Report Summary

Sovereign debt crises, political uncertainty and weak economic growth across the board have hobbled the recovery of Europe’s M&A market from the body blows delivered by the global financial crisis of 2008. But some of Europe’s charms are enduring for investors who prefer to dig a bit deeper: its stable regulatory environment, its global brands and its skilled talent pool, to name just a few.

A strong recovery in 2013 may be unlikely, but evidence is mounting that an upturn in the market may be approaching. This report examines the extent to which global and European financial crises, credit conditions and investor sentiment continue to affect appetite around the world for M&A in Europe; it identifies the underlying strengths and weaknesses of the European M&A market; and it assesses the prospects for a recovery in both inbound and outbound investments, and for intra-European M&A.

The key findings of this report are:

• Even in challenging times, Europe’s durable strengths make it desirable. The size of Europe’s economy, its central location and the quality of its assets mean it is still a key market for deal-making despite the current instability hanging over the continent. Only 5% of respondents in the Economist Intelligence Unit survey of senior business executives from across the world think Europe is an unattractive M&A market. Among Europe’s strengths, respondents cite its highly developed infrastructure, the technological prowess of its companies, its talent pool and its stable regulatory and legal frameworks. Securing unique competitive advantages and eliminating intellectual property risks are often the key factors driving M&A in Europe.
• Western Europe offers the most attractive M&A opportunities within the region. Just under one-third (32%) of respondents picked western Europe as their top destination on the continent for M&A in the next two years. Within western Europe, Germany has the best M&A opportunities on offer, and France and the Netherlands are a distant second and third. Preference is not, however, uniform and Japanese and Chinese respondents are principally focused on what they regard as safer European and non eurozone markets (northern Europe and the UK). Generally there was less interest in southern Europe, suggesting that the ongoing troubles in the euro zone are continuing to deter investment in the less stable parts of the continent. Only 26% say that they are not interested at all in the European M&A market over the next two years.
• European firms are turning their gaze towards high-growth markets for M&A deals. With a weak market at home, over one-quarter (27%) of European respondents think that their companies will seek to diversify their risk by investing elsewhere. And over two-thirds (69%) of all respondents agree that European companies will increasingly have to make acquisitions in high-growth or emerging markets to stay competitive. Many of the biggest European companies already have a significant presence in emerging markets, which makes increased outbound M&A activity a logical next step for European firms.
• Attractive valuations of European assets are luring in bargain hunters... The downturn has depressed asset valuations in Europe, and firms that are not in a position to wait for the market to improve are being forced to dispose of assets at a discount or a loss. Potential buyers around the world, therefore, are eyeing European acquisition targets becoming available at attractive prices. A significant proportion (43%) of respondents say that the socioeconomic uncertainty in Europe is actually increasing their appetite for M&A deals on the continent.
• …but at least some sellers of European assets are choosing to wait and watch. Low valuations are deterring companies from selling their crown jewels unless forced to, which is proving to be one of the key factors blocking a recovery in European M&A. Just 15% of respondents say that their firms will be selling assets in Europe in the next two years. Few big deals are being done because cash-rich companies with sizeable assets are preferring to sit out the downturn. Large European companies are the most likely to be snapping up good deals on the continent, while European small and medium-sized enterprises are the most likely to put up ‘for sale’ signs, as finances are tight for them and many are needing to raise cash.
• Rising costs such as higher taxes and volatile currency markets are key obstacles for global firms’ European M&A strategies. Respondents quote economic instability and weak economic growth in the euro zone as reasons to be cautious about European M&A. However, more specifically, executives in the survey express concern over rising costs, currency fluctuations and potential risks to corporate reputation. European labour laws and industrial relations also deter investment into the region, and 85% of Japanese and Chinese respondents are worried about the difficulty of integrating new European businesses.
• Lack of finance is not an unassailable challenge; cash is the most popular currency for deal-making. Using cash to fund deals will continue to be the preferred option for companies. Over two-fifths (44%) of respondents in the survey say that they will use cash reserves to finance deals—bank loans are a distant second (25%). This suggests that economic and political uncertainty, rather than lack of finance, is the biggest constraint on deal-making. Private equity activity, a key driver of M&A activity before the financial crisis, remains subdued, but some recent deals suggest that the private equity market may have turned a corner.