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In cross-border mergers and acquisitions, choosing an investment banker is no longer a limited proposition.
Nikos Valance, CFO Magazine
November 1, 2000
It used to be that a company completing a global acquisition could choose from among a handful of investment banks, principally The Goldman Sachs Group, Merrill Lynch & Co., and Morgan Stanley Dean Witter & Co. Now, with worldwide mergers-and-acquisitions activity exploding, European banks becoming global powerhouses, and local lenders growing more formidable, the selection of banking partners for international deals is not so limited.
"The explosion in M&A activity has supported many investment banks in recent years," says Thomas Poz, an analyst with Thomson Financial Bank Watch in New York. "Each of the three M&A giants did more than $1 trillion in business in 1999," he says, adding that only 55 percent of that business was in the United States. In addition, says Fred Puorro, senior executive vice president with Thomson, as other large banks try to spread their influence by teaming up with local institutions, "those local lenders, especially in Europe, are also becoming part of the international financial family."
The main benefit for companies, of course, will be the clout they gain from the increased competition. "Without changing their risk profile, banks will cater more to their customers," says Poz. "There will be some give-and-take in terms of what investment banks will offer going forward." And such give-and-take, adds Barry Sharp, CFO of AES Corp., an Arlington, Virginia-based global energy company, "will affect the sources of capital, the fees, and the development of ideas."
Still, increased competition does not make selecting a global investment bank any easier. According to experts, the choice is dictated by several factors: the size of the deal, the bank's knowledge of the target company, the availability of local expertise, and the solidity of the relationship between the global customer and its investment banker. In the future, says Puorro, the more complex needs of the global customer will force global banks to bundle their products, thus lowering fees. This development will also allow smaller institutions to participate in cross-border deals.
It's the Volume
The sheer volume of global deal-making continues to surpass records and drive change. According to statistics compiled by Thomson Financial Securities Data, the volume of announced worldwide M&A activity in just the first six months of 2000 totaled $1.88 trillion on more than 19,347 transactions. This comes on the heels of a record-breaking $3.3 trillion in activity for all of 1999.
The United States is no longer the center of that activity. In fact, the number of domestic M&A deals in the first half of 2000 slipped by nearly 15 percent from the prior year. Meanwhile, the value of announced transactions in Japan reached a record high of $150 billion, compared with just under $18 billion the year before. In the rest of Asia, M&A activity jumped 58.6 percent in 1999, led by South Korea, where volume increased 94 percent. European M&A activity reached a record high of $468 billion in the fourth quarter of 1999. And while overall M&A activity in Latin America slowed in 1999, the dollar volume of deals announced by Latin American companies jumped by more than 360 percent, with new records set in Argentina and Chile.
The global banking environment has evolved to service this activity. As regulatory walls have crumbled worldwide, true global banks have emerged, as evidenced by last summer's merger of J.P. Morgan and Chase, UBS's planned purchase of PaineWebber, and Credit Suisse Group's offer for Donaldson, Lufkin & Jenrette. The consolidations now cross national borders more than ever. In addition to the Credit Suisse and UBS announcements, Société Générale has acquired Cowen Securities and Deutsche Bank has purchased Alex Brown.
Such consolidation, says William Viqueira, former treasurer and now senior vice president for business development at $38 billion Lucent Technologies Inc., will force a "broader relationship" between banks and their globe-trotting clients. A single bank, he explains, may now provide not only M&A advice, but also customer financing, cash management, and foreign exchange, which means it's in the bank's interest to provide services it might not otherwise want to offer. "It makes us a more strategic client to them," says Viqueira. "So they're inclined to go along with less-profitable services we might request."
Such requests are already being honored. Global Crossing Ltd., a telecommunications company headquartered in Los Angeles, had raised $16.5 billion for acquisitions in the last three-and-a-half years. But when Global Crossing recently acquired Racal Telecommunications Network in the United Kingdom, CFO Dan Cohrs found it necessary, for tax reasons, to come up with additional cash quickly. Consequently, Global turned to Goldman Sachs to set up a nonrecourse debt facility. Says Cohrs, "Five years ago, Goldman couldn't have made a balance-sheet commitment for financing. It would have played just an advisory role."
To date, investment banks haven't been forced to make huge loan commitments in order to partake of the global feast, but that hasn't stopped such companies as Global Crossing and others from asking. Recently, for example, Ford Motor Co. pressed Goldman Sachs to provide part of a credit line in addition to M&A advice on a particular deal. Although Goldman Sachs declined and instead provided underwriting for the transaction, the request is indicative of the kinds of services banks will be asked to perform in order to maintain relationships.
Which to Choose
Despite their newfound flexibility, global banks are not guaranteed all cross-border business. Global customers increasingly are deciding on a case-by-case basis which institutions they will partner with on such deals.
While Global Crossing's Cohrs, for example, maintains that U.S. banks, on the whole, are better at completing M&A transactions, he says that his preference for these banks is not written in stone. Referring to Global's $1.65 billion acquisition of Racal, Cohrs says, "If U.S. banks didn't have a local presence with personnel [who] understood the local regulations and circumstances, we would have been a little more prone to use a British bank. Generally, I'd say if we were doing a specific action in a specific country, we would look hard at using a local bank."
Primarily, Cohrs looks for knowledge of the telecom industry as well as knowledge of the target in selecting a bank. He says this is especially important in an industry like telecom, which offers so many potential acquisition targets. "It's impossible to keep track of all the companies that might make for a good acquisition," says Cohrs. "The banks we use have to be able to help us identify a company and think it through strategically."
For Sharp of AES, which has operations in 25 countries, the quality of the bankers themselves is paramount. Given that AES is mainly acquiring local electricity companies, quality means an in-depth understanding of the local regulatory and business environments. As a result, AES does not hesitate to employ local bankers. In recent deals in Argentina and Brazil, AES used Brazilian and Spanish banks. And in its first-ever, $1.78 billion hostile takeover, of Venezuelan electrical supplier Electricidad de Caracas, the company involved local banks as well as Morgan Stanley. "It's usually unique country by country," says Sharp. "Local folks usually have a better understanding of the regulations in the electricity markets or of the political process generally. Many of the local bankers and lawyers either came from the industry or helped write the laws and regulations regarding electricity."
When a deal reaches a certain size, however, most finance executives feel more comfortable working with a global bank. For example, Amkor Technology Inc., a leading global provider of semiconductor packaging design, assembly, and test services, divided the work between an American lead bank, Citibank; a French bank, Société Générale; and the German Deutsche Bank, when it recently purchased the packaging and test facilities of Anam Semiconductor Inc., in Korea. The entire deal was worth $1.5 billion, $900 million of which was to be financed through a bank syndication. "We had a relationship with the investment bankers of all three banks through previous deals," says Ken Joyce, Amkor's CFO. "Each bank individually could have done the transaction, but due to the size, it was better to have more than one involved. The syndication got done faster." The deal was ultimately divided up with Citibank as the book manager, SG as the administrative agent, and Deutsche Bank as the documentation agent.
To Joyce, size does indeed matter. "To do large deals you need a global bank, because you need access to the capital markets." Because Amkor's deals are often complex, Joyce has to be sure the banks can deliver. "You have to determine the amount of bank financing required, then size up the banks, as well as comparable transactions done that year," he says. In Amkor's case, he adds, "we needed someone who could do the syndication. And we needed banks that not only know our industry, but also know which banks will invest in our industry." A lot of the sizing up of the banks is done personally. "You have to feel them out," says Joyce. "A lot of it is relationships."
Because of such relationships, Garth Milne, treasurer of Schaumburg, Illinois-based Motorola Inc., generally prefers working with a global bank or two as opposed to one of its branches or a local credit facility. "In significant countries, we have relationships with one or more major local banks, as well as one or more global banks. But in minor countries, we work with global banks. The local branches of global banks sometimes have capital restrictions, and they may have their own interests or agenda. The global bankers are people you've dealt with before."
Ironically, however, Milne says the current environment sometimes has freed the company from having to use any banks. "One effect of globalization and deregulation is that we've tended to manage our liquidity offshore on a regional basis. So if a country allows us to fund a company or an investment from a global pool of cash, we'll do that." Milne cites China as one example: "When we entered China, a significant amount of our funding there was from excess cash in other Asian countries."
No Bankers Needed
Minneapolis-based ADC Telecommunications Inc., on the other hand, has virtually eliminated its use of banks in all countries. The company, which morphed from a hearing-aid manufacturer in the 1930s into a broad-band last-mile telecommunications supplier, has completed more than 30 acquisitions since 1995. And during that time, says CFO Robert Switz, "we've used banks [only] four or five times. If M&A is a way of life for you, it makes sense to develop an in-house capability."
The advantages, says Switz, are clear. "There's not a lot of value-added that bankers bring into a deal. We're very astute in due diligence; we have extremely skilled negotiators and a very competent legal team." And, ultimately, he says, going it alone "saves us lots of money."
In fact, Switz says, many companies have active M&A programs, but no history of using bankers. As he points out, however, the competition among bankers keeps them calling, even if you're known as a company that's basically not interested. "The best banks keep calling on us to help in our M&A efforts," he says. "They're very active in trying to find prospects for us, and they're active in helping us to differentiate companies that are competing in the same space."
But what happens if the bank helps you find an acquisition and you do the deal on your own? "Generally, they recognize that's part of the job," says Switz. "They don't expect the payouts to correlate directly to their activity. But over time their efforts will pay off, either in foreign exchange or in other areas. Maybe even in M&A!"
The Euro Factor
One other factor affecting global banking relationships is the euro. From a funding standpoint, the debut of the new currency has companies looking at Europe as one entity.
"Most multinationals are either in the middle or at the end of a process across Europe of creating one euro pool of liquidity," says Garth Milne, treasurer of Schaumburg, Illinois-based Motorola Inc. "This means they'll have one bank as their main euro bank and one or more in each country for collection and possibly even disbursements, as opposed to one [bank] per country." Milne thinks that the pooling bank can be either American or European, with Citibank, Chase, and Bank of America heading the list of possibilities, along with ABN Amro and Deutsche Bank.
It's still unclear how many countries they'll cover, however. The recent rejection of the euro by Denmark and opposition in Britain does not bode well for universal participation. Nonetheless, as other countries, particularly the newly emerging market economies of Eastern Europe, become eligible for participation (Poland has already satisfied the requirements), the acquisition of smaller banks may present a competitive advantage to the global megaplayers.
"Western European banks and American banks going into these regions may want to rely on the identity the local banks provide," says Fred Puorro, senior executive vice president of Thomson Financial Bank Watch. "Unlike in the [United States], where there is very little of the regional history and differences you find in Europe, identifying the local name with the parent company will foster the further expansion of the large European and American institutions into that region."
Puorro also acknowledges that the single currency plus the deregulatory climate now prevailing globally have created a relatively frictionless trading zone among euro nations. For this reason, he maintains, the large banks are looking at this region as ripe for the expansion of their markets. —N.V.