(FORTUNE Magazine) – A SPECTER IS haunting Europe -- the specter of grinding global competition. In their first act of exorcism in the early 1980s, European companies restructured by shedding weak units, cutting costs, and laying off workers. Though necessary, that approach did little to give enterprises so thoroughly focused on their home markets the scale they will need to thrive in the 1990s. Now, flush with cash and back on the offensive, European managers are turning to mergers, joint ventures, and takeovers -- fiercely hostile as well as friendly. This second wave of restructuring promises to alter Europe's corporate landscape more dramatically than any other event since World War II. The U.S. is still way ahead in merger frenzy. The total value of American mergers and acquisitions so far this year is more than $300 billion, according to IDD Information Services, a New York research firm. Many of those shopping in the U.S. have been Britons, Germans, and Dutchmen eager to expand their stake in the world's biggest and most open marketplace. Europe, by contrast, has only begun to deal. In a recent poll by the accounting firm Peat Marwick McLintock, 62% of companies declared that they were actively considering merging with or acquiring another European company. Says Gilbert de Botton, chairman of London-based Global Asset Management, which manages investment funds worth $2 billion: ''Over the next decade Europe is going to experience the kind of intensification of M&A activity that the U.S. went through in the 1980s.'' As a result, U.S. and Japanese companies will face far tougher competitors. In the latest move, General Electric of Britain and Siemens of West Germany have joined in a $3.1 billion hostile bid for Plessey, a major British telecommunications and defense electronics group. If successful, the takeover would create a European-based rival for America's GE and AT&T, and Japan's NEC and Fujitsu. More giant Euro-competitors will soon be born. They will have both the means and the will to attack the Japanese and Americans in Europe, Japan, and the U.S. In Britain, the No. 1 M&A market in Europe, $46 billion worth of companies were sold last year, according to Acquisitions Monthly magazine. That's a record, but it will likely be broken this year. British companies have spent $3.4 billion so far in 1988 for acquisitions on the Continent -- more than 15 times the level of three years ago. Next behind Britain is Spain, Europe's , fastest-growing economy, which should have at least $9 billion in domestic mergers by the end of this year. Since January the Paris bourse has been roiled by an unprecedented 27 takeover bids, up from just one four years ago. Boldest of the young Gallic raiders testing the limits of France's current fervor for free markets is Bernard Arnault, 39. Allied with British distiller Guinness, Arnault has seized a controlling stake in one of France's biggest companies, luxury-goods giant LVMH Moet Hennessy Louis Vuitton, which had been created through a merger. (For more on Arnault and others in the van of Europe's restructuring, see box.) Individual deals are bigger than ever. The year opened with the peaceful marriage of Sweden's Asea and Switzerland's Brown Boveri, electrical engineering giants with combined sales of $18 billion. This was soon followed by two of the most spectacular cross-border bids ever attempted. First, France's Cie Financiere de Suez foiled Italian dealmaker Carlo De Benedetti in a $4.5 billion battle for Societe Generale de Belgique, an industrial conglomerate that ranks as Belgium's biggest company. Then Nestle of Switzerland swallowed Rowntree, a British candymaker, in a bitter $4.2 billion takeover. Why should stodgy old Europe suddenly turn into a red-hot M&A market? Like the U.S. ten years ago, it has an abundant supply of companies with undervalued assets and relatively cheap share prices. By U.S. standards -- even by the more sober standards of the late 1970s -- many of these companies are stunningly low on debt. London stockbroker Phillips & Drew calculates that the average debt-equity ratio, including short-term debt, among British industrial companies has fallen from 26% in 1978 to 16% now. According to the Commerce Department, the roughly comparable figure in the U.S. is a record 64%. These healthy balance sheets are encouraging conservative European bankers, themselves awash in cash, to finance acquisitions. Says George Magan, director of London investment bank J.O. Hambros Magan & Co.: ''In the next 12 to 18 months we're likely to see some major British companies go private on a scale so far unknown in this country.'' In the past 18 months, there have been three management buyouts worth more than $1 billion each. Though the management LBOs are designed to enrich the principals, industrial need rather than greed seems to be the main force driving Europe's desire to deal. To seize opportunities presented by the European Economic Community's push for a truly unified market by 1992, and to avoid getting clobbered by new competitors, companies must redouble efforts to build pan- European manufacturing and marketing muscle. Says John M. Hennessy, chief executive of investment bank Credit Suisse First Boston in London: ''Unless European corporations rapidly restructure so that larger, tougher, more competitive businesses emerge, U.S. and Japanese companies will be the victors in 1992 -- in Europe and the rest of the globe.'' The logic of consolidation applies with equal force to the thousands of family-owned, medium-size businesses that form the backbone of many European economies. As cross-border competition rises, big customers find it more vital than ever to buy from the lowest-cost supplier -- wherever that supplier might be. Says Albrecht Matuschka, 44, a pioneer in venture capital in West Germany: ''Any company not now No. 1 or No. 2 in Europe in its particular market niche must either start looking for prey to take over or become a target itself.'' THIS VIEW is gradually gaining acceptance even among West Germany's stubborn owner-managers. Says George Coppen, head of M&A at PA Group, a London consulting firm: ''Until recently, even asking a German about selling his business could be misconstrued since most companies were sold only if they were in some sort of trouble. That's changing.'' The number of acquisitions by foreigners rose to around 270 in the past two years -- up nearly 50% since 1986. And, says Tim Filkin of DB Consult, Deutsche Bank's four-year-old M&A subsidiary, medium-size German companies have become keenly interested in acquiring their counterparts in France. Bigness for bigness' sake is not the goal. Says Percy Barnevik, the tough-minded Swede who put together Asea's merger with Brown Boveri: ''The key is to focus on gaining size in your core businesses.'' That's why many of today's sellers in Europe are huge corporations no longer willing to carry or invest in marginal operations acquired in past diversifications. In September, Unilever, the $27-billion-a-year food and consumer products manufacturer, sold its Dutch and West German transport companies to Memphis-based Federal Express, which is eager to expand its European network. Similarly, Philips of the Netherlands (1987 sales: $26 billion) has concluded it cannot compete in both electronics and the rapidly consolidating global appliance market. It recently sold control of its home appliance division to Whirlpool of the U.S. * for $470 million. More American multinationals, even those long established in Europe, may become buyers of companies in the run-up to 1992. Says Nicholas Garrow, head of Salomon Brothers' M&A operations in London: ''As markets for products consolidate across Europe, even the giants must review their strategies and consider whether their positions are strong enough.'' Japanese corporations, whose direct presence in Europe is minuscule, are already thinking hard about buying European. Predicts Jeffrey Rosen, head of international M&A at Wasserstein Perella & Co., a U.S. merger specialist 20% owned by Nomura, Japan's biggest brokerage: ''The next wave of Japanese acquisitions is going to be in Europe.'' The Old World has already become a new frontier for the doyens of the U.S. M&A scene. Salomon Brothers played midwife at the birth of Spain's biggest bank last summer, when Banco Central and Banco Espanol de Credito combined. In Italy, Goldman Sachs helped unite chemical colossi Montedison and Enichem, while Shearson Lehman aided De Benedetti in his raid on Societe Generale in Belgium. Yankee gunslingers viewed by some European managers with grave suspicion have also arrived. Drexel Burnham is setting up Europe's first junk bond fund, denominated in pounds and worth some $380 million. In early November corporate raider Asher Edelman announced he would set up shop in Lausanne and spend up to eight months a year hunting undervalued European companies. In London, the City is abuzz with rumors that Kohlberg Kravis Roberts, America's overlord of the LBO, is on the prowl for its first European deal. EUROPE'S newly denationalized companies are getting into M&A in a big way. Last spring British Aerospace, fully privatized in 1985, offered Her Majesty's government $270 million and the chance to rid itself of another ward of the British state, troubled carmaker Rover Group. Suez bank in Paris celebrated its recent liberation from government ownership by helping De Benedetti acquire French auto-parts maker Valeo. The bank later took on De Benedetti in the battle over Belgium's Societe Generale. Recently Suez itself has become the object of takeover speculation. Analysts see British Steel as the most likely candidate to pick up the pieces from the next shakeout in Europe's steel industry. Once a money-losing white elephant, British Steel now has the lowest costs and fattest profits in Europe. It will be sold to the public in early December for an estimated $4.5 billion. By the early 1990s Margaret Thatcher plans to raise at least $40 billion by denationalizing Britain's electricity and water utilities. Portugal's market-minded Social Democrats also want to sell a lot of state-owned companies. First, though, they'll have to sort out a small legal technicality -- a clause in Portugal's constitution, adopted during a brief fling with Marxism in the mid-1970s, declaring that public ownership of any industry is irrevocable. As it intensifies, the consolidation of European business will prove particularly painful for sectors that now enjoy a high degree of national protection -- banking, insurance, transportation, telecommunications, and construction, among others. One recent forecast sees the number of building societies -- British equivalents of American S&Ls -- falling from more than 110 to fewer than ten over the next decade. Similar shrinkage is in store for West Germany's overpopulated regional banking industry, as well as the overmanned and undercapitalized banks of Italy, Spain, and Greece. Says Martin Waldenstrom, president of Booz Allen Acquisition Services in Paris: ''A lot of service companies are either going to fail or get gobbled up.'' That's why most of the merging now going on in financial services and other areas acutely affected by 1992 is taking place within national borders. The primary aim of these deals is to defend the home ground against even larger foreign predators. In June, for example, Cie du Midi, a major French insurance company, merged with domestic rival Axa to escape the unwelcome attentions of Italy's Assicurazioni Generali, an insurer twice its size. Where no national champion exists, politicians are trying to create one. When Spain's biggest banks merged last spring, Socialist Prime Minister Felipe Gonzalez hyperbolically hailed the birth of what is still only Europe's 30th- largest bank as ''probably the economic event of the century.'' Aggressive cross-border acquisitions are increasing too, and not just by Eurodreamers such as De Benedetti. National Westminster, Britain's largest bank, has just bought five branches in France and 63 in Spain. British building society Abbey National took control of a large Spanish mortgage lender. Germany's Deutsche Bank, which two years ago paid more than $600 million for Bank of America's Italian branches, has made acquisitions in Portugal and Spain and is looking at France and the Netherlands. PERNOD RICARD of France recently defeated Britain's Grand Metropolitan for control of whiskeymaker Irish Distillers. Among the five purchases made this year by Paris-based BSN (1987 sales: $6.2 billion) is a $340 million deal with Hanson Trust for two companies that produce sauces -- Britain's HP and America's Lea & Perrins, maker of that most un-French condiment, Worcestershire sauce. France's Bernard Arnault took his name-brand strategy -- built on Moet Hennessy Louis Vuitton -- a step further by linking up with Britain's Guinness, which has a few famous labels of its own. In the year's finest example of cross-Channel cooperation, Carnaud of France, an ailing packaging company turned around by Jean-Marie Descarpentries, a former McKinsey consultant, merged with the packaging division of Britain's MB Group in a $1.3 billion deal. With roughly $4 billion in sales, the new company becomes the world's third-largest packager, after American National and Toyo Seikan of Japan. Hostile takeovers will become more commonplace. In a crucial mental shift, a growing number of European industrialists and financiers now accept the economic case for unfriendly bids. Says Percy Barnevik of Asea Brown Boveri: ''Europe still offers too many protected networks to shelter slow-moving and sometimes incompetent managers. We're so far away from where the U.S. is today that we should stop worrying so much about pushing harder in this area. We need more hostile takeovers.'' The biggest obstacle facing would-be raiders is the severe shortage of targets. Though the EEC's economy is roughly as large as that of the U.S., it has far fewer stockholder-owned companies. Britain has nearly as many as the rest of Europe combined. Because of extensive cross-holdings of shares by banks and other companies, many public corporations on the Continent are practically invulnerable to takeover bids. Businesses controlled by either Fiat or its owner Gianni Agnelli account for about 20% of the market value of Milan's borsa. To encourage takeovers, the Amsterdam Stock Exchange is trying to persuade Dutch companies to eliminate some of the legal defenses they now employ. The European Commission, the EEC's executive arm, is also pushing a number of measures, such as limiting bank holdings in industrial companies to 10%, that could expand the market for corporate control. Even in West Germany, where there hasn't been a hostile takeover in memory, attitudes are slowly changing. Says Hans Dahm, senior vice president of the WestDeutsche Landesbank of Dusseldorf: ''We're feeling the first tremors. Insiders now expect takeover bids on German soil sooner or later.'' THE DARK SIDE of Europe's restructuring is the unavoidable human cost. Even the EEC's determinedly optimistic projections anticipate a short-term loss of several hundred thousand jobs when national barriers fall. That cost will rise if managers fail to make the new mergers work. Says Gary Hamel, a professor at the London business school and consultant on corporate strategy to many multinationals: ''Making acquisitions is the easy part. The fundamental management challenge for European companies is to learn how to integrate these national operations into an effective whole.'' This process, in Hamel's view, will likely take longer and lead to far more corporate divorces after 1992 than most managers now expect. In the long run, though, Europe's merger boom will almost certainly enhance the region's international competitiveness, which is the only sure- fire way to create jobs. Like many observers, Robert Hormats, vice chairman of Goldman Sachs International, sees historical parallels between Europe's unification drive and the industrial amalgamation that occurred in the U.S. during the latter part of the 19th century. Says Hormats: ''Before that massive consolidation took place, U.S. industry was largely regional and parochial. But when it ended, the country had developed a huge number of very efficient, world-class companies.'' For Europe the real nightmare will come not if its new mania for merging continues, but if it ends prematurely because politicians lose their nerve.