Buy America!

Japan caused a furor in the united States a decade ago by buying up such American icons as Rockefeller Center and the famed California golf course at Pebble Beach. Now, it's Europe's turn. European firms are racing to establish a beachhead in the world's largest consumer market, snapping up companies that specialize in everything from soup to mobile phones. While the price tags are far higher than dreamed of 10 years ago, European firms have avoided the outcry generated by the Japanese acquisitions.

Until now. Last week's announcement that German telephone giant Deutsche Telekom planned to spend $46 billion for U.S. mobile phone provider VoiceStream Wireless has touched off a wave of opposition from U.S. politicians. Senator Ernest Hollings introduced a bill banning companies that are more than 25% controlled by a foreign government from acquiring a U.S. phone license. The bill quickly gained support in both houses of Congress. As Deutsche Telekom is 58% owned by the German government, this would effectively bar the company from fulfilling its ambitions in the U.S. "We didn't deregulate the American market in order to put it under the German [government]," said Hollings.

His bill provoked an angry response from the European Commission in Brussels. It sent a letter to U.S. Trade representative Charlene Barshefsky expressing "our very strong concern at the [Hollings] bill," said a spokesman. The Commission warned Washington that blocking the takeover would be in violation of the 1997 World Trade Organization agreement and hinted that the "implications" would include Europe's withdrawal from that body, a move that could torpedo free trade.

Whatever the outcome of the dispute, it's clear that Deutsche Telekom's offer to buy VoiceStream is part of a burgeoning movement by European corporations to expand in the U.S. marketplace. In just the last few weeks, British-Dutch consumer giant Unilever has purchased Bestfoods, makers of Hellman's mayonnaise and Knorr soups, for $20 billion; Swiss banking giant UBS bought U.S. stockbroker PaineWebber for $12 billion; and the one-time French water utility Vivendi bought Seagram, owners of Universal Studios, for $30 billion. A study by the Organization for Economic Cooperation and Development in Paris concluded that Western Europe in 1999 overtook the U.S. as the world's leading region for cross-border mergers, led by Britain, Germany, France and Sweden. What appears to be driving the merger spree is a belief that markets are becoming global rather than national, and to survive the wave of consolidation a company needs to have worldwide reach. "Strategic considerations are dominating the boardrooms," says Philip Yates, head of European mergers and acquisitions for U.S. stockbroker Merrill Lynch. "Market participants feel that if they don't act now there may well not be an opportunity later."

One reason cited for Deutsche Telekom's interest in VoiceStream is that there are so few independent mobile operators available in the U.S. to allow the German firm to extend its network globally. A result of the shortage of choice U.S. assets for sale is that prices have headed sky-high. Deutsche Telekom's bid for Voice-Stream was so rich that investors sent the German firm's stock down 25% in two weeks.

Surprisingly, European companies don't seem to be deterred by the fact that the euro has been trading near its low since the common currency was introduced 19 months ago. "There's little evidence of the euro's weakness acting as a brake on mergers and acquisitions," says Stephen Barrett, vice chairman of London-based consultants KPMG Corporate Finance. "ceos of acquisitive companies are standing by the strategic imperative that they must roll out products and services globally." Paradoxically, the huge number of euros being converted into dollars to fund the European shopping spree may be directly responsible for the euro's continued weakness, even though the Continental economy is picking up steam while the U.S. economy cools. Barrett warns, however, that the sheer size of the mergers taking place makes it likely that more deals will come under scrutiny of competition authorities on both sides of the Atlantic in the next 18 months (see box). Opposition by the European Commission and the U.S. Justice Department led telecommunications giants WorldCom and Sprint to drop merger plans last month. The controversy over Deutsche Telekom was also believed to have been behind the firm's decision not to make a bid for Sprint, where it controls 10% of the shares. "The move in Congress is quite dangerous at a time when we're trying to convince European countries, especially the French, to be more open to foreign takeovers," says Philip Keevil, head of European M and A at Schroder Salomon Smith Barney in London.

Trying to block deals may prove futile. Many of Japan's well-publicized investments in the U.S., criticized at the time as representing a sellout to Asian interests, ended up becoming financial disasters. Both Rockefeller Center and Pebble Beach were eventually sold back to American owners, but at a hefty discount. What's more, a study by KPMG of 107 corporate marriages showed that the vast majority failed "in producing any business benefit as regards shareholder value." The main problem was a clash of cultures. With so many European companies scrambling to tie the knot in the U.S., it's important to remember just how few corporate marriages turn out to be happy.