Bank Invaders Scale The Pyrenees

Two Spanish rivals race to do the first big cross-border merger

At Madrid's Banco Bilbao Vizcaya Argentaria, Pedro Luis Uriarte would love to be the first chief executive to make a major transborder bank merger in Europe. So would his crosstown rival, Angel Corcostegui, CEO of Banco Santander Central Hispano. Having carved up Spain and Latin America between them, the pair are now making the whole Continent their battleground.

Santander is ahead on points. It snapped up control of two Portuguese banks on Nov. 11 following a bruising political battle. Now it plans to as much as triple its 5% stake in France's third-biggest bank, Societe Generale, and might end up with 30% of London's Natwest Bank. Meanwhile, Bilbao Vizcaya wants a strategic alliance with Italy's UniCredito Italiano. "We're going to see operations that were barely imaginable a few years ago," says Uriarte.

The dueling Spaniards have stolen a march on slower competitors in Germany, France, and Italy, who are still biting their nails over domestic mergers. Santander and Bilbao Vizcaya, both products of local mergers, have been there, done that. Now, says Scott Bugie, director of financial institutions at Standard & Poor's in London: "They are flexing their muscles."

DEEP POCKETS. And what muscles. The strapping Spanish banks are slashing costs. Expected returns on assets next year are over 20%, and they're cash-rich, with war chests of about $10 billion each.

Above all, the Spaniards are the first to challenge Europe's long taboo against big transborder mergers--and win. Santander's Corcostegui threw down the gauntlet to Portugal's political Establishment with a bold bid for control of four banks owned by the Champalimaud group. The central bank tried to scuttle the deal. But after European Commission competition referees stepped in, Santander won control of Champalimaud for $2.2 billion. "Champalimaud was a test case. From this moment on, Europe is not the same," says Inigo Lecubarri, a bank analyst at Salomon Smith Barney in London.

Yet political sensitivities run high against foreigners wolfing down national champions and spitting out local jobs. So hostile bids like the one for Champalimaud are likely to remain rare. And the Spanish marauders are adapting their tactics, especially in bigger markets with larger prey, such as France and Italy. "It's like crossing a frozen lake," says Luis Abril, a managing director at Santander. "You have to proceed slowly, with an icebreaker." They are are aiming to develop friendly alliances through cross-shareholdings as a prelude to full mergers.

That's precisely what Bilbao Vizcaya's Uriarte wants to do with UniCredito. "The final goal is to merge the Spanish and Italian banks into a European bank in two or three years," says a UniCredito official. "This agreement will be something totally new--a bank that has no nationality." Meantime, Santander is eyeing alliances in Italy and France.

Of course, if they start pulling off megadeals, Santander and Bilbao Vizcaya won't have the field to themselves for long. Indeed, Dutch banks ING Bank and ABN-Amro Holding are eager to be in the forefront of European banking consolidation. ING is attacking the Spanish on their home turf through an online bank called ING Direct. And there are rumors, which ING officials dismiss, that it may try to grab control of Credit Commercial de France. Bank insiders say ING rebuffed a recent approach from ABN-Amro about a merger.

MISSTEPS. The Dutch banks have tried, so far without success, to mold a smattering of stakes they have in other European banks into a cohesive European network. But outside the small Benelux market, they have been stymied repeatedly. ABN-Amro was rebuffed when it tried to take over Belgium's Generale Bank and France's CIC.

But Santander's breakthrough in Portugal heralds significant change. The approach of cooperating first and talking deals later might just be the way to negotiate the political minefields of transborder mergers. While waiting, says Uriarte, "[we] will improve our sex appeal."

He may be right. Faced with hostile raiders from the U.S., Britain, or Germany, weaker banks in France and Italy might find an agreed-upon deal with a Spanish suitor a far more attractive proposition.

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