Head of Rothschild Espana Tackles Trends in Corporate Mergers and Acquisitions in Europe
The comparatively small European market, liquidity abundance, limited opportunities for corporate growth in the region and the need to cut costs in line with lower economic growth environment are driving companies in Europe to pursue mergers and acquisitions (M&A), according to Ignacio Munoz-Alonso, Managing Director of leading investment bank Rothschild and Head of Rothschild Espana.
Munoz-Alonso spoke at The Fletcher School on November 20 in a talk on "European Dynamism and Fragmentation", focusing on trends in M & A and investment banking in Europe, and how they are impacted by new regulations and trends in the European Union. The event was hosted by the International Business Program as part of its Global Speakers Series.
Munoz-Munoz-Alonso, who has had 16 years of experience in M & A, debt capital markets, and financial engineering prior to leading Spain's oldest and most prestigious investment bank, said cost-cutting is the primary driving force behind mergers and acquisitions among companies based in. He contrasted this defensive orientation with the motivations for M&A in the US and other parts of the world, which he suggested to be more aggressive, such as to secure leadership in a sector.
"The type of deals we see in Europe, as compared to the U.S. and Asia, are transactions intended to preserve EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization)-based growth rates. Thus, while companies manage to cut costs when they consolidate, they don't really expand on their markets," Munoz-Alonso said.
Munoz-Alonso also cautioned that the 'textbook' reasons for M&A do not always reflect the real motivations companies have when they are considering transactions. He said transactions were traditionally seen as either ''offensive or defensive," and reflected a range of strategies, such as to enhance their profitability, invest excess cash-on-hand, take advantage of tax shields that another company is entitled to, or as a hedge against increased competition that may result from industry deregulation.
However, Munoz-Alonso said that many transactions are also motivated by psychological factors or frustration with limited opportunities for organic growth.
"First of all, corporations see that everyone is doing it, and they're inclined to do it as well. Second, acquisitions are seen as 'sexy'. Also, organic growth is very tough, so corporations resort to mergers and acquisitions as a way to short cut expansion. This is especially true in Europe, where growth prospects are more limited than in the U.S., so there is less opportunity to expand and to invest," he said.
Even when mergers are started for the right reasons, Munoz-Alonso explained the 'seven deadly sins' that cause mergers and acquisitions to fail, the foremost of which is the failure to manage the post-acquisition effectively.
"Typically, executives believe that after the deal is closed, everything will fall into place. Unfortunately, this is not always the case. Frequently, executives 'leave the shop unattended', so to speak, and fail to attend to the consolidated corporation's new needs," he said.
Similarly, Munoz-Alonso said that executives also fail to manage new expectations that arise after the transaction is completed, and the consolidation for the two companies is poorly executed.
"Executives suddenly realize that they have various new matters to deal with, such as tax and legal issues. The manager of the M & A will have to put everything together and unfortunately, not everyone is able to implement this effectively," he said.
Munoz-Alonso said that in some cases, companies overestimate synergies or end up overpaying as a result of poor financial assessments. There are also cases where the companies fail to close the deal, which is very frustrating after pursuing months of negotiations.
"Because of these [problems], there is a high failure rate of 20 to 30 per cent of M & A transactions in Europe, mostly due to poor execution," he said.
Munoz-Alonso cautioned that the M & A 'losers' spiral' of a poorly conceived and implemented deal often becomes a vicious circle, as companies try to recover some of the lost value by launching another takeover. "If the first attempt at consolidation failed, then the only way they see to resolve this is to get other firms and go through the process again," he said.
Companies should also evaluate the challenges of executing a transaction before deciding to consolidate, Munoz-Alonso stressed. These include planning execution, particularly by studying the applicable legal regulations and effective due diligence, careful deal structuring, analyzing the acquisition financing, and looking at the implications of the transaction on capital markets.
Munoz-Alonso cautioned that it is difficult to predict the long-term trends of M & A activity in Europe.
"There will be more activities involving mergers and acquisitions in the next year and year and a half. Beyond that, though, it's uncertain," he said.
