As the search for new sources of growth and new areas for strategic expansion grows, groups may initiate more aggressive external growth operations in 2011. The first stage, however, will be a period of spin-offs or disposals of non-core activities, since numerous companies today are too diversified, with subsidiaries that are barely profitable or not at critical mass.

The formation of big international groups
The Nineties saw the creation of national market leaders in Europe, with cross-border mergers limited. Between 2000 and 2008, companies were focusing on globalization and the opening up of new markets and undertook cross-border mergers at an unprecedented rate. All sectors were involved, but the financial sector was the scene of spectacular transactions, like the takeover of ABN Amro, culminating in the disaster caused by the credit crunch of 2008-2009.
The two main players in the acquisition of ABN Amro were the first to suffer from this situation; Fortis was taken over by BNP Paribas and Royal Bank of Scotland was bailed out by the UK government. Overall, in the last 15 years, more than 40% of companies listed amongst the top 50 global groups have been involved in large scale mergers which have radically changed their profile.

Strategic consolidation under way
At present a number of groups are becoming aware of the difficulty of managing companies that are too diverse, and so are seeking to consolidate their core business through two, three or four strategic entities. Gearing (the ratio of net debt to equity) is under control (estimated at 30%, although there are strong variations between sectors) and in the current context of relatively low interest rates, disposals and targeted acquisitions are likely.
The pattern since the start of the year has confirmed this assessment, with on the one hand a high number of spin-offs and sales (in France the Accor spin-off, the sale of AXA’s UK assets, the British spin-off of Carphone Warehouse and Cable and Wireless, and in Italy the announcement of a Fiat spin-off and the partial sale of Enel’s renewable energy subsidiary expected in the Autumn) and on the other a low number of mergers of any size (the biggest in Europe being the acquisition of Cadbury by Kraft, criticized both by the UK government and some Kraft shareholders).

Asia and Latin America: new growth
Alongside spin-offs, the second current trend seems to be a move towards emerging markets. Groups are currently looking for areas of growth, despite the high valuations of companies already established in these markets.
At sector level, two specific cases can be identified:
• sectors like banking, oil, the automobile industry and certain technological fields where emerging countries already have national champions and are directly or indirectly in competition with western groups. Acquisitions could take place in either direction;
• sectors where emerging countries still have little presence but wish to develop these industries. Few transactions with these countries are predicted, with instead a pattern of development through organic growth (pharmaceuticals, agriculture and food, etc.).

Emerging countries are currently looking attractive and acquisitions made with a view to opening up these new markets for growth are part of a long-term trend. IMF economists are predicting that nearly 50% of global GDP will be generated in these countries in 2014, against only 25% in 2000.
Faced with the challenges of globalisation, against a background of erratic financial markets, the big international groups have chosen in recent times to consolidate their core activities and sell their nonstrategic businesses. Takeovers will be less spectacular, with buyers aiming to avoid downgrades by the credit rating agencies, as well as any criticism linked to the risks of an aggressive strategy. In this environment, companies which succeed in consolidating their core business and developing new skills in emerging markets will be the big winners in tomorrow’s global markets.

Mid-sized businesses in the firing line
Large-scale transactions and the creation of European, sometimes global, leaders have been of mixed benefit to shareholders. The next targets for mergers and acquisitions will be medium-sized businesses, especially since European competition authorities remain vigilant and may obstruct certain transactions. We anticipate a return to classic buying patterns, in contrast to the grand scale of transactions seen in the last fifteen years. Based on our analysis of sector consolidation, we believe that mid-level transactions, below 3 billion euros, will be preferred.

THE MOTIVES BEHIND MERGERS AND ACQUISITIONS
Four factors can drive a company’s management to launch a takeover:

1. the need to find new sources of growth, in which case companies turn to emerging markets if they can find appropriate targets;
2. the search for a complementary country or product(s);
3. surplus cash-flow, although currently groups prefer to retain such surpluses in the expectation of improved transparency in the US and European economies;
4. a high valuation in relation to the sector average, making payments in share capital attractive.

Besides these factors, an acquisition can be initiated through opportunism or with the aim of avoiding takeover by a competitor: in other words, it is better to be the hunter than the hunted.

The possible characteristics of a likely target company are very varied given the large number of exceptional situations. The most common are:
• a valuation that is lower than the sector average;
• the need to restructure, with low profitability (return on equity);
• a weak strategy accompanied by the publication of successive disappointing results, leading to doubts concerning profit growth in years to come;
• small size in relation to the sector average – these companies need partners (unless they operate in a niche market);
• subsidiaries with majority shareholders who wish to delist the company.