Study by Roland Berger Strategy Consultants on the potential for mergers in 13 key European industries: Many sectors are facing a new wave of takeovers and mergers

• Economic drivers and business requirements demand action
• Major need for consolidation in Europe
• Low company valuations trigger new M&As
• Merger activities are concentrated in the pharma, chemicals, food retail, automotive supply, IT services, and telecom/ mobile communication sectors

Against the backdrop of a dramatic fall in mergers and acquisitions since 2000, Roland Berger Strategy Consultants examined the potential and opportunities for mergers in 13 key European industries. The consultants identified three strategic clusters:

1) The consultants expect to see the largest number of mergers in industries with above-average potential for mergers and a range of options: in pharma, chemicals, food retail, automotive supply, IT services, and telecoms/mobile phones.

2) The sectors energy, media/publishing, construction, and tour operators also show potential. Consolidation is also required in the European defense industry.

3) By contrast, automotive manufactures must first unleash their internal potential. While airlines may have a backlog of merger potential, their options are limited by national legislation.

The number of mergers in Europe fell from 5,401 in 2000 to 3,138 in 2002. In the same period, the transaction volume fell from USD 1.7 billion to USD 563 million. Consultants from Roland Berger think this is due to uncertain economic development and the sustained post merger phase as a result of the takeover hype of recent years.

Despite this, the economic drivers of M&A are as strong as ever, e.g. globalization, fiercely competitive internal markets, deregulation and privatization of key markets, and technological progress.

"There is a strong business case as well," explains Hauke Moje, Associate Partner in the Corporate Strategy & Organization Competence Center at Roland Berger. Many key industries have a high, stable level of synergies, such as airlines, IT services, food retail, mobile communications, and some specialty chemicals. In addition, the influence of non-European market players is increasing the pressure on many industries such as airlines, pharmaceuticals companies, IT services, and food retail.

"However, a lack of opportunities and strict conditions considerably limit merger options in individual industries," says Moje. These include restrictive national rules for airlines, the lack of attractive takeover targets in the car industry, the ongoing intervention of national competition regulators in the energy sector, and the restrictive competition policy in the publishing industry.

Europe still has to catch up with the US: 15 years after the introduction of the single market, industries are still very fragmented in Europe, while in the US a few large companies dominate each sector. The five largest airlines dominate 75 percent of the US market, while in Europe they only manage 39 percent. The five largest US publishing houses control 60 percent of business compared to just 44 percent in Europe. And in the defense industry, the top five companies have 58 percent of the US market between them, against 45 percent in Europe.

At present, low share prices are creating some room for maneuver by investors and are giving many companies the opportunity to start takeover activities again. "Those who have the cash should buy today, not tomorrow," recommends Roland Berger, Global Managing Partner. "Low prices are generally irrelevant for mergers through share swaps. But the share price of each partner is extremely relevant for the subsequent ownership ratio. This affects German firms first and foremost, since the Dax fell by 44 percent in 2002, while the CAC fell only 33 percent and the FTSE just 24 percent."