Peter Martin - A taste of his talentsWhy is it that European companies fare so badly when they invest in America? Cross-border mergers in general have a poor record; but the roll-call of failed US acquisitions by European companies is striking.
This week saw Emap admitting to its problems with Petersen, a US magazine publisher, and paying with the head of its chief executive. This is just the latest of a string of unhappy experiences that go back to Midland Bank's disastrous purchase of Crocker, and most recently include Daimler's merger with Chrysler and Sema's acquisition of LHS Group.
A big reason why European acquisitions in the US go wrong is that it all seems so easy. The US has stock markets in which acquisitions are the norm, and a smooth-running merger machine in the form of eager investment banks and lawyers. That makes it quick and simple to buy a US company without the years - decades - of investigation and wooing required in some other countries.
And America seems a very transparent market. The voluminous filings required and the huge amount of stockbrokers' research all make it easy for outsiders to feel they know the company they are buying and the markets it serves.
That can be an expensive mistake. It is easy to underestimate the challenge of doing business in the US. Competition is fierce, and industry structures don't always work in the way that outsiders expect. European companies sometimes make the mistake of buying a US business for what seems a cheap price, expecting to bring its margins up into line with their own fatter ones. Superior management should close the gap quickly, they think.
Too often, though, it turns out that the acquisition's weak profits were not so much the result of poor management as of endemic industry problems - overcapacity, cut-throat competition, an unequal relationship with customers, and so on. The best management in the world cannot bring the acquired business's margins into line with those of its new parent, operating in quite different market conditions.
Worse problems are caused when an acquirer's corporate culture fails to mesh with that of its new subsidiary. That's the biggest single risk in all cross-border acquisitions, of course. But there seems to be a particular problem in the US.
American management culture is extremely powerful. It is inculcated in the country's excellent business schools, and reinforced by a business publishing industry that endlessly recycles the values and principles of the best companies. This makes it very hard for overseas acquirers to superimpose their own culture.
Too often, overseas acquisitions lead to a protracted internal battle. One possible outcome is a victory for the US managers, giving them effective independence at the price of abandoning the hopes of a genuinely integrated global business on which the original purchase was justified. Or the overseas parent loses patience and replaces the US management - at a considerable cost in terms of lost experience and market knowledge.
Still, even if the US is a potential trap, it is one that many European companies are eager to fall into. Last year, according to a study by KPMG, there were 453 acquisitions of North American companies by European ones, a 20 per cent increase on the year before. UK companies spent $96bn on North American acquisitions; French companies, the second most enthusiastic transatlantic bidders, spent $43bn.
Since then, of course, the pace of mergers has sharply slowed. But the US continues to attract interest from acquisitive European companies, as the near takeover of Lucent by Alcatel this week demonstrates.
The reason for this persistent trend is that many European companies feel they have little choice. They are fully aware of the risks posed by a US acquisition. But they know that unless they achieve a strong position in the American market, their hopes of becoming a genuine global competitor are slim.
The huge US market is essential to building true global scale. And in many industries the US is the place with the leading technologies, and the most innovative and demanding customers. A strong presence there is essential to long-term success around the globe.
It is this imperative that makes it so hard for companies to resist the US market. And it also makes it hard for investors to decide on an appropriate response to the prospect of a big transatlantic acquisition.
The more ambitious and driven a management team, the more likely is it to seek to make an acquisition in the US. Investors cannot have the energy and ambition wthout the US yearnings. Since investors in any company with aggressive growth plans are unlikely to be able to avoid the risks of a US acquisition completely, they must try to spot the potential disasters in advance.
There are a few obvious pointers. Companies that are simply trying to bolt a big US leg on to an essentially domestic operation - such as Beazer's acquisition of Koppers and Farnell Electronics' purchase of Premier Industrial - are likely to face particular problems. A purchase that is part of an explicit global strategy, by contrast, provides at least the reassurance that the acquirer is not merely reliant on running the target better than its incumbent managers.
A second warning light should flash when the acquirer fails to acknowledge the individual characteristics of the US market. Any assumption that the US business can be run in the same way as overseas is worrying. This might be an explicit promise of bringing a European approach to a hopelessly backward US market. Or it might be simply a failure to acknowledge that there are potentially any real differences between the European widget market and the US equivalent.
Either way, there is reason for shareholders to be cautious. Sometimes European companies really do have specific technical or business-model advantages over their US rivals. But sometimes they merely misunderstand the ways in which the US market has developed.
The US is a big place - that's part of its appeal. When things go wrong, they do so in a big way. It's impossible to avoid the risks completely. But sensible managers, and prudent investors, can at least avoid the obvious mistakes.
