Shares: Euroland faces wave of cross-border take-overs

The week ahead
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The Independent Online
TAKE-OVERS - friendly and hostile - are meat and drink to the stock market. The economic environment and company trading performances are, of course, important influences but at the end of the day it is bids and deals which are the major inspirational force.

There is little doubt the deeply held conviction that major corporate activity is being prepared in London is helping to underpin equities.

This year has so far produced a handful of large deals although there has been a steady stream of action on the market's undercard.

In 1987 Britain accounted for more than 80 per cent of Europe's take- over action. As the Continent has caught the merger bug and deals have flowed with increasing strength the British percentage has fallen sharply and is now just under half.

It will probably decline still further although the overall value of domestic deals, as well as those on the Continent, will continue to increase as transactions get bigger.

Ian Harnett at the BT Alex.Brown investment house says Europe is set for a record year "with an increasing number of cross-border deals".

He believes that the signalled arrival of the euro is one of the factors behind the European upsurge. "The prospect of a new large market with a single currency has changed the horizons of companies," he says.

Inflation - or the lack of it - is another influence. "In an era of low inflation it is difficult to keep profits growing at the kinds of rate investors have become used to in previous years.

"If it is difficult to grow the top line then management will focus on cutting costs as a way to improve the bottom line. Looking for synergistic acquisitions becomes a key of achieving this aim."

Unbundling conglomerates, often haphazardly thrown together, has also provided fuel for the take-over flames with businesses sold as a rag-bag of diversified activities being reorganised in recognition of the now more fashionable focused approach.

Then, of course, there is globalisation. "Monopoly considerations, which might have been viewed as an impediment to deals in the past, can be dismissed when one considers market share in a global context," Mr Harnett observes.

Large mergers since 1987 have totalled pounds 273.4bn, with the average deal priced at pounds 2.5bn. The Swiss, at pounds 4.7bn, have the highest average with Britain next at pounds 2.7bn. In the 11 years Britain produced 45 mega-deals - more than double the next busiest nation, France.

Mr Harnett calculates that more than 60 per cent of the take-overs have been domestic affairs, but the pattern is changing.

Not surprising in view of the common language and similar corporate culture, the Americans have played a far stronger predatory role in Britain than in Europe. Against the Continental ratio of three US bids out of 21, Britain has managed 10 out of 21.

Financials and utilities have provided much of the action. The Americans have plugged in to many of the regional electricity companies and among financials to fall to overseas invaders are such renowned City firms as Kleinwort Benson, Smith New Court and SG Warburg.

It is not, of course, only proud City groups which have fallen. The Savoy Hotel has gone American, Rolls-Royce Motors is going German, a fate which may befall The Mirror. And Christie's International, the world famous fine-art auctioneer, is set to operate under a French hammer.

Southern Electric, the only "rec" still independent and quoted, is on the week's results list. It produces year's figures on Thursday and although the basic business should have performed well, profits will be dragged lower by the start-up costs of its gas venture, a poor contracting performance and higher interest charges. Around pounds 246m against pounds 255.5m is likely.

National Grid, which floated its Energis off-shoot in December and returned pounds 760m to shareholders, will offer year's figures near pounds 488m against pounds 685m tomorrow.

Thames Water, the biggest water utility, which may have suffered a cut- off in Indonesia, is also on tap tomorrow. About pounds 408m, up from pounds 371.8m is expected.

The three utilities will, no doubt, follow the already established pattern of handing out, to the annoyance of their detractors, sharply increased dividend payments. Southern should go from 21.5p to 24p; Grid from 11.2p to 12p and Thames from 34.4p to 38.9p.

Boots, Siebe and Vodafone also feature on this week's reporting schedule.

The tried-and-tested chemist shops formula continues to underpin Boots. With Halfords and the opticians chain also increasing their contributions, profits of pounds 550m (pounds 536.2m) are expected. Even Do-it-all, the DIY operation, should have cut its losses, from pounds 9.5m to pounds 500,000.

Engineer Siebe, with pounds 3bn of corporate deals in two years, should achieve year's profits a touch over pounds 500m against pounds 417.1m. And Vodafone, regarded as a take-over target as the telecoms industry continues to consolidate, should manage an out-turn of just over pounds 650m against pounds 514m.

Pilkington, the glass maker, is busy cutting costs and it will be progress on this front, rather than profits, which will interest the market. It said last year it wanted to eliminate pounds 190m of costs, involving 6,000 redundancies and shutting down unprofitable operations.

Paolo Scaroni, the new chief executive, is expected to say that around pounds 100m of costs have already been taken out, which should be reflected in this year's figures. This week, however, a 15 per cent profits downturn to pounds 112m in the year to March is expected to be announced.

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