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For U.S. Companies, Europe Is an M&A Playground

For American corporations hungry for returns in a low-interest environment, European companies are looking tantalizing.

At least one group is seeing opportunity in Europe amid the euro zone’s crisis: U.S. corporations, which are snapping up their European brethren at a record rate in a quest to increase revenue.

“Anemic growth everywhere is driving companies to aggressively figure out how to grow their business in a 2 percent economic growth world,” says Scott Bok, CEO of New York–based investment bank Greenhill & Co.

U.S. companies have announced $132.06 billion worth of purchases of European companies so far this year, a record, according to Dealogic. That’s far ahead of the previous high, $107.71 billion for the same period in 2008. Much of the activity is coming in deals priced at $5 billion and up, Bok says. “Most of those companies have a strong position in their own market and want to expand.” Valuations are attractive in Europe. The Standard & Poor’s 500 index trades at a hefty trailing price-earnings ratio of 21.3, compared with 18 for the STOXX Europe 600 index.

“Europe’s economy has been depressed a lot longer than the U.S.’s since the financial crisis ended,” Bok says. “People still feel there is opportunity long term.” This month the International Monetary Fund forecast 1.5 percent growth for the euro zone this year.

Meanwhile, U.S. companies are flush with cash, particularly overseas, as they are reluctant to face a tax of as much as 35 percent on repatriated earnings. At the end of 2014, U.S. nonfinancial companies held a whopping $1.73 trillion of cash, with $1.1 trillion of that kitty stashed overseas.

“A lot of companies are using cash trapped overseas to fund these acquisitions,” says Paul Stefanick, head of global investment banking coverage and advisory and co-head of Americas corporate finance at Deutsche Bank in New York. Low interest rates in Europe make this a good time for U.S. companies to borrow euros to finance their acquisitions, he and others say. The ten-year German Bund yields 0.67 percent, compared with 2.21 percent for comparable U.S. Treasuries.

The buying power of the greenback is also helping to propel the M&A wave. “The strength of the dollar has supported the increased activity into Europe,” says David Lomer, co-head of Europe and MENA mergers and acquisitions for J.P. Morgan Chase & Co. in London. “We expect this to continue.”

The biggest deals announced so far this year are Broomfield, Colorado–based beverage-can-maker Ball Corp.’s purchase of U.K. rival Rexam for £4.43 billion ($6.8 billion); Memphis, Tennessee–based FedEx Corp.’s acquisition of Dutch parcel delivery company TNT Express for €4.4 billion ($4.8 billion); Silicon Valley data center provider Equinix Inc.’s purchase of London-headquartered TelecityGroup for £2.35 billion; and Greenwich, Connecticut–based XPO Logistics’ acquisition of French trucking company Norbert Dentressangle for €3.24 billion.

Many of the transactions consummated over the past couple of years have taken place in the health care and industrial sectors. “Some parts of health care services are pretty domestic, but for others, such as pharmaceuticals, it’s a global market,” Bok says. “That’s a prime example of where there’s a lot of activity.” In May suburban Chicago–based medical product maker Baxter International agreed to buy the Oncaspar leukemia treatment from Italy’s Sigma-Tau Finanziaria for $900 million. As for the industrial sector, given its slow growth in the U.S., says Stefanick, “consolidation opportunities are compelling if you can take enough costs out.” To that end, General Electric Co. announced a $17 billion deal for French company Alstom’s energy assets last year.

M&A professionals expect the merger boom to continue, unless Greece’s debt crisis ends with the beleaguered nation making a messy exit from the euro zone. “I suspect there will be a resolution that won’t solve everything but will allow Greece and Europe to muddle through,” Bok says. “In that case, the M&A trend will remain very much in place.”

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