparts. The uppity investors who are making their presence felt in French and German boardrooms should constrain CEOs tempted to stretch financial logic.

Even so, shareholders are also eager to reward companies that can demonstrate growth. Faced with sluggish home economies and willing lenders, European CEOs will follow Japan’s lead.

This is a Breakingviews prediction for 2020. To see more of our predictions, click here: bit.ly/2QCkYW5

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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