Commentary: A Banking Revolution: Let The Top Bidder Win

Dutch banking giant ABN-Amro Holding enjoys an enviable reputation for thrift. While German and Swiss banks have spent billions to build expensive investment-bank franchises, ABN-Amro has concentrated on cutting costs in its core business, retail commercial banking. Now, the Dutch bank has bid $12.3 billion, a hefty 24 times earnings, to buy Belgium's Generale de Banque, besting a rival offer from Belgium's Fortis by 12%. Analysts predict a bidding war will ensue.

Whatever happens next, this deal will break the mold. First, it shows that in the new Europe, old-style political finagling is obsolete. The Belgian Establishment had hoped to create a "Grande Banque Belge" by cooking up a deal with Fortis behind closed doors. That deal's price now looks way too low. More important, in Europe after monetary union, individual governments won't be able to protect national champions like Generale de Banque as they used to.

ABN-Amro's bid shows just how fast U.S.-style banking consolidation is blowing away Europe's financial borders. Bankers in Germany and France had thought the next wave of European bank mergers would take place mainly within national boundaries. Overlapping branch networks would consolidate gradually, over five or 10 years, to avoid political fallout over job cuts. But ABN-Amro has already pruned its branch network in the Netherlands and is moving to the next stage--cross-border deals aimed at forming a pan-European banking system.

As nimbler rivals move cross-border, overbanked Germany, France, and Italy are on notice: Their largely state-controlled and inefficient lenders will come under pressure to reform far sooner than many politicians dreamed. Indeed, another message the ABN-Amro bid flashes is that major bank layoffs are on the way. Until now, many bank takeovers have involved back-office savings from combining computer systems and the like. ABN-Amro Chairman Peter Jan Kalff says he would save only $170 million by taking over Generale, justifying his rich bid with the strategic need to broaden his home market. But Salomon Smith Barney analyst Matthew Czepliewicz thinks that no matter who wins Generale de Banque, promises of gentle trimming will fall by the wayside as Europe's bank mergers escalate. "Cost-cutting in Europe will be so much more aggressive two years from now that the delicate aspects of this deal will soon be forgotten," Czepliewicz says.

Politicians' first impulse, as always, will be to intervene to stave off job losses. But they should take note of Belgian Finance Minister Philippe Maystadt's reaction to the ABN-Amro offer: Let the top bidder win. European bank consolidation is inevitable and long overdue. For policymakers, the lesson of the latest Belgian deal is clear. The globalization of financial services is unleashing market forces the pols can't control. Unsolicited takeover bids are no longer taboo in Europe. As the feeding frenzy for bank assets gets more violent, the price of those assets will keep rising. And as far as shareholders are concerned, nothing outweighs local politics like a big, fat bid. You can almost smell the desperation of bank CEOs who know that if the price is right, it won't matter where the buyer is from.

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