Shareholders urged to examine mergers carefully

For investors, Europe at the moment is an exciting place to be. There is a buzz in the air as bids, mergers and takeovers become almost daily occurrences and even market gossip can send a share price into the stratosphere.

Few sectors have been unaffected by the merger mania that has gripped many continental European stocks since the introduction of the euro. "We are in the middle of a regional financial experiment, the size and scale of which has never been tried before," says Mr Bryan Allworthy, European strategist at Merrill Lynch in London.

The financial services sector, in particular, has been riding high on bid excitement but other industries have also been touched by the wave of consolidation.

From France's Total, with its plans to buy Belgium's Petrofina, to the proposed purchase of British insurer Guardian Royal Exchange (GRE) by Axa or Hoechst and Rhone-Poulenc's plans to form a life sciences joint venture, merger euphoria is everywhere.

Such is the pace of consolidation that there have even been bids for companies whose merger proposals have yet to go through. Just weeks after the announcement by Societe Generale (SocGen) and Paribas that they were linking up has come the surprise bid from Banque Nationale de Paris (BNP) for the two French banks.

However, analysts suggest that shareholders should examine all mergers and acquisitions and the reasons behind them very carefully. While some companies are acting on long-held ambitions to expand globally, mergers in other sectors may be primarily designed to counteract already difficult trading conditions.

"These mergers are staving off the inevitable," said Mr Albert Edwards, global strategist at Dresdner Kleinwort Benson in London. "The inevitable is that profits grow in line with revenues and revenues grow in line with nominal gross domestic product growth - which is next to nothing."

The outlook for most of the large continental European economies is far from bright as unemployment in France and Germany remains high and the Asian crisis continues to have a knock-on effect on European industries, particularly commodity or cyclical stocks.

While link-ups can release value for shareholders, delivering cost savings and economies of scale while fortifying the position of the enlarged firm within its sector, this may not always be the case. Historical and anecdotal evidence suggests that not more than 50 per cent of mergers are really in favour of the shareholder in the long run and analysts recommend that investors weigh up the costs as well as the benefits of such deals before deciding what to with their cash.

"Too few shareholders pay attention to the cost of restructuring. Instead they are bamboozled by the proposed synergies and benefits," says Mr Allworthy.

He suggests that shareholders should look closely at each deal to see whether it is proactive and value-creating or is simply a reactive move to defend an existing position. "As an investor involved in a merger, you have two choices. Investors have to decide whether it is a useful exit strategy from a management which is reactive and is seeking to protect its position or the long-term strategic vision of a management that knows where it wants to be."

In the coming weeks, investors should also get a better feel for the immediate outlook for European stocks as the 1998 reporting season draws to a close and analysts review their overall earnings estimates.

The consensus estimate among analysts last October was for European earnings growth of 14 to 15 per cent in 1999 but this was cut to 12 per cent towards the end of last year and many believe it could be shaved further in April.

Some sectors are undoubtedly more exposed than others, while certain stocks are also more vulnerable to the trouble spots of the globe such as Brazil, Russia and south-east Asia. The trick for investors is to find those firms which are reasonably well insulated from the crises or those well positioned to capitalise on the opportunities thrown up by the international slowdown.

Merrill Lynch is generally recommending growth stocks in areas such as pharmaceuticals and telecommunications, utilities and consumer cyclicals, but is not at all keen on commodity stocks or cyclical stocks such as chemical, engineering or paper and packaging companies, sectors which have had little or no pricing power in recent years.

Meanwhile, Irish investors will continue to find it expensive to buy European stocks directly because of the custodian charges involved and for many, managed funds may still be the way to go to achieve a diversified portfolio. Mr John Keilthy, head of private finance at NCB Stockbrokers, reports growing interest among the firm's clients in buying European stocks. He also says funds are more convenient for most would-be investors and have the advantage of providing an investor with exposure to the entire market rather than to just four or five stocks.

Because European stocks are not held in certificate form, and because they are not part of CREST, the electronic system operated by the Irish and London stock markets, the stocks have to be held by custodians who levy additional charges on top of the ordinary transaction costs.

However, there have been discussions about including the main European stocks in CREST, a move that would make direct investment in euro zone shares much easier.

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