Unholy Alliance?

Activist investors, private equity drive M&A surge in Europe

Working in tandem. Source: Reuters

Well-heeled US and British investors are bringing a one-two punch to Europe that will spur mergers and acquisitions in Germany even as they seem headed to a new record globally next year. A combination of activist investors pressuring companies to streamline and private equity investors who want to snap up the ballast they throw off is driving the upsurge.

Poster child for the trend was the move by Daniel Loeb’s Third Point hedge fund to take a 1.3 percent stake in food giant Nestlé earlier this year. This prompted Ulf Schneider, CEO of the Swiss behemoth, to jettison less profitable operations as quickly as he could. Private equity firm Fireman Capital Partners was standing by to take stakes in two tea brands, Sweet Leaf Tea and Tradewinds, when Nestlé sold them.

The activist investors want higher share prices and the private equity firms want investments they can turn around for a profit in three to five years, so what looks at first like an unholy alliance is actually a match made in heaven. “We should see more and more interaction between activists and financial investors,” said Christoph Seidel, who heads up M&A activities for JPMorgan in Germany and Austria.

Private equity funds are looking for buying opportunities, and they are swimming in money.

It is a tandem that has already worked well in the United States, said Holger Knittel, head of M&A for Citi in German-speaking countries, and now Europe is in their crosshairs. Activist investors like Third Point, Elliott, Value Act Capital, Cevian and TCI are embarking on campaigns in Europe. Seven years ago, only half a dozen European firms with more than a billion dollars in market capitalization were targets of activist campaigns. In the past year, that number rose to 40 such campaigns.

In Germany, Petrus Advisors bought into Commerzbank’s Comdirect unit, Active Ownership Capital took stakes in Schaltbau and Stada, and Elliott in machine maker GEA. Their investments have been amplified by a growing number of mutual funds and pension funds that are eager to support the activist investors in the hopes or sharing the spoils. With stakes as low as just 3 percent or up to 10 percent, these activists push companies not only to sell off units but to restructure or kick out management.

Private equity funds, meanwhile, are looking for buying opportunities, and they are swimming in money. Apollo, for instance, this summer collected $25 billion in a fund for acquisitions, and Robert Seminara, European chief for the firm, wants to invest a quarter of that in Europe, including Germany. Globally, financial investors were involved in 953 transactions for $92 billion in the third quarter alone, according to tracking firm Prequin. This has helped push up valuations, so that deals are getting bigger all the time. Bain and Cinven, for instance, paid a very rich €6.8 billion for generic drugmaker Stada. Prequin estimates financial investors have $610 billion to spend on acquisitions globally.

Financial investors are not the only forces driving the M&A boom. “For many companies there is pressure to act in the tech sector,” said Christof Bechtel, co-head of investment banking for Merrill Lynch in German-speaking countries. Acquisitions have proven to be a quicker solution than developing their own technology. Some experts forecast that next year’s M&A global total will top the record $308 billion from 2007.

Unholy or not, however, it is the alliance between aggressive activists and well-funded financial investors that will continue to spur M&A activity and generate generous fees for investment banks.

Handelsblatt reporters Peter Köhler and Robert Landgraf cover finance and investments from Frankfurt. Darrell Delamaide adapted this story into English for Handelsblatt Global. To contact the authors: koehler@handelsblatt.com and landgraf@handelsblatt.com.

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