This time last year, with the single currency area lurching from one crisis to the next, Europe was a no-fly zone for many US investors – both in terms of buying companies and backing private equity funds in the region.
But times have changed. Buoyed by their steadily recovering domestic market and ever-increasing stock prices, US chief executives are more confident now than they have been for some time, according to a the most recent CEO Confidence Index, a quarterly tracker published by US leadership consultancy Vistage International. Since many of them also have huge cash piles trapped outside the US for tax reasons, not to mention banks clamouring to lend them money, they’re keen to invest – and now Europe appears to have found a degree of economic and political stability (at least for the time being), European acquisitions are back on the radar.
It’s true that US trade buyers never totally went away, as far as Europe was concerned: according to Mergermarket, they’ve been responsible for somewhere between a fifth and a sixth of all M&A activity around European targets in each of the previous three years, and have accounted for at least half of all inbound M&A every year since the crisis. But for a time in 2012, activity levels fell off a cliff.
“There was a period where Europe was completely toxic – where the messaging around Europe was driven largely by the string of bad news stories people saw on their TV screens,” says Richard Madden, chief executive of boutique investment bank DC Advisory. “And that was effectively an override to the good sense that is beginning to prevail now.”
The UK-based M&A advisor has already sold five private equity owned business to US trade buyers in 2013 – including Lincolnshire-based Napier Turbochargers, which went to US-listed group Wabtec in February (netting owner Primary Capital a 5x return), and jeans brand Lee Cooper, which was sold to US business Iconix on behalf of Sun European Partners for $72 million.
Mike Hart, an executive director of DC in New York, says a lack of future visibility was a key reason for last year’s drop-off. “Acquirers are able to accept lower levels of growth and price them into an acquisition, but it is much more difficult to price in uncertainty. Of late some form of stability has returned, and we believe this will be met with an increase in inbound M&A from the US.”
So what are these US trade buyers looking for? A product that can be sold into the US market, like Lee Cooper jeans, is clearly one attraction. But using Europe as a base to tap into other higher-growth markets is another common strategy – either via a target’s existing customer base (like Napier in Asia), or its distribution network (like Lee Cooper).
“Many European companies have successfully managed to grow outside of Europe,” says Hart. “These assets are particularly attractive to US buyers seeking a broader geographic reach – in particular those that have thus far focused on their home market.”
Certain geographies and sectors continue to throw up red flags. Many US firms remain sceptical about investing in France, for example, due to labour restrictions (as expressed most forcefully by Titan International chief executive Maurice Taylor in a letter to French Industry Minister Arnaud Montebourg earlier this year). Consumer-focused businesses that are wholly Europe-dependent are also still a tough sell.
But in general, US companies seem likely to be active buyers in Europe in the coming months. And rather than worrying about this as a competitive threat, GPs ought to see it as a positive development for the exit environment, says Madden.
Of late some form of stability has returned, and we believe this will be met with an increase in inbound M&A from the US.
“If you’re a private equity firm, you really want to sell to a trade buyer,” he argues. “So the fact that there are bidders out there, who are well-financed and enthusiastic about buying the right sort of business, is a real positive for private equity.”
“US bidders differ from PE in that they prefer not to acquire businesses where there are multiple operational issues to straighten out,” adds Hart. “The last thing a large US corporation wants to do is buy a business and then face the mammoth task of restructuring and professionalising it. They’re very reluctant to take on that risk. So they see private equity as having a specific role to play in taking a business [like that] and making it suitable for integration into a large corporation. [This allows] the US trade acquirer to focus on what they do best: growing the top line.”
Even if private equity bidders do come up against US trade buyers in a bidding process, that’s not necessarily a bad thing, he suggests: “Private equity is likely to be a bit nervous if they’re in a process with no trade involvement. Strong trade competition in a process bodes well for a sponsor’s exit plan.”
On the other hand, sellers should never buy into the still-lingering prejudice in some quarters that these buyers represent ‘easy money’. “The idea that the US guys are some kind of dumb money is an absurdity,” insists Madden. “They didn’t get to be the most successful players in the largest market of the world by being stupid. The reality is they’re very smart, very analytical and very thorough. They’re feeling pretty confident, but they’re also very focused on making sure they manage the downside as best they can.”