According to Buyout Mania, American-style private-equity firms are moving into the European market — and the Europeans don’t like it:
The backlash against American ‘locusts’ in Germany reflects recent wrenching shifts in the way continental Europe does business. Germans in particular have taken pride in their ‘humane’ form of capitalism, characterized by relatively short working hours and high pay, in contrast to what they see as a more cutthroat, competitive American way. But as global competition grows, European firms are under pressure to trim costs. Private-equity transactions — in which investors buy up a company using substantial amounts of debt, overhaul operations, then sell out after a few years — have been common for years in the U.S. and Britain. They used to be the rare exception in continental Europe, where financial leverage has long been frowned on and relationships with investors were based on tradition. No longer.Starting in the late 1990s, all the big U.S. players, including Blackstone, Kohlberg Kravis Roberts (KKR), Carlyle Group and Texas Pacific Group, set up small-scale European operations. They’re now bustling, growing rapidly and accounting for ever more of the U.S. groups’ business. In four years, Blackstone’s investments in Europe have jumped from about 10% to 30% to 40% of its total business, and the firm has opened offices in London, Hamburg and Paris. ‘It has become quite a significant part of our business,’ says Stephen Schwarzman, Blackstone’s CEO and one of its co-founders. ‘It’s a moment of structural change in Europe.’ The American moneymen last year were involved in about one-third of all European buyouts, doing deals worth more than $25 billion. That’s triple the amount in 2001 (see chart). And there’s no end in sight: several of the groups, including Blackstone and KKR, are in the process of setting up new investment funds aimed in part or entirely at Europe.
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One reason Europe is attractive: such huge firms as electronics giant Siemens, automakers DaimlerChrysler and Fiat and the French media company Vivendi Universal have shed operations they deem no longer core to their fundamental business. Also, investors have been buying medium-size companies whose family owners are looking to sell. Once the Americans take over, they move fast, prodding the firms to make their operations leaner and frequently reshuffling management. The worse off an operation is, the more money the investors stand to make from selling after turning it around. “We like the complexity of Europe,” says Jim Coulter, a San Francisco-based founding partner of Texas Pacific. “It often means there is more inefficiency.”That’s where the controversy kicks in. In their drive to reduce working capital and improve cash flow to pay off the debts incurred during the buyout, managers can’t afford to be sentimental about businesses that don’t do well. They spin off, reorganize or shut down poorly performing subsidiaries. Thousands of workers can lose their jobs in the process. But what’s bad for the workers is good for the company’s financials.