International Buyouts: Emerging Markets By Way Of Europe

Includes: GE, HPQ, JNJ, MSFT
by: Investment U

By Jason Jenkins

European companies are selling at a discount. Well, at least that’s the sentiment in the United States and Asia. Bloomberg data shows that takeovers in Europe by foreign companies rose nearly 60 percent to $252 billion in 2011.

There’s a feeling that American and Asian companies seeking acquisitions in Europe may pick up the acquisition pace in 2012 after a second half slowdown this year. Companies including General Electric Co. (NYSE:GE), China’s HNA Group Co. and Japan’s Fast Retailing Co. (9983) have shown a strong interest in the region.

But Why?

It’s two-fold. On one hand, you have a beaten-up euro. On the other, share prices in the region have been decimated by the Eurozone’s sovereign debt crisis.

According to Gregg Lemkau, head of mergers and acquisitions for Europe, the Middle East, Africa and Asia-Pacific at Goldman Sachs Group Inc., “There are well-positioned acquirers globally looking for bargains.” That’s even with all the economic turmoil that has been a recent burden on acquisitions. Lemkau went on to say, “One of the drivers in Europe has been historically low valuations and a relatively soft currency.”

Low Equity Valuations

The MSCI Europe Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the developed markets in Europe. The MSCI Europe Index consists of the following 16 developed market country indices: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. The Index is currently trading at 10.4 times reported earnings. That means that equities in the region are cheaper than they’ve been 98 percent of the time since 1995.

European Currency Issues

Since the sovereign debt crisis reared its ugly head about two years ago, the euro has fallen by about 13 percent against the dollar. A cheaper European currency makes a more favorable environment for U.S. buyers. On the other side of the world, the Japanese yen has gained about 10 percent over the last half of this year against a benchmark basket of currencies including the euro.

A Region Teetering on Collapse

No one wants access to Europe. However, they do want technology and the access to emerging markets that many European companies possess. Look at what acquisitions gave these companies:

  • Johnson & Johnson’s (NYSE:JNJ) planned purchase of Synthes will give it devices used to treat bone fractures and trauma. This deal would allow J&J, the world’s second-largest seller of health products, to be the leader in the $5.5-billion market for devices used to treat trauma victims.
  • Hewlett-Packard Co.’s (NYSE:HPQ) $10.3-billion takeover of the U.K.’s Autonomy Corp. gave it access to a data-sifting enterprise search technology helpful to cloud computing.
  • Microsoft Corp. (NASDAQ:MSFT), in buying Luxembourg-based Skype Technologies SA for $8.5 billion, absorbed the world’s biggest provider of internet telephone service.

Bloomberg data goes on to show that European companies have also tended to be more aggressive than their U.S. counterparts in expanding in markets like Africa and the Middle East. Since 2000, they have spent about $90 billion on deals in those regions since 2000, compared to about $50 billion by U.S. companies.

The second installment of this article will address plays against possible bumps in the roads and other players who may be buying in Europe next year. Stay tuned.

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