How To Get Into Gear For 1992
What should a U.S. CEO make of these European developments? Will “1992″ change his industry, affect his markets? The answer, [...]
April 1 1990 by Sir Michael Butler
What should a U.S. CEO make of these European developments? Will “1992″ change his industry, affect his markets? The answer, for a large number of
One issue that is giving rise to lively debate is public purchasing. Around 16 percent of European Community’s (EC) gross domestic product is accounted for by public purchasing, due to be opened to free competition over the next few years. European companies argue that either the U.S. and Japanese governments must be persuaded to open up their public purchases to European companies, or European companies should be given purchasing preference (as opposed to non-European multinationals with subsidiaries in Europe, since the U.S. government does not treat the American-based subsidiaries of European companies as American).
This argument may not prevail. Article 58 of the Treaty of Rome says that any company, no matter where its ultimate ownership lies, must be given equal treatment with European companies. Non-EC companies rely on this Article when making European acquisitions.
Non-European companies have been slow to join the growing movement to restructure European industries. Japanese companies, for example, have made acquisitions in the
With the exception of the
The hostile takeover bid, as common in the U.K. as it is in the U.S., is virtually unknown in Denmark, Germany and Italy; it is extremely rare in Holland and Belgium; and an infrequent innovation of the second half of the 1980s in France and Spain.
A recent consultant’s report on the obstacles to takeovers in the member states of the EC runs three lengthy volumes. They include many devices illegal in the
This does not mean that there are no transactions taking place. Companies frequently come up for sale, only because of succession problems. In
Mergers and joint ventures are beginning to transform the industry, with General Electric of the
The real problem for a U.S. CEO is identifying good targets; the number of intermediaries engaged in M&A is quite small, and the private seller seldom advertises his company as being up for grabs. Intermediaries are much more willing to discuss strategic alliances and cross share holdings-though these may lead to an outright sale or a common earn-out-than they are to put their company on the auction block.
The EC countries will remain distinctly different throughout the 1990s. The non-European CEO should not take the plunge without first seriously studying each country. Taxes will be slow to level out-corporate tax in
The diversity of the effects of “1992″ in different industries is striking. The only generalization that can be made is that there will be more competition. Consider a few different sectors: banking and investment services, information technology (IT), telecommunications, pharmaceuticals and road transport.
BANKING AND INVESTMENT SERVICES
Once the key directives have been adopted and then implemented (target date 1 January 1993), a banking license in any member state will permit the company in question to operate anywhere in the Community, and to offer its services to companies in other member states without having to establish itself there. An Italian company will become free for the first time to undertake its foreign exchange or interest rate hedging operations in
Once the remaining exchange controls are removed, any European citizen will be able to open a hank account anywhere in the Community. The effects will be profound in countries where no one in living memory has been able to legally take his money out without having to fill out endless and often mindless forms.
From the point of view of the economy, it may be the steps that firms take in anticipation of 1992 that will have the most important immediate effect. Already major Spanish, Danish and Dutch banks have merged. Others have formed strategic alliances and large cross share holding groups are being formed under the leadership of Deutschebank,
IT AND TELECOMMUNICATIONS
The official program of liberalization of telecoms has been long delayed by old-fashioned nationalist reflexes. An agreement on the first steps has now been reached, however, and it is reasonable to think that it will go a long way in the end, perhaps stopping short of full blown competition on the basic telephone network. Apart from some fields of public purchasing, the computer sector is already open (and IBM is the biggest computer company in almost every European country).
It is the preparatory steps that firms are taking which are moving the industry most. The 12 main European IT firms have formed a powerful lobby, accepting worldwide, open competition, insisting on worldwide open standards, arguing for an equivalent opening up of public purchasing in North America and Japan and, above all, initiating with the EC a common program to build a “European Central Nervous System” of electronic data interchange (EDI) and other computer networks to serve the single European market in the 1990s.
Pharmaceuticals is an idiosyncratic industry. Most large European firms, like their
But there are still no signs of a breakthrough on the issue of pricing. At present, because of different systems in each country for reimbursing citizens for expenditure on medicines, prices differ widely (up to 8 or 10 times difference for some drugs), from one country to another. Many governments fix prices in negotiation with firms; the outcome is often influenced by whether a firm manufactures, or undertakes some of its R&D expenditure, locally.
This situation cannot last. Already, “parallel imports” are causing problems. When the internal frontiers of the Community are abolished, the firms will have no choice but to press vigorously for movement toward a common European price. What will happen to national reimbursement systems then?
This is an idiosyncratic industry of a different kind. National markets have been protected by a system of quotas and licenses. Trucks have frequently had to return empty because they were not allowed to pick up loads in other countries. No wonder there are almost 50,000 firms in the industry.
Even here, at last, the single market is on the way. Tentative steps have been agreed on toward abolishing quotas and licenses and permitting “cabotage.” Already some of the bigger firms are on the acquisition prowl. This is one of the industries where the forthcoming period of restructuring will be traumatic. By the mid-1990s, the number of firms may be reduced to a tenth of the present figure.
In many of the industries that are going “global,” powerful European firms will emerge. Much of the action now going on in the fields of strategic alliances, joint ventures, and M&A is consciously designed to enable European companies to compete better with their rivals from
Now is the time for U.S. CEOs to take a long, careful look at this new
This is not an easy task. So many people have piled into the “1992″ knowledge industry in the past three years-consultants, lawyers, public relations specialists, stockbrokers, analysts, and merchant bankers, among others. The quality of the advice offered varies from nothing to expert. Yet, it is hard to do without expert advisers.
My advice to British CEOs-and it applies to North American CEOs as well-is to begin preparing for 1992 by appointing a bright, young director or senior executive to travel to Brussels and other capitals, talk to representatives from the U.S. Chamber of Commerce in Brussels, meet with Commission officials and talk to journalists and other contacts in the industry. Once the appointed executive has surveyed the scene and presented his ideas, the director or CEO can then determine which of the expert advisers, if any, he will choose to help lead his firm into 1992.
Sir Michael Butler joined Hambros Bank Limited in 1988 and was appointed a director of Hambros PLC and executive director of Hambros Bank Limited. He served as permanent representative to the European Community from 1979 to 1985. He is a director of the Wellcome Foundation, chairman of ICL’s European Strategy Board, and chairman of the City of