EDVARD PETTERSSON
Staff Reporter
Europe loves L.A., and the attraction is expected to grow even stronger in the coming months.
Last week’s announcement that French telecommunications company Alcatel SA is acquiring Calabasas-based Xylan Corp. for $1.8 billion, a huge premium over Xylan’s pre-existing market value, marks the latest in a flurry of L.A. acquisitions by European suitors.
In the past 12 months alone, European companies have snatched up 16 Los Angeles-area companies for an aggregate amount approaching $4 billion, according to Securities Data Co.
“The deal flow indicates that the end is not in sight,” said Tom Weinberger, president of investment banking firm Sutro & Co.
Tom Lieser, director of the UCLA Anderson Forecast, attributed the European takeovers to local growth. “We are victims of our own success,” he said. “California is now perceived as a strong region, and Southern California in particular has been improving steadily in recent years.”
The recent deals are coming on the heels of several European-U.S. mega-mergers in 1998. Chief among those were Daimler-Benz AG’s $40 billion acquisition of Chrysler Corp. to form Daimler-Chrysler Corp., British Petroleum Co. PLC’s $55 billion purchase of Amoco Corp. to form BP Amoco PLC, and Vodafone Group PLC’s pending $66 billion deal for AirTouch Communications Inc.
Because the L.A. economy is dominated by small and mid-sized companies, it is unlikely that acquisitions of that magnitude will take place here any time soon. But many of the smaller local companies may make attractive takeover targets for overseas bargain hunters precisely because of their relatively small size, rapid growth and vast potential.
“It is all about finding the right match that is also financially affordable,” said Lieser.
Because California emerged from the early-1990s recession later than most other U.S. regions, its growth continues to outpace the rest of the country. Also driving the state’s growth has been its concentration of fast-growing technology companies. Meanwhile, growth in many Western European countries remains sluggish, at best.
Europeans’ interest is not limited to L.A.-area or even California targets.
The entire U.S. economy continues to show surprising strength, confounding forecasters by trouncing growth projections quarter after quarter. And L.A.-area acquisitions are seen by many European companies as a means of quickly gaining access to that robust U.S. marketplace.
“The U.S. is the most attractive long-term growth market because it offers low interest rates, minimal inflation, and a stable political environment,” said Jourdi de Werd, managing director of investment bank Greif & Co. “There are very few opportunities for growth available overseas.”
By comparison, other foreign markets that Europeans have traditionally targeted Asia, Russia and Latin America remain mired in financial chaos of varying degrees.
European companies also see L.A. companies as a well-positioned launching pad for future expansion into Asia, once economies there recover.
“Obviously, L.A. is the portal to the Pacific Rim markets as well as the largest distribution hub for the West Coast,” said Weinberger. “Overseas buyers can utilize L.A. as a focal point to reach both local (U.S.) and Asian markets.”
And in certain cases, the roles of the European acquirer and L.A. target are reversed, as is the case with Alcatel and Xylan.
“In addition to Europe, Alcatel has great access to the Chinese market, with 100 representatives, whereas we have only five people in China currently,” said Xylan spokesman David Rodeweld.
Unlike other recent acquisition waves, such as occurred in the banking industry, the European acquisitions are not related to industry consolidations and are not resulting in large-scale layoffs. Rather, they are seen as a means of achieving strategic alliances that will complement existing operations by adding new products or market share.
Besides last week’s Xylan deal, other big L.A. companies recently bought by Europeans include: Encino-based Pinkerton’s Inc., which agreed late last month to be acquired by Swedish security company Securitas AB; and L.A.-based magazine publisher Petersen Cos. Inc., which late last year was bought by British publisher Emap PLC.
“Securitas’ acquisition of Pinkerton’s is a pure play to get in the U.S. market,” said de Werd.
Michael Stugrin, a Pinkerton’s vice president, agreed, pointing out that Pinkerton’s and Securitas have no overlap in their respective operations in Europe and the United States.
“The increasing globalization of our clients created the need for us to expand overseas,” Stugrin said. “We’ve acquired a number of smaller companies in the U.K. and in Germany in recent years, but it would have taken us years to arrive at the scale we are now at through the merger with Securitas.”
Of course, the financial muscle of Securitas, with a market capitalization of $5 billion, will go a long way toward fueling Pinkerton’s further expansion in the U.S. as well.
Likewise, Alcatel’s takeover of Xylan is widely seen as an arrangement from which both companies stand to benefit.
For years, Xylan has been a supplier to Alcatel. By adding Xylan’s network and telecommunication switches, Alcatel will fill a gap in its product line, making it more competitive in the race for U.S. clients. At the same time, Alcatel’s far more extensive distribution network will give Xylan access to new markets in Europe and needed capital backing.
“Xylan is in an industry where we are up against some very large competitors. For example, Cisco (Systems Inc.), which has a market capitalization of $100 billion,” said Xylan’s Rodeweld. “Even though we have the technology to compete, many of our customers worry that we can’t keep up because of our relatively small size. In addition, technology is evolving so fast. We can use the resources of a partner the size of Alcatel to stay ahead of new developments.”
