The Euro Bankers' Waltz

Banking's old barriers will soon fall

In Paris, Bank of France Governor Jean-Claude Trichet struggles to broker a deal between the top executives of Banque Nationale de Paris and Societe Generale, locked in a takeover battle for five months. In Germany, Deutsche Bank and Dresdner Bank gingerly discuss combining their inefficient German retail operations--a likely precursor to a massive shakeout. Not to be outdone, on Aug. 19, P. Jan Kalff, chairman of Dutch banking giant ABN Amro Holding, declared that he is back on the acquisition trail and hungrily eyeing prominent targets in Italy and France, including Societe Generale itself.

Indeed, hardly a day passes without a new sign of upheaval in the corridors of Europe's top financial institutions. For months now, European banks have been in a race to consolidate their holdings--and build up the bulk needed to compete against global rivals in Europe's newly unified financial markets. Most of the attempted takeovers or mergers up to now have been domestic deals, such as BNP's bid to grab control of both Societe Generale and Paribas, or small, regional linkups, such as that of Sweden's Nordbanken Group and Finland's Merita Pankki.

Now, however, several European banks are preparing to break political and cultural taboos by lunging after their rivals elsewhere in Europe (table). Deutsche Bank CEO Rolf E. Breuer and Emilio Botin, co-chairman of Spain's Banco Santander Central Hispano (BSCH) are among those leading the way. Says Matthew Greenburgh, co-head of Merrill Lynch & Co.'s financial-institutions group in London: "It's only a matter of time before there's a crossborder merger between two of the really big banks. And if that happens, it'll certainly transform the market." Such a megadeal would spur other big players to find partners of their own, spawning a new generation of behemoths.

FRENCH PRIDE. The tumult points to the end of the line for many of Europe's national banks. In an era of the euro, globalization, and the Internet, banks need critical mass and geographical diversity to retain customers and satisfy demanding shareholders. Increasingly, Europe's financial institutions will have no choice but to look abroad to bolster balance sheets. The banks that don't acquire could become prey themselves.

The efforts by Trichet and BNP Chairman Michel Pebereau to build a French national banking champion were a last-ditch attempt to preserve the traditional, clubby ways of French finance. Above all, Trichet has been determined to prevent a foreign bank from swallowing up key French institutions. BNP managed to secure 65% of Paribas but only 31.8% of the voting shares of Societe Generale. Daniel Bouton, Societe Generale's chairman, fiercely opposed the BNP takeover.

Although Trichet may be able to pull off a compromise between BNP's Pebereau and Bouton, many analysts expect Bouton to keep fighting by seeking support from other shareholders or backing from a new, foreign partner. So far, the takeover battle has produced one victim: Paribas Chief Executive Andre Levy-Lang resigned on Aug. 25.

Even if Bouton loses too, it's likely just a matter of time before the forces of competition pry France's financial market open. "The French will sooner or later have to accept foreign acquisitions in the banking sector," predicts Ernst-Ludwig von Thadden, research fellow at London's Center for Economic Policy Research. Elsewhere, institutions such as Germany's Commerzbank or Spain's Argentaria may be put in play.

Ironically, the most aggressive predators so far have been banks outside Europe's biggest economies. That's partly because they don't have huge domestic markets and have already seen a banking shakeout. ABN Amro boasts $490 billion in assets and a 30% share of the commercial-banking business in the Netherlands. But it accounts for less than 3% of all deposits in the 11-nation euro zone. "Now we have a single currency, we need to expand elsewhere in the European Union," says a member of Kalff's strategic planning team.

That's why Kalff is interested in acquiring Italy's Banca di Roma, in which ABN Amro already holds an 8.76% stake, or Societe Generale. It also explains why the Netherland's ING Group has launched a friendly bid for the 58.2% of shares it does not already own in Germany's BHF-Bank. "We are further strengthening our position as a financial services provider in Germany and Europe," notes Chairman Godfried van der Lugt.

HAMSTRUNG MINISTRIES. The Dutch bankers are not alone. BSCH is maneuvering to buy a 40% stake in the sprawling Portuguese banking empire controlled by financier Antonio Champalimaud. The word in London and Madrid is that Lloyds TSB Group is negotiating a merger with Spain's Banco Bilbao Vizcaya, which could create a potent financial-services group in Europe and Latin America. Meanwhile, Barclays Bank and Switzerland's Credit Suisse Group are also on the prowl for a euro zone partner, financial sources say.

If only half the banks looking to merge or take over rivals make it to the altar, they will change the face of European finance. Over time, analysts expect the euro zone to be dominated by up to a dozen Continent-wide banks, plus local savings banks catering to retail customers. No doubt, governments will try to control the crossborder shakeout. Finance ministers in Germany, Italy, and Portugal--not only in France--are eager to keep major banks out of foreign hands. But EU rules prohibit governments from discriminating against bidders on the basis of nationality. And the European Commission, not national watchdogs, is responsible for approving crossborder mergers.

That's why more bankers are likely to put up a struggle when governments try to interfere with the market. They could follow the example of BSCH, which lodged a formal complaint with the EC--and won--when the Portuguese Finance Ministry tried to block its bid for part of Champalimaud's financial empire. The ministry is appealing. Still, "there's a growing feeling that the barriers to crossborder banking can be overcome," says Angus Hislop, lead partner for European banking for Pricewaterhouse- Coopers in London. The floodgates could open any day.

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