Given the activity we’ve already seen, that may seem startling. In 1996, 211 megadeals (mergers and acquisitions worth more than $1 billion) were announced. By 1999 that figure had risen to 476. Overall announced volume rose from $1.2 trillion to more than $3.8 trillion. The most impressive growth was in cross-border activity, which surged from $314 billion to $1.2 trillion in announced deals.
But we’re just getting started. Corporations figure they have much to gain from cross-border mergers–and at least as much to lose from standing on the sidelines. In an increasingly competitive and networked world economy, they seek scale, scope and a variety of other advantages. By buying Argentina’s YPF, Spain’s Repsol became a bigger, more diversified international oil company. The Dutch insurer Aegon’s purchase of TransAmerica added distribution channels for financial products. The Daimler-Chrysler combination produced mutual benefits in engineering, marketing and many other areas. Some deals are especially attractive because they improve the stability of earnings; others, because they spread the risk and expense of new capital investment.
European companies have been especially active. Intra-European deals in 1999 rose by 87 percent over 1998. The Single Market and euro are driving Pan-European consolidation in banking, insurance and other industries. Europeans also are reaching across the Atlantic. Converging European and American corporate governance practices–including Europe’s increased emphasis on boosting shareholder returns–make it easier for deals to be done.
Roughly 60 percent of all cross-border deals in recent years have involved a European acquirer. As international buyers, British firms have topped those of the United States. Acquisitions by German, French and Dutch firms together have exceeded those of both British and U.S. companies. Americans have heard about DaimlerChrysler, but few know that the Dutch grocer Ahold is now a significant player in the U.S. supermarket business, or recognize the important role of large European-headquartered institutions such as AXA or ING in the U.S. financial-services sector.
The surge in mergers and acquisitions has begun to reach Asia. The recent financial crisis has added to pressure for Asian governments to open up, change ownership rules, reform bankruptcy laws and allow more M&A activity. In Japan, the number and size of domestic mergers and acquisitions have grown significantly as restructuring, particularly in the financial-services sector, builds momentum. Foreigners are buying in, too; witness the purchase of Japan Leasing Corp. by GE Capital. Helping the process along are regulatory reforms and a break with the more traditional corporate culture.
Of course, cultural change is never easy. In some parts of the world the strength and market penetration of large new corporate combinations could trigger nationalist, cultural or social backlash. As part of their effort to avert this, international companies need sophisticated multinational and multicultural human-resource policies. Many global companies are already working to recruit, and ensure upward mobility for, employees in the diverse countries in which they operate.
Prominent international businesses will also have to emphasize transparency. The bigger the corporation, the more it needs to be open for inspection. Customers around the world will seek information not only about a company’s products, but also about its social, environmental and labor policies. Postmerger integration poses still further challenges in large multinational deals. For some companies an alternative to mergers has become popular: networks that allow companies to form new combinations and alliances when needed. Such “flexible alliances” have played a powerful role in the pharmaceutical industry and especially Silicon Valley. Given the speed and scope of the changes in store for nearly all companies, the Valley is a good place to shop for ideas.
In the period ahead agile and innovative corporate Davids will challenge traditional Goliaths, pursuing them in their own backyards and across borders. Goliaths will respond by improving their own nimbleness, forging bold new international combinations to pool their strengths and forming alliances with the very Davids who challenge them. It will be an exciting time for participants and observers alike.
