Learn Chinese Online: Chinese School - Spain emerges as M&A powerhouse

WORLD / Wall Street Journal Exclusive

Spain emerges as M&A powerhouse
By KEITH JOHNSON (WSJ)
Updated: 2006-09-26 16:09

http://online.wsj.com/public/article/SB115922499480673588-etl1nzl1SYxF8gkkI
Lxvjc9CK2Y_20061002.html?mod=regionallinks

MADRID -- Fueled by a decade of economic growth at home and seasoned by
years of experience in Latin America, an armada of Spanish companies is
pushing aggressively into new markets in Europe and beyond, transforming
themselves into some of the world's biggest corporate names.

Practically unheard of a decade ago outside Spain or Latin America --
where many made their first international forays -- companies such as
Telef��nica SA, Ferrovial SA and Abertis SA are emerging as some of the
hungriest corporate predators on Europe's mergers-and-acquisitions scene.
The emergence of these formidable new competitors has stoked
protectionist tendencies within some of Spain's neighbors and, at times,
has helped make bidding wars more expensive. The Spanish expansion,
especially in sectors such as telecommunications and banking, also is
forcing other so-called national champions across Europe to accelerate
their own expansion or risk being left behind.

"Fifteen or 20 years ago, a meeting in Paris or London or New York was
nothing but nerves. We didn't know the languages, we didn't know how they
did business," says Luis Abril, a top executive at Telef��nica who has
worked for other big Spanish companies. "Not any more."

Ferrovial, a onetime family-owned construction company, bought the
concern that runs Britain's Heathrow Airport this year for ��5 billion
($19 billion). Banco Santander SA, which two years ago pulled off
Europe's second-largest cross-border banking deal with its ��9.5 billion
($18 billion) purchase of Abbey National, is now the world's
ninth-largest bank by market capitalization. Telef��nica bought U.K.
mobile-operator O2 for $30 billion, as well as the former state-owned
phone company based in the Czech Republic, and grabbed a 10% stake in
China Netcom all within the past year. Smaller companies making a variety
of products, including sweaters, rearview mirrors and windmills are
pouring into far-flung markets such as China.

In years past, the big predators in Europe were well-established British,
French and German companies. Today, corporate Spain's voracious appetite
reflects the country's growing economic power. Spain's economy has been
one of the fastest-growing in the euro zone, producing the majority of
new jobs for the common-currency area. Madrid began deregulating key
sectors -- such as telecommunications, banking and energy -- sooner than
many neighbors on the Continent, which helped jumpstart economic growth
and gave those industries early lessons on domestic consolidation and
foreign competition.

Spain's economy expanded 3.6% a year on average during the past decade;
this year, growth of 3.4% is forecast. In contrast, Germany's economy --
Europe's largest -- averaged 1.4% annual growth for the past decade.
Spain's expansion has enabled its companies -- many of which were either
too small or inexperienced a decade ago to consider cross-border
expansions -- to amass sizable war chests. Corporate financing became
cheaper with the arrival of the euro, making previously unthinkable deals
possible.

These factors have helped Spanish companies outpace rivals from
more-sluggish and protected European economies. Spanish banks, for
example, are among the world's most profitable. Signs that Spanish
growth, driven in large part by a 10-year construction boom, will slow in
coming years is giving Spanish companies a reason to enter new markets
primed for their own takeoffs. In addition, the country's tax law, which
gives companies a break on foreign-acquired goodwill, effectively
reducing the cost of purchases, has encouraged cross-border deals. The
recent U.K. deals, for example, resulted in sizable tax breaks for the
Spanish participants.

Corporate Spain's push into Europe is hitting some speed bumps, as
governments flout European Union mandates to deregulate certain
industries and instead turn more protectionist, with some countries
moving to keep certain industries such as banking and energy under
domestic control. Italy is trying to block Abertis's takeover of
Autostrade SpA, which would create a toll-road giant, despite the deal
receiving a green light Friday from the EU. Banco Bilbao Vizcaya
Argentaria SA ultimately lost its bid for Banca Nazionale del Lavoro SpA,
based in Rome, in part because of resistance from Italy's central banker
at the time, Antonio Fazio.

Madrid, too, occasionally has pulled up the drawbridge in the past
two-plus years. It spent a year fighting a German bid for power company
Endesa SA before recently backing down. Spanish executives say the
government's resistance to that bid has made it harder for them to enter
some European markets.

Some Spanish companies are reaching beyond Europe to make acquisitions in
the U.S. "With the euro strong and European protectionism on the rise,
conditions are looking very ripe for a further spate of deals in the
U.S.," says Mauro Guill��n, a professor at the University of
Pennsylvania's Wharton School who wrote a book on Spanish multinational
corporations.

Late last year, Santander moved into the U.S. with the purchase of a 25%
stake in Philadelphia-area lender Sovereign Bancorp., spending a total of
��.9 billion. This week, it announced the $650 million purchase of Drive
Financial, an auto-finance company in Dallas -- a lucrative segment
Santander dominates in Europe. Spanish rival BBVA recently has closed
some small deals in California and Texas -- where it is the largest bank
-- and this summer signaled its plans to enter the U.S. retail market.
Wind-turbine maker Gamesa SA just built a factory in Pennsylvania and
says it plans to keep growing. Ferrovial runs toll roads in Chicago and
Texas, as well as Canada. Technology company Indra Sistemas SA, which
already makes flight simulators for the U.S. Navy's F-14 Tomcat fighter
plane, just landed infrastructure-management contracts in St. Louis.

Corporate Spain might not have been ready for this wave of expansion
without the experience gleaned from its first international push into
Latin America a decade ago. Telef��nica, along with banks and utilities,
snapped up assets across Latin America during a wave of privatizations,
surpassing U.S. investment in the region in 1999 and 2000.

That expansion, dubbed the "reconquista" by economists, gave Spanish
companies experience in managing takeovers and foreign operations, and
honed their playbook for turning inefficient operations into models of
profitability. It also gave Spanish executives the confidence they could
compete.

"Spanish companies simply wouldn't be what they are without Latin
America," says Luis de Guindos, a vice president at Lehman Brothers
investment bank in Madrid. "But now they are coming back to their natural
market in Europe and very, very clearly looking at the U.S., because for
the first time they really can."

Indeed, Latin America was a learning experience and -- at least for the
banks and Telef��nica -- a cash cow. But the recent rise of populist
governments has had a role in slowing the pace of new Spanish investment
there.

"The most important jump we've all made is out of Latin America and into
the rest of the world," says Jos�� Manuel Entrecanales, chairman of
infrastructure group Acciona SA, which operates in more than 40
countries. "I think we've shaken off the Spanish inferiority complex for
good."

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