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Thursday, 30 December, 1999, 20:42 GMT
The insatiable merger appetite
By BBC News Online's Diane Wilkinson
The year is ending as it began - on a wave of merger frenzy.
While the UK's largest company, Vodafone, is battling for control of German telecoms group Mannesmann, turmoil continues in the financial sector as Bank of Scotland and Royal Bank of Scotland fight over NatWest.
Why the frenzy?
Worries about the approach of the year 2000 failed to deter activity as had been feared and 1999 proved to be yet another record year.
Apart from the obvious drive to cut costs in the face of ever-increasing competition, other factors have made mergers an increasingly attractive option:
Old and new favourites
The total value of UK bids announced by the middle of December was a staggering £168bn.
However, this figure was eclipsed by deals made by British firms overseas.
Vodafone, the UK leader in mobile phones, has aggressively moved to establish its worldwide position, acquiring US rival Airtouch for £42bn and creating a national US mobile network in a deal with Bell Atlantic.
Vodafone, now the UK's biggest company, does not pause for breath and is currently undertaking the largest hostile takeover in history (£83bn) for German telecoms group Mannesmann.
Among the old favourites, pharmaceuticals, high development costs of new drugs have driven many mergers this year, with Zeneca, a spin-off of ICI, reaching a £22bn merger deal with Swedish firm Astra to form one of Europe's biggest drug firms.
The sector that many people believe will increasingly dominate the takeover stakes is financial services.
The last decade has seen a technological revolution in the way services are delivered, with the telephone and the internet bypassing more traditional avenues of business.
New entrants such as Virgin and the high street supermarkets together with a general trend towards globalisation have forced a major rethink among traditional banks.
Consolidation appears to be the name of the game both in the UK and worldwide.
There have already been some very big deals: NatWest's £11bn plan to merge with insurer Legal & General being among the biggest, although this is now threatened by the takeover battle for NatWest between Bank of Scotland and Royal Bank of Scotland.
Lloyds, which is the largest UK bank, has been one of the fastest movers, securing its position with some well-timed takeovers.
In 1995 it took over TSB, then building society Cheltenham and Gloucester, and finally this year is buying insurance company Scottish Widows for £7bn.
The single currency has boosted activity by making it easier for US and other European companies to do business across Europe.
The euro has made it is easier for firms to raise cash to buy other companies as investors in the eurozone can lend money to companies without any currency risk. Low interest rates also help.
This resulted in Olivetti's bid for Telecom Italia which was made possible by borrowing on the eurobond markets.
European companies have reacted to protect their market share from new competitors by looking for growth opportunities themselves.
Another factor spurring European merger activity is privatisation. The sale of government-owned businesses has meant that larger companies with the ability and inclination to acquire are coming on to the market.
These companies are not just acquirers, but also targets, as was the case with Telecom Italia.
Recent figures on merger activity show that cross-border activity looks set to break new records in 1999.
The total for the first half of 1998, a year in which all records were broken, was $243m. This has grown to $409m in the first half of 1999, an increase of 61%.
European businesses in particular are becoming more active in the international merger and acquisition market.
Countries such as France and Germany have significantly stepped up the value of their purchases abroad.
However, the level of investment going into these countries has not seen the same meteoric increase.
This cannot be attributed to a lack of interest, just the opposite. There has been a great deal of interest, the reaction to which has highlighted cultural differences in European attitudes towards takeovers by a foreign firm.
The German government's open hostility to the Vodafone bid for Mannesmann is the most high profile, but not the only example of such differences.
French and Italian companies remain just as uneasy about opening up their corporate frontiers to foreign interest.
Those cultures may have to change. Globalisation and ongoing European integration mean that there will be more, not less interest in European firms in the years ahead.
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