FT Alphaville " Guest post: While Rome is burning From Alberto Saravalle, managing partner at Bonelli Erede Pappalardo What happens to M&A while Rome is burning? In the past few months Italy has been in the midst of a political, economic and financial crisis. Although the entire Eurozone has been deeply affected, undoubtedly the eye of the storm was in Greece and Italy. One would have expected that Italy's downgrading and the fears of the Eurozone break-up be reflected in the M&A market, in terms of fewer deals and increased reluctance on the part of foreign players to invest. Yet the provisional data available to date according to a report issued by KPMG is utterly inconsistent with this gloomy picture. Although the number of deals and volume remain among the lowest of the decade and significantly lower than those of other European countries, there is a significant increase in both (+19% in volume and + 6% in numbers). This data is particularly striking when compared with that of the global M&A market which, after a buoyant first semester, resulted at year-end in a decrease of approximately 7% compared to the previous year. More significantly about 70% of the transactions (in terms of deal value) involve foreign investments in Italy, especially from strategic investors. Among the most noteworthy deals completed are the acquisitions by LVMH of Bulgari and by Lactalis of Parmalat. Indeed this wave of foreign (predominantly French) acquisitions at one point caused concern and political reactions that almost led to the enactment of protectionist measures. In the end, this proved much ado about nothing and the only outcome was the creation of a new fund established by the Cassa Depositi e Prestiti to invest in companies of "significant national interest." The last quarter of 2011 understandably saw lower activity, due to limited access to finance, uncertainties as to the immediate future and fears of recession. Notwithstanding this blip, significant transactions are in the pipeline and once again foreign players are at the fore: EDF (French again) is about to take control of Edison, and the Chinese company Weichai signed an agreement for the acquisition of Ferretti yachts. So what does all this mean? Are Italians selling out to reduce their leverage? Perhaps there is some truth in this, but the situation cannot be generalised so readily. The domestic market is no longer interesting for large Italian corporates that are increasingly investing abroad to establish a global presence. The acquisitions by Fiat (Chrysler), Prysmian (Draka), Luxottica (Tecnol and Multiopticas) are a clear indication of this trend. This leaves the door open for foreign strategic investors willing to disregard the financial crisis and fears that the country will exit the Eurozone to seize the moment. In the end Italy, with all its flaws, remains one of the leading countries that provides interesting opportunities, especially in terms of well-known brands (Ballantyne, Moncler, Ferré, Mandarina Duck to mention just a few examples sold to foreign companies in 2011). What about the immediate future? The fears of recession may contribute to bridging the valuation gaps between sellers and buyers. Lower prices and the need for fresh capital may create new opportunities. Also the liberalisations, heralded by the Monti government, could give fresh vitality to the market and pave the way for privatisations, primarily of local utilities and services. Debt-ridden local entities, no longer able to receive State support, will be induced to sell their crown jewels. This could result in another wave of M&A where the buyers could be infrastructural funds that have a healthy appetite for new deals. In fact, this sector has already driven some of the largest transactions of 2011: F2i (an infrastructural fund established by the Cassa Depositi e Prestiti and several primary banks) acquired GDF Suez's and E.On's natural gas networks, Metroweb (the Milan optic fibre network) and a large holding of Milan's airports. The world is always divided between those who see the glass half empty and those who see it as being half-full. The former will focus on the foreign "invasion," while the latter, among which I count myself, will perceive in this data a sign of confidence for the ability of the country to address its domestic problems. As the old saying goes, "It doesn't hurt to be optimistic; you can always cry later." This entry was posted by Guest writer on Monday, January 30th, 2012 at 13:19 and is filed under M&A. Tagged with Alberto Saravalle, Bonelli Erede Pappalardo, Italy.