At one point during the
At one point during theWharton 2000 Global Business Forum held last month in Philadelphia, Guy Dawson, chairman of investment banking for Merrill Lynch in Europe, asked the audience to consider a projected financial map of the world from a Wall Street Journal article 10 years ago. “It had a huge China dominating about half the globe, quite a large Japan and U. S., and a tiny, shriveled wasteland called Europe. Needless to say, the emergence of Europe over the past five years as a powerful, vibrant financial region was not expected.”
Other participants who took part in the Forum’s European session echoed Dawson’s point. As the Euro, introduced in January 1999, approaches its second anniversary, speakers and panelists scrutinized the economic, political and social trends shaping the continent’s investment environment, noting above all how unexpectedly far Europe has traveled financially in just the past few years. A separate session measured the progress of Russia and the countries of Eastern Europe toward becoming viable free market economies.
Entrepreneurship in Europe is experiencing a huge upswing, panelists agreed, partly as a result of double-digit Internet penetration growth rates and a greater availability of seed capital. Nigel Drummond, CEO of U.K.-based Internet Incubator, said that attitudes have changed tremendously since 1997. “In France it was considered overly risky to be an entrepreneur. The venture capital industry didn’t exist,” he noted. “And to give you an idea of how small the community of entrepreneurs was, in the U.K. we used to meet every Thursday evening in a pub. There were 12 of us.”
What does the European venture capital picture look like? Drummond explained that because VC investing has just begun there, “it resembles a classic new market – a lot of new entrants, and very fragmented. And because many people don’t have good research and experience, it’s still very trend-driven. This month it’s wireless ASPs that everyone is interested in.”
As far as corporate venture capital activity, Aymerik Reynard, managing director of Innovacom, the venture capital subsidiary of France Telecom, asserted that it was generally the more cutting-edge, rather than traditional, companies that tended to get involved, “like Nokia and Erickson and semiconductor-type companies.”
Most panelists shared the view that corporate venture capital, while still uncommon in Europe, was of great benefit to start-ups. Patrick Beaudan, co-founder of Equity Capital Network, said that his startup clients love corporate sponsors, because “you need more than money. You need relationships, business development, alliances. Ninety-five percent of individual VCs may claim they’ll do a million things for you, but before you know it they’re on to the next deal. It’s a huge selling point that we can bring corporate sponsors to our clients.” While other panelists agreed, they also warned about choosing a corporate VC carefully and making sure to cement a relationship with the larger corporation.
The speakers also discussed exit strategies for start-ups, explaining that exiting has tended to be more of a long-term process in Europe compared to the average time it takes for companies to do an IPO in America. Reynard predicted that “we will start to see real exits on the public markets in Europe – more opportunities for strong companies to go public.”
But for entrepreneurs in Europe, road blocks remain. Beaudan identified one of the major ones: Companies are generally prevented by law from offering stock options, which hamstrings their efforts to attract new talent. “European parliaments tend to think stock options are obscene, that getting rich is obscene. They’ll have to sort that out, maybe on a pan-European level, before they can dream of coming anywhere near the U. S.” Jerome Ternynck, CEO of London-based Mr. Ted, a recruitment software company, agreed that “if a company goes through the roof, people want their stock options, and you just have to accept that if you want to get the right person on board.” He added that overall “we continue to see a careful attitude toward startups in Europe. It is not easy to recruit.”
All agreed that the European marketplace is still immature and probably headed for a “correction” which will leave only the more viable companies and more professional investors in its wake. “We’re working out how to make strong pan-European businesses, and how to pass that knowledge on to bright young entrepreneurs,” said Jonathan Sparey, a partner in LEK Consulting’s UK office. “That will get easier.”
Meanwhile, mergers and acquisitions are booming, according to session participants, with capital outflows reaching $180 billion in the first half of 2000 alone. Hot M&A sectors include media and entertainment, Internet services, consumer goods, telecommunications and investment banking.
When asked about recent articles in the Wall Street Journal and elsewhere asserting that European M&As and the Euro are on the decline, panelists characterized this phenomenon as merely a “dip” in a wave that will rise for at least the next five years. “The European infrastructure is happening now. And exporters in Europe love the euro,” commented Fritz Kroeger, a partner in A. T. Kearney. “Americans didn’t care about the low dollar some years ago.” Added Larry Furlong, a Vice President in Goldman Sachs International: “The key acquirers are busy integrating. We feel they’re coming back.”
The panel identified national culture clashes as perhaps the biggest stumbling block to successful European M&As. Jorge Calvert, managing director of UBS Spain S. A., reminded the audience that national pride in Europe is a “big deal … Sometimes M&As that would have built shareholder value fall through because the companies can’t decide who will be the CEO.” Jeff Bell, Ford’s country manager for Spain, said that his company’s expertise in handling cultural differences gives it an acquisitions advantage. “Volvo came to us, after a failed merger with Renault. They saw that we were sensitive to cultural integration. We not only kept their people in Volvo, but also immediately placed them, with no trial by fire, throughout Ford’s global operations.” Fritz Kroeger described the reaction when German managers from Daimler went into a newly-acquired Austrian company to “educate” the workers, who were mostly people in their 60s. “I saw grownups with tears in their eyes because they were so humiliated. But there’s another side to the coin: Daimler is a very quality-driven car. It’s not so much a company as a religion.”
Strong nationalist sentiments aside, the panelists foresaw a European “merger-quake” in the next five to ten years in industries such as utilities, banks, transportation, chemicals and retail. Will shareholder value be the result? “The sense I get from everyone on the panel,” said Furlong, “is that M&A deals don’t create value; good M&A deals create value, whether in North Carolina, Benelux or Japan.”
A separate panel on Russia and Eastern Europe revealed a less rosy picture – as might be expected – than that of the West. Although Eastern Europe is recovering from the financial recession and political turmoil of 1998, Russia still has a long way to go economically, according to conference participants.
Dan Wilson, director of European emerging markets at Salomon Smith Barney, said he believes central Europe will soon be joining the European Union, but that most investors still see Russia as a high risk. Apparently their attitude is not without grounds. Until recently in Russia, panelists pointed out, it was not unheard of to settle shareholder issues by gunning down the general director. Even today, they add, corporate governance violations maintain a stranglehold on the Russian economy.
“Companies may be making money, but there’s a question as to whether or not shareholders really are seeing the dividends, and whether there are legitimate balance sheets,” said Tim Seymour, director of the U. S. branch of Troika Dialog, an investment bank and brokerage house. Added Terry English, CEO of the investment bank Sovlink: “Russian corruption is a reality and it is diverse. We encountered one company where a manager in cahoots with the tax authorities managed to bankrupt an entity within the company, with the idea of taking over the plant. You’ve got to be on the job 24 hours a day to protect your investors.” Other obstacles for investors that were identified included: market liquidity; the fact that shares are usually traded through local structures, which tends to shut out institutional players; an inadequate banking system; and the problem of what English characterized as a “huge, draconian tax bureaucracy.”
On the more positive side, Tim Seymour delineated a Russia in which:
• the brokerage community and shareholders are beginning to stand up to violations
• the “asset grab” that accompanied privatization is over and there is more of a focus on streamlining these structures
• “They have a President who goes to work every day” (in Seymour’s words)
• Russians are demonstrating more faith in their own economy: domestic investment is up 17%.
What does the future hold? The panelists asserted that in order for Russia to experience greater progress, the country needs to run itself on a legal basis, and to restructure the four existing major state monopolies. Some saw a bright future for Russia in the next one to five years.
Philadelphia attorney John Gallagher, who represents Moldova’s interests in the United States and helps arrange technology transfers with Russia, mused half-humorously about the more psychological aspects of Russia’s journey toward capitalism. Referring to an official tour he took a few years ago, in which he visited 15 Russian cities in 15 days and was invited to a state dinner each night, he commented: “The biggest insight for me, and the scariest, was that from St. Petersburg to Vladivostok it was the same exact menu, 15 times. I couldn’t help but think, ‘Stalin still has a grip on this country.’”
Congressman Curt Weldon of Pennsylvania ended the panel on an optimistic note. Considering it has only been a free market economy for eight years, he said, Russia has made “unbelievable progress.”