Bnp's Boss: The Man Who May Be King

Can Michel Pebereau win his battle to form the world's biggest bank?

Triumph still eludes Michel Pebereau, CEO of Banque Nationale de Paris (BNP). For the past three months, he has argued long and often that his double hostile bid for Societe Generale (SG) and Paribas is a smarter move than the friendly merger announced in February between those two, his French rivals. Now, the political scales may be tipping in his favor. On June 21, French bank regulators froze a request by SG to raise its bid for Paribas. At the same time, Banque de France Governor Jean-Claude Trichet demanded all three parties sit down and try to negotiate a compromise.

WARRING FACTIONS? Even so, a quick resolution seems unlikely, given the strong feelings on all sides. Although both SG and Paribas scheduled board meetings for June 24 to discuss a possible compromise, the outcome will hinge on shareholders accept ing his tender offer, scheduled to close on July 21. If he can pull it off, the cerebral, cigar-smoking 57-year-old will be catapulted to head of the world's biggest bank, with $1.1 trillion in assets. Yet being the No. 1 player in the big leagues is an achievement that Pebereau has long pursued without success. And he's so close now that a setback would be crushing, leaving BNP exposed to a hostile bid by a foreign bank.

While BNP's audacious $37 billion double-bid pleases many investors eager to reap the benefits of consolidation, it also has its critics. Some bankers question whether Pebereau is up to running a global banking goliath. And as the takeover battle drags on, the danger rises that a merged bank will be rife with warring factions. "The longer the battle, the higher the integration risk," says Paul Chegaray, analyst at J.P. Morgan in London.

Pebereau's very strength as a risk-averse retail banker may be a handicap in forging a strong investment bank. Some bankers and analysts doubt that Pebereau, a workaholic who micromanages operations, has the skills and vision to succeed in investment banking. "The uncomfortable part [of Pebereau's project] is the wholesale and investment banking side," says John Leonard, an analyst at Salomon Smith Barney in London.

Yet few doubt Pebereau's ability to reap efficiency gains by merging the overlapping retail operations of SG and BNP. He built his reputation as a master of analysis and control over lending. Unlike most other French bankers, he skirted both the real estate debacle of the early 1990s and the emerging-markets catastrophe of 1998.

French government officials would prefer a friendly compromise. They have made it clear they do not want a foreign bank playing white knight to SG, because that would diminish French chances of developing a national champion able to compete in global markets. But given the bitter enmity between SG Chief Executive Daniel Bouton, 49, and Pebereau, many still believe a foreign bidder, such as a Dutch bank, might enter the fray. Once a foreigner makes a bid, French bankers say, it would be hard for government officials to dismiss it. The European Commission has sent a clear signal to governments not to thwart cross-border mergers to protect national champions.

If Pebereau comes out on top, the victory will crown an impeccable career as a public administrator and banker. A graduate of elite French universities, including the prestigious Ecole National d'Administration, he launched a rocketlike career, working for the French Treasury and two finance ministers.

SHARP MIND. When a Socialist victory in 1981 eliminated his chances of becoming Treasury director, he moved into banking and became the only French manager to privatize two state-owned banks, improving the bottom line of both dramatically. By the time he left the first bank, Credit Commercial de France, in 1993, he had doubled both profits and shareholder equity in just five years. At BNP, he took an underperformer and raised return on equity from 2.2% to 11.8% in 1998, making it France's most profitable bank.

Pebereau's sharp mind and caustic wit are legendary. At meetings with analysts he often humiliates those who ask pointed questions, acting as if he has already answered the question and implying the provocateur is too simple-minded to have understood his earlier response. Indeed, French bankers say that it is Pebereau's big ego and cold personality that have torpedoed his numerous attempts at merging BNP with other financial institutions throughout his career. He's made unsuccessful runs at insurer Union des Assurances de Paris, holding company Compaigne de Suez, Credit Industriel & Commercial, and Credit Lyonnais, not to mention his earlier friendly overtures to both Paribas and SG. "Everyone agrees he's brilliant. But no one wants to do a deal with him," says a senior French banker.

BNP managers say Pebereau's style is not autocratic, and that behind the authoritarian facade is a gifted and emotional man who listens to Bach in his office, devours science-fiction novels, and enjoys students so much he continues teaching a class in macroeconomics at one of his alma maters, Ecole Polytechnique. But those who know him agree he is a classic product of France's elite schools: a talented manager with a colossal ambition. "He's a tiger," says a BNP insider. "It can be dangerous."

Pebereau's bold reaction to the Feb. 2 announcement of a planned $17.2 billion merger between Paribas and SG is understandable. The deal would create the largest European investment bank--and leave BNP and Pebereau vulnerable to a hostile cross-border raider. French banks are exposed because they are undercapitalized, need to consolidate, and lag in profitability. As a result, they are valued much lower by the market than their British, Dutch, and Spanish rivals. That's why French banking authorities are eager to keep foreign bankers out of the market until domestic banks have bulked up.

Pebereau insists his plan to unify BNP, SG, and Paribas will raise return on equity at the combined entity from an average 12% today to 16% in 2002, more on a par with that of Europe's top banks. The main boost to efficiency would come through rationalizing computer operations, back offices, and integrating foreign operations. Sensitive to government worries about unemployment, Pebereau has promised to avoid branch closings and mass layoffs, relying mainly on attrition to trim employee rolls. He projects savings of $1.2 billion by 2002 and an additional $800 million by 2004.

Pebereau's promise to continue operating two separate retail-bank operations raises questions about how quickly cost savings can be gleaned, and prompts some to question the logic of the bid. Anglo-Saxon investors are betting that a more radical restructuring of the banking sector "has to come in France," says Shiela Garrard, analyst at Lehman Brothers in London. Pebereau hints that he may be able to squeeze out greater efficiencies. But even if he can, making the three-way merger a real success will test far more than his cost-cutting skills.

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