There has been a tremendous amount of coverage in the global press given to the European debt crisis. All of the doom and gloom headlines have led to a distorted view of economic realities on the continent and an unjustified sense of panic on the part of many investors.

The fact remains that the European Union is the world’s largest economy, with a GDP of $17.6 trillion as of year-end 2011.The continent is headquarters to 161 Global Fortune 500 companies as well as many of the world’s best known and most respected brands including BMW, IKEA, Nestle, Shell, and Gucci.  Even that symbol of blue-collar America, Budweiser, is now owned by a company headquartered in Belgium (Anheuser Busch InBev.)

While it’s true that most European governments seemed to have their collective heads in the sand throughout the financial crisis of 2008 and the sovereign debt crisis of 2010, a discerning investor could see many European companies beginning to take advantage of the prevailing conditions to transform their businesses through cost reductions and operational restructurings.

The worldwide financial crisis has presented these companies and their management teams with the need – and the opportunity – to refocus on the fact that business competition is no longer strictly local. With technology improvements, advances in communications and the relatively low cost to transport goods, businesses are competing with anyone who makes a similar product virtually anywhere in the world. Many European management teams have been using this period to streamline and structure themselves to be much more competitive in this new, effectively smaller world.

Governments are implicitly recognizing that having viable long-term businesses that thrive and fully employ their people – even at lower headcounts – is better than businesses choked by inefficiency. New efficiencies should translate into explosive cash flow and earnings growth at these companies when the macro-economic environment improves. This, in turn, should translate into extraordinary value creation as progress is made on long-term solutions for the European debt crisis.

Many corporate management teams are undertaking dynamic changes that are adding value to balance sheets and cash flows, and literally growing their margins in a time of general economic contraction. At the same time, current prices and valuations of European securities generally reflect weak expectations. But buying everything in sight is not the correct approach.

Being a successful investor in distressed situations means finding diamonds in the rough. These can be individual companies that have been beaten up, yet offer attractive assets and real prospects for moving forward. Because the market has written them off, they can be superior turnaround situations.

An  excellent example of an individual “diamond” is Vivendi. This French conglomerate owns the largest mobile telecom operations in France and Morocco; the largest music company in the world, Universal Music; the largest pay TV business in France; and 62% of video game maker Activision.

Vivendi was once the largest water company in the world, under the name Générale des Eaux. Guided by questionable leadership decisions, the company went on an acquisition spree, spun off its water business, and then floundered for the next decade. Having grossly overpaid for many early acquisitions, the company has been forced over the years to sell some very valuable assets at distressed prices. Thus, shareholders have been burned on many occasions and most have essentially given up on the company. Today, with its stock trading at or near its lowest multiples in years, the company pays a healthy 6.5% dividend – yet its share price continues to flounder.

The company is a classic diamond in the rough with shareholders universally disaffected and calling for real change. New shareholders who have little tolerance for excuses are taking stakes, demanding board representation and pushing for value creation. The assets are sound but undermanaged – yet, change is underway.