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Protection racket

23 Mar 2011 By Chris Hughes

Protectionist European governments are potentially running rings around Brussels again. Stake-building in Italian diary group Parmalat by French rival Lactalis has put Rome on high alert to introduce a raft of protectionist measures. The episode highlights why the European Commission must become more agile in policing free cross-border M&A.

The Parmalat controversy is in retaliation for longstanding French protectionism. And there are countless examples of commercial tension between Paris and Rome. In 2006, France moved to block Italian power group Enel from acquiring Paris-based peer Suez, which later merged with Gaz de France. French utility EDF is currently threatening not to renew a shareholder pact with Italy’s Edison.

But these are, by no means, the only instances of European M&A protectionism. Paris has seen off potential deals with non-European bidders – notably Novartis’s interest in Franco-German pharma rival Aventis in 2004, and PepsiCo’s interest in food group Danone a year later. The Bank of Italy tried to keep Banca Antonveneta out of the clutches of ABN Amro in 2005.

Spain has also been embroiled in a host of intra-European protectionist spats – both as suitor and target. Italy’s Autostrade blamed its own government for killing a possible deal with Spanish toll-road rival Abertis in 2006. A year later Spain welcomed Italy’s Enel as a suitor for gas group Endesa – since the alternative was Endesa being swallowed by Germany’s E.On. Yet the oft-mooted synergistic union of Telecom Italia and Telefonica still appears to be a no-no to Rome.

It is hard to believe that European states have signed several treaties enshrining the principle of the free movement of capital. Europe has a European Commission which is empowered to enforce various anti-trust and internal market rules. So why does cross-border M&A founder time and again? The are many different forces at work. In Italy, for example, domestic banks and local foundation shareholders are the puppet masters of corporate control. Banca Intesa’s role may be critical in determining Parmalat’s fate: it is a small but influential shareholder in the group, and in Granarolo, a potential merger partner for Parmalat.

But the overarching problem is that M&A needs speed and momentum, and member states are effective in applying the brakes. A mere hint that a government will make life difficult for an unwelcome bidder – say by withholding certain licences – will make the gutsiest chief executive rethink a deal. Meanwhile, the Commission is only too willing to allow governments to explore technical get-outs. By the time the lawyers have thrashed out the legalities of whatever protectionist measures are contemplated, the bidder will probably have got cold feet.

Commission oversight of cross-border M&A is lumbering and witless. Europe must find a way of enforcing its existing powers in step with the governments and the market. If those powers are insufficient, it should seek more.


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