Plus ca change

Nicolas Sarkozy swept to power in France in May promising economic reform - but what will it mean for French businesses and cross-border M&A activity?

Daniel Parton reports.

When Nicolas Sarkozy made his opening speeches after his election as president in May, business leaders listened with interest when he spoke of driving economic growth by rewarding effort and spurring competition.

Planned reforms include scrapping the 35-hour week and introducing tax-free overtime pay, abolishing wealth taxes and removing legislation that allows certain trade unions the right to negotiate with an employer, regardless of whether it has any members in the workforce.

Sarkozy is proposing the kind of market reforms most EU countries undertook in the 1990s, but which France has failed to instigate and has in part led to the country’s sluggish economy and high unemployment – which at more than 8% is one of the highest figures in Europe.

Many analysts have welcomed Sarkozy’s plans, such as Dominique Evrard, a partner at Deloitte in France. “This declining [economic] road which has been followed by our previous governments [was] completely opposed to the roads followed by other countries. So clearly what Mr Sarkozy wants to do is to give more importance to the work, to labour and also to avoid taxing the labour force too much, which is the case right now.

“What Mr Sarkozy is trying to achieve is probably something quite new in France, but it has to be done. So I am optimistic and it should have a positive impact.”

Indeed, if early polls are anything to go by, businesses within France have generally welcomed Sarkozy’s election. A recent survey by research group Insee reported an upturn in business confidence in June.

Should Sarkozy’s reforms go through – he is likely to face opposition from the trade unions – the hoped for turnaround in France’s economic fortunes should also provide a boost to already robust M&A activity.

Despite France’s sluggish economy in recent years, French businesses have nonetheless been busy consolidating, especially since the turn of the century.

But even if Sarkozy’s reforms are defeated, or do not produce the hoped for economic improvements, deal making will continue, especially at the small-to-medium level, Evrard said. “There are a lot of companies to be sold because their owners are getting too old. Also, some industrial groups still have to restructure some business segments.”

All around the world

Evrard also expects cross-border deal making to grow. “[With] large French international groups, hardly 20% of their revenues are in France,” he said. “Although they are headquartered in France, their major concern is international. For the time being, I don’t see any willingness not to keep growing abroad, like building plants in emerging countries or making acquisitions.”

Christophe Eck, a partner at law firm Gide Loyrette Nouel, agrees. “Over the past 10-15 years… French companies have become very international,” he said.

Eck added that the majority of turnover and consolidation activity by CAC-40 listed companies is outside France. “Total, for instance, the big majority of its turnover and profits is outside France,” he added. “A bank like Societe Generale is doing more than 50% [of its business] outside France.”

For example, food maker Danone has recently bid £8.3 billion for Dutch baby food maker Royal Numico, which would give it control of brands including Cow & Gate.

Danone is also in talks to sell its biscuit unit to US giant Kraft for £3.56 billion. This has received no objections in France, in contrast to the fuss created when Italian energy firm Enel bid for French rival Suez, prompting a hastily prepared counter bid from Gaz de France. This may indicate Sarkozy plans to abandon the policy of his predecessors to protect businesses in certain industries from falling into foreign hands.

Evrard added that he also expects SMEs to pursue an increasingly international M&A policy. “French entrepreneurs have realised the market is no longer French, the market is global,” he said. “They need to grow abroad because the French market is probably at the maximum it can go.”

Currently, France is the fifth largest investor in European businesses, with 169 projects completed in 2006, according to a survey by Ernst & Young. In contrast, France is the second most popular destination for foreign investment – behind the UK – with 565 deals in 2006.

Indeed, Eck believes that foreign investment will rise, with deals financed with funds from the Middle East becoming more common in the coming year. “They have a lot of cash and are incorporating more and more funds,” he said.

Nevertheless, despite this prospect, Eck believes there will be a slight slowdown in M&A activity in the coming months as the dust settles on Sarkozy’s election. “When I discuss it with colleagues in other firms it seems that [M&A activity] is slowing down; it’s just after the elections and people want to see what the policies will be,” he said. But he believes activity will pick up again within the next six months to a year.

Marc Barber

Marc Barber

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.

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