Company heads armed with strong balance sheets and lots of cash have a lot of confidence, say analysts.
The chief executive officers of some of Europe’s richest companies, gathering at this week’s World Economic Forum amid a flood of negative economic forecasts, have a message for doubters: don’t count us out.
The heads of Nestle SA, Royal Dutch Shell Plc and Vodafone Group Plc, who are scheduled to attend the meeting of executives and politicians in Davos, Switzerland, are starting 2012 with the resources for dealmaking: strong cash piles, robust balance sheets and emerging market operations that are blunting the impact of slowing profits at home. Roche Holding AG’s $5.7 billion hostile bid for Illumina Inc this week shows European CEOs are already stepping up deals as the debt crisis lingers. (Click here for graphic)
“What’s happening in the markets is not perfectly aligned with the confidence CEOs are expressing in doing deals because they’re armed with strong balance sheets and lots of cash,” said Pip McCrostie, who oversees Ernst & Young’s mergers and acquisitions practice as global vice-chair of transactions, and is attending the forum. “Europe has large corporations that are among the strongest and most diversified. The broader question for them will be whether there is a way to grow and use M&A to do that.”
Cash piles
The biggest European companies by market value have cash reserves of $1.54 billion on average, 23 per cent more than in 2007, according to data compiled by Bloomberg. More than $100 billion in divestments by European companies last year helped the largest non-financial members of the Stoxx Europe 600 Index, the region’s benchmark, boost their average profit margin to 12.6 per cent, compared with 11.1 per cent in 2006, in the midst of the last economic boom.
One measure of investor confidence in future profits, price-to-earnings ratios, shows European companies are faring just as well as their US peers. The largest companies in the Stoxx 600, including Shell and Novartis AG, have an average ratio of 18.2, compared with the 15.7 average of their US counterparts, according to Bloomberg data.
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Business leaders and policy makers are gathering in Davos after the World Bank cut its global growth forecast this month by the most in three years, saying that a recession in the euro region threatens to exacerbate a slowdown in emerging markets. Economists predict that the euro area will contract by 0.4 per cent this year after 1.5 per cent growth in real gross domestic product last year, estimates show.
“When you are a global player, you need to put bets on many markets, and also have a geographic strategy to manage the risk of a slowdown in any one place,” said Maurice Levy, CEO of Publicis SA, the world’s third-largest advertising company, which gets about a third of its revenue from Europe.
While European companies slowed the pace of dealmaking last year as the debt crisis roiled markets, many haven’t been shy about setting ambitious plans. Siemens AG, which still gets 50 per cent of its revenue in Europe, has about euro 16 billion ($20.8 billion) in cash and short-term investments, and is on the hunt for takeovers after a 27 per cent drop in fiscal first- quarter profit. Nestle, led by CEO Paul Bulcke, is armed with $8 billion in cash, and set a goal of obtaining 45 per cent of revenue from developing countries by 2020, compared with about a third now. “There is greater uncertainty and greater speed of movement because companies are anxious about where to invest in new growth markets,” said Chris Zook, a partner and co-head of the global strategy practice at Bain & Co, who is attending Davos.