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Euro Will Increase Cross-Border Mergers & Acquisitions - Social and Economic Policy - Global Policy Forum Euro Will Increase
PIRC Intelligence
Cross-Border Mergers & Acquisitions
January, 1999
What impact will the single currency have on the corporate governance practices of European companies?
Currently, the member states of the EU display a wide variety of governance customs, dictated by the individual circumstances and history of each economy. But current trends towards harmonised accounting principles, coupled with the introduction of the Euro, means that company reports across Europe will be more transparent and accessible. Foreign investment, particularly from the US, will increase. And with the money will come demands for improved governance.
While there are already efforts to set international benchmarks of good governance, changes in Europe are likely to be market led, with companies seeking to improve openness to attract new capital.
Comparability The globalisation of capital markets has, over the past decade, forced large companies to move towards internationally recognised accounting principles, either those of the International Accounting Standards Board, or the US-based Financial Accounting Standards Board.
The EU has played its own part in encouraging harmonization; there have been successful directives on such issues as cross-border takeovers, for example. But there continues to be a wide variety of reporting and disclosure practice across the Union.
The single currency should at least accelerate the trend towards consolidation, as companies across Europe will for the first time be speaking the same financial language. Jan-Peter Springorum, director of Dutch Corporate Governance Services in Amsterdam, told PIRC that such "fiscal harmonization" was a "slow and difficult process" but that the introduction of the Euro will help "speed that process up a little."
Harmonization will make companies more transparent, and hence more attractive, to outside investors. Put simply, the new Euromarket will attract money. And European markets, only two-thirds the size of the US public markets, are ripe for investment.
The levels of US investment in Europe have already shown a marked increased in recent years. That trend looks set to continue at an accelerated pace. The US-based Dow Jones newswire greeted the Euro's first day of trading by arguing that the new currency gives investors "greater freedom to invest internationally." The wire predicted that investors would "venture into new European regions and sectors."
Europe also looks attractive relative to other less stable markets. As Stephen Davis, partner of Beacon Global Investors, says, Europe appears as a "bright spot" given the turmoil in Asia and Latin America. But these new investors, especially the Americans, will want something in exchange for their money. They will demand improved corporate governance.
New standards The Euro will have the effect of making companies more comparable across national borders. The annual financial statement of, say, a Portuguese engineering firm can be compared Euro-for-Euro with its German equivalent. Hence, the effect of the Euro is to replace local practices with ones that apply Europe-wide. Companies will increasingly be seen, not in their regional or national context, but in a European one.
And, as investors compare companies across Europe in terms of financial performance, so they will make comparisons on a corporate governance basis. Since report and accounts will be more transparent, comparisons on such issues as board composition, executive pay or environmental disclosure become easier to make.
Stephen Davis told PIRC: "Peugeot will no longer be compared just to Renault, but to BMW and Volkswagen as well on corporate governance criteria." In a continental market, companies will no longer be able to claim that they are complying with national best practice. Steve Davis concluded that "national regulations and customs will be superseded by ones that apply across Euroland."
Open arms There are already signs of a greater degree of openness and transparency in some markets. In Germany, for example, companies have become more open about their performance.
In 1993, Daimler-Benz sought a listing on the New York Stock Exchange, which required it to produce financial information in accordance with international accounting standards. Last year's merger with US auto manufacturer Chrysler was yet further evidence that Daimler sought to perform on a global scale, with the commitment to transparency that that entailed.
In late 1998, Deutsche Bank announced plans in December to spin off some of its largest holdings in German companies. More than £20 billion worth of stock will be spun off to the public. These stakes include Deutsche's 12 percent stake in Daimler Chrysler and its 9.4 percent chunk of Allianz, the insurance giant.
Just a few days after Deutsche's announcement, Dresdner bank followed suit with the announcement of a £12.8 billion firesale. For both banks, these were stakes held since the Second World War.
Similar trends have been afoot in Italy. Large chunks of state owned industry have been privatised, and corporate dynasties like the Agnellis, who control Fiat, started simplifying the complex web of cross-holdings and subsidiaries that made up the firm.
Single set of standards? It is unlikely in the short term that Euroland will produce anything so stark as a single code of corporate governance best practice. But even in the absence of any kind of uber-Hampel, there is likely to be some convergence on key issues as disclosure and share voting.
An early attempt to provide a set of minimum standards has been made by the OECD, the Paris based agency representing 26 leading industrial nations. The draft guidelines were issued November 1998 (see PIRC Intelligence, November/December 1998), and will be discussed by a variety of governance experts from around the world, including PIRC's Anne Simpson.
The standards offer a starting point on best practice. The OECD emphasise that the guidelines are "non-binding and do not aim at prescriptions for national legislation. The purpose rather is to delineate those basic principles that can serve as a reference point for national work." There is likely to be tension, however, between a US-style "shareholder first" approach and the more stakeholder oriented approach found in continental Europe.
An alternative approach is being pioneered by the US public giant, the $110 billion California Public Employees' Retirement System (CalPERS), which has markedly increased its investments in Europe in recent years. Rather than trying to impose a US approach abroad, the fund will seek to forge a set of alliances in separate markets.
In the UK, CalPERS has already teamed up with Hermes, the fund manager with a history of activism. (See PIRC Intelligence, November/December 1998). The alliance encourages the two funds to work together in each of their home markets. CalPERS is seeking to forge similar alliances in France and Germany.
Dangers But while the arrival of the Euro seems to herald a higher standard of disclosure and more open voting procedures across Europe, shareholders must be aware that the new order also carries risks.
One predicted result of the Euro is a spate of cross-border mergers and acquisitions. As companies see themselves, not just as regional or national firms, but as continental ones, they will be encouraged to seek consolidation across Europe.
This carries the risk that weaker rivals will club together to reduce competition. So too, national governments may seek to protect local firms from foreign predators. If there is an upheaval of ownership in the new Europe, it will be up to shareholders to ensure that their companies' response is not reactionary or protectionist.
With that warning in mind, the Euro offers shareholders tremendous opportunities for improved corporate governance, enhanced accountability, and greater returns across the burgeoning markets of Europe.
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