Cross-border combinations rife with risk Crown Cork & Seal is tripped repeatedly in Carnaud purchase

Delay costs millions

Hurdles include rivals, currency, regulators, raw materials costs

August 10, 1998|By BLOOMBERG NEWS

Even solid companies can slip up in a merger -- especially when it spans an ocean.

Consider Philadelphia-based Crown Cork & Seal Inc., the big can maker and packaging company that paid $5.2 billion for CarnaudMetalbox SA of France about 2 1/2 years ago.

European antitrust regulators delayed the combination for five months; the company misjudged a move by aluminum makers to raise prices; a rising dollar chewed into earnings; and a new rival stepped in to take business.

Mergers and acquisitions are always risky. When companies from different countries join, the odds of difficulties rise.

The history books are rife with duds, including Pharmacia AB's merger with Upjohn Co. and Matsushita Electric Industrial Co.'s purchase of MCA Inc.

On tap this year: Daimler-Benz AG's $42 billion planned purchase of Chrysler Corp.

"International mergers are incredibly complex," said Merrill Lynch's Douglas Groh. "You are dealing with multiple currencies, multiple regulatory agencies, different languages, even time issues."

Even with the legacy of mergers that miss the mark, U.S. and European businesses find each other irresistible. Last year, they spent a record $77 billion in trans-Atlantic transactions, and the first half of this year puts 1998 on track to be a $100 billion year, according to IFR Securities Data.

Founded in Baltimore in 1892, Crown Cork was once a major employer in Philadelphia with as many as 5,200 workers during the 1950s.

Its headquarters moved to Philadelphia in 1957, and it sold its Baltimore-based packaging systems division to managers and investors last year.

As with so many big matches, Crown's purchase of CarnaudMetalbox -- including its plant in Belcamp in Harford County -- was celebrated by investors and analysts.

The company counted on cutting costs by using its increased purchasing power to save on raw materials, and from eliminating jobs and closing plants. Crown, which became the world's biggest packing company as a result of the merger, gave Wall Street every reason for optimism.

"It will be a wonderful marriage with all sorts of opportunities," Crown Chairman and Chief Executive William Avery said at a meeting with investors and analysts in January 1996, a month before the acquisition was completed.

The celebration was short-lived. In 1997, the first full year after the merger, earnings rose just 3.5 percent to $294 million.

Crown shares, meanwhile, have dropped 23 percent in the past year. Compare that with its biggest U.S. rivals: Ball Corp. has gained 28 percent, while Owens-Illinois Inc. shares are up 16 percent.

Crown executives say that if the CarnaudMetalbox combination didn't dazzle investors, it was because of external events and forces beyond the company's control. Inside, they maintain, everything worked out as planned.

"To say we haven't met every goal that we set would be completely erroneous," Crown Treasurer Craig Calle said.

Almost from the moment Crown announced the planned purchase, glitches started cropping up. At the time the sale was announced in May 1995, Crown executives figured on closing the transaction in September.

That was before CarnaudMetalbox rivals, including Pechiney SA of France and Schmalbach-Lubeca AG of Germany, the world's fourth- and seventh-biggest can makers, complained to European antitrust regulators that the combined company would have an unfair advantage. The European Union eventually forced Crown to sell five aerosol-can plants in Europe.

Wrestling with the antitrust issue meant that Crown couldn't tie up the purchase until late February 1996. During that stretch, Crown lawyers, lobbyists and other advisers ran up bigger bills.

Nor could Crown take advantage of its new heft to cut bargains with suppliers. Crown puts the cost of the delay at $25 million.

The company anticipated an intense review by the commission and prepared all the paperwork. But Crown wasn't ready for how loud its new rivals protested -- or how long it took to resolve their objections.

"In the U.S., the government looks at how something like this will affect the consumer," said Crown's Avery. "In Europe, they look at how it affects other companies."

Pechiney and Schmalbach-Lubeca didn't just battle Crown in the regulatory arena. They also fought back in the marketplace.

In May 1997, the two spun off their can-making operations to combine and form Impress Metal Packaging Holdings. Impress quickly whacked can prices, forcing Crown to follow.

Merrill Lynch analyst Groh estimates that Impress' price cuts last year clipped 10 cents to 20 cents from Crown's earnings of $2.17 a share.

"It was a pretty good move on their part," Avery said. "I didn't expect that."

Other forces conspired to frustrate Crown.

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