Telecoms, defense, banks, and airlines: the merger drums are beating loudly.

Madrid"We must join forces." "We need financial institutions with scale." "We must consolidate and grow to compete with our American and Asian counterparts." "It is difficult to understand why the EU is placing obstacles in the way of consolidation." These are just a few examples of a message that has long been shared by senior executives from companies in very different, but all strategic, sectors: the firm defense of further business integration in Europe. A desire that—amid a geopolitical crisis—has found an opportunity for consolidation in the strategic autonomy promoted by Brussels. Today it resonates strongly in sectors such as telecommunications, defense, banking, and airlines.

In the specific case of defense, Indra acknowledged this Friday in a communication to the National Securities Market Commission (CNMV) that, among other alternatives, it is studying a "possible transaction" with Escribano Mechanical & Engineering (EM&E) within the framework of its strategic plan. It so happens that one of the co-founders of this family business, Ángel Escribano, is currently the president of Indra, in which EM&E Group holds a 14% stake. Indra has hired KPMG to analyze the transaction and estimates that EM&E Group's value is between €1 billion and €1.5 billion, according to the report. Expansion. The potential transaction has not been well received by Indra shareholders, which this Friday fell 2.32% on the Spanish stock market—the largest drop in the session for an Ibex 35 stock—and closed at 26.94 euros per share.

Among the arguments of those defending this merger strategy is the need for much more private investment so that Europe and its companies are not left light years behind the United States or China; also the need to improve profitability and be able to overcome financial difficulties without problems. "The different regulators will have to act and make the necessary changes to have technology companies with the necessary scale to be able to invest [...], otherwise Europe will continue to lose relevance and the ability to continue autonomously," stated Telefónica's president, Marc Murtra, during the company's last general shareholders' meeting. Since he landed as CEO at the telecommunications Spanish, the Catalan has defended that course day after day.

"We must differentiate between having large monopolies or oligopolies and large, strong companies. They are not incompatible," reflects Begoña Castro, economist and member of the College of Economists of Catalonia. "Competing [internationally] with four small companies is not the same as competing with one large company, especially in the technological field, which is what will determine our ability to improve competitiveness," adds the expert, who assumes that "[in Europe] we won't be first, but we will gain ground."

Persuading Brussels

The fact that messages like Murtra's are aimed at the European Commission is not in vain. Business consolidation has always been under the watchful eye of the EU executive regarding its impact on competition. "Finding that balance is the most difficult thing," Castro acknowledges. The economist asserts that if this debate is constantly brewing in Europe, it is because—unlike in the United States—Brussels has been concerned that a high degree of concentration does not give rise to "illegal agreements" such as price fixing. "It would be detrimental to society," he anticipates.

In fact, one need not look beyond Spain's borders to find a recent example of how business integration can end up being derailed by the European Commission's objections regarding the impact on competition. In August of last year, Iberia decided to abandon the purchase of Air EuropaOfficially, the airline stated that "in the current regulatory environment, continuing with the operation did not represent a benefit for shareholders." However, company sources specified that the European Commission's competition commitments to Iberia were behind the green light for the transaction.

In any case, the current context has led the EU executive to begin this mess. Aside from the multiple business pressures to move toward deregulation, The Draghi report has also helped, which directly calls for an end to the veto on mergers between telecommunications companies, where fragmentation has been gradually gaining ground. The European Commission plans to open a public consultation on a reform of the guidelines governing business concentrations this second quarter of the year.

"A review process has been launched for the guidelines for horizontal and non-horizontal mergers," said Lea Zuber, the European Commission's Competition spokesperson, in a statement to ARA. Specifically, the European Commission is considering whether the current way of evaluating a horizontal merger (when it involves identical companies competing for the same market) and a non-horizontal merger still makes sense. In general, the European Commission has always been more reluctant when integrations are horizontal. "The realities of today's market, such as digital ecosystems and complex supply chains, blur the lines of a merger between competitors or between actors with different interests," Zuber points out.

For Castro, encouraging integrations of complementary companies makes "more sense." In fact, he gives an example. the recent purchase of Hispasat, the Spanish government's satellite operator, by Indra. "If you merge with someone with the same business model, you end up with two people [workers] doing the same thing. One ends up on the street," notes the economist, who believes the result is usually "different" when it comes to a complementary merger: "For example, between a parent company that makes telephones and someone that installs cables."

The leap to cross-border mergers

This effort will be led by former Spanish minister Teresa Ribera, current First Vice President of the European Commission and European Commissioner for Competition. Beyond taking into account resilience, sustainability, and innovation when studying integration, the reform also aims to include the impact on the economy's productivity and competitiveness. "The goal is to provide the parameters that will guide the Commission's assessment of future business mergers," explains Zuber.

While these changes await, countries are looking within their borders, or so Banco Santander President Ana Botín implied during the presentation of the 2024 results: "There is no European framework that favors cross-border acquisitions," the banker stated at the end of February. In the case of banking, a sector in which Brussels has historically not shown great reluctance regarding integration, the most obvious example of this is the This is what is happening in Spain with BBVA's takeover bid for Banc Sabadell.. Still, it's not the only one: the Italian government has just authorized Monte dei Paschi's takeover bid for Mediobanca, both Italian banks.

The fact that the first steps can be taken within the Member States goes beyond the financial sphere. "European consolidation must begin within the countries. If not, it won't make economic sense," Murtra stated a few weeks ago. In the case of the defense sector, Indra's chairman, Ángel Escribano, has targeted two companies in the same sector: the Asturian company Santa Bárbara, and the company and Indra shareholder EM&E Group, of which Escribano is the co-founder.