European companies are cheap relative to U.S. rivals, which have strong dollars and higher-valued shares to spend. But new hurdles are also forming that will make it harder for outsiders to pursue acquisitions in the region.Even as Europe gradually reopens for business following the coronavirus shutdowns, the Stoxx Europe 600 remains down 7% in dollar terms since the start of March, while the S&P 500 is broadly flat. That leaves European stocks trading near their widest discount to the S&P 500 relative to forecast earnings since the global financial crisis.

For deal makers, though, taking any advantage will be challenging. European authorities are busy sharpening their tools to stop foreigners snapping up family jewels on the cheap.
Margrethe Vestager, the European Union’s competition chief, said the EU needs to be “vigilant” and “assertive about what is in our strategic interest” in an interview with Bloomberg TV last week. The Dane is the one who decides whether to approve or block tie-ups. She insisted that while Europe is open to foreign direct investment, Brussels doesn’t want takeovers by state-subsidized businesses, nor foreigners buying a company just to take its technology—nods to China and the U.S. respectively.
The EU, which has strict rules against state subsidies for its members, has long worried that state-backed Chinese companies have an unfair competitive advantage over homegrown rivals. Since the crisis, its concerns have broadened. Officials are now on high alert after Berlin accused Washington of seeking control of CureVac, a German biotech company with promising Covid-19 vaccine technology. Last week, the German government expanded its power to block the acquisition of a more than 10% share in any of its health-care companies.Brussels has been busy building hurdles too. From October, the EU will have new powers to screen major foreign direct investment in key sectors. Its opinion will be influential but nonbinding: EU member states will make the final decisions.

Over half of member states already have an equivalent of the Committee on Foreign Investment in the U.S., which scrutinizes overseas takeovers of U.S. companies. The EU wants the rest of its members to create their own FDI screening process urgently and to use their other powers to the full, including the option to buy a stake in important companies to prevent foreign buyers snapping them up.
Once through that screening, all big deals need EU antitrust approval, an intense process that the crisis has made less predictable. Officials’ primary consideration is how any tie-up might affect competition, but right now that’s nearly impossible to determine: Most sectors aren’t operating and no one quite knows what they will look like when the economy restarts. The forecasts that frame antitrust decisions were always a mix of art and science. Now they also involve a lot of guesswork.Special rules can clear the way for anticompetitive deals if they are buying so-called “failing firms,” which some targets after today’s shutdowns are likely to be. But there are high legal requirements to qualify. It isn’t enough for the target to have run out of cash in the current crunch.