Spanish Banks Are Scaling The Pyrenees

They're racing 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 after a bruising political battle. Now, it plans to raise its stake in France's third-biggest bank, Societe Generale, to as much as 15% from 5%. And if Royal Bank of Scotland--in which it is the largest single shareholder--bids for London's Natwest Bank, Santander could end up with a 30% stake in a Big Four British bank. Not to be outdone, Bilbao Vizcaya is angling to form a strategic alliance with UniCredito Italiano that could lead to a huge Hispano-Italian bank. Also, it is eyeing Banco Comercial de Portugal. "We're going to see operations that were barely imaginable a few years ago," says Uriarte.

DEEP POCKETS. The dueling Spaniards have stolen a march on rivals in Germany, France, and Italy, who are still focused on domestic mergers. Santander and Bilbao Vizcaya, both products of big local mergers, have been there, done that. In the process, they bulked up to become big-league contenders. Each has a market capitalization of more than $40 billion. "They have money in their pockets, and they want to buy something," says Scott Bugie, director of financial institutions at Standard & Poor's in London. "They are flexing their muscles."

And what a punch they pack. The two are profitable and well-managed. Following its January merger with Banco Central Hispano, Santander aims to slash costs by $700 million over three years. Bilbao Vizcaya plans to slice $525 million out of its costs in the wake of its merger with Argentaria, sealed in October by respective presidents Emilio de Ybarra and Francisco Gonzalez. The banks' returns on assets are expected to top 20% next year, and they're cash-rich, with war chests of about $10 billion each. "They are in an extremely good position," says Carlos Pertejo, a bank analyst at J.P. Morgan & Co. in London.

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 Establishment with a bold bid for control of three banks owned by the Champalimaud group, the country's third-largest financial outfit. The central bank tried to scuttle the deal. But European Commission competition referees cried foul and stepped in. Although Santander didn't get everything it wanted in a complex compromise finalized on Nov. 12, it did win control of Champalimaud for $2.2 billion--and 12% of Portugal's banking market. "Champalimaud was a test case. From this moment on, Europe is not the same," says Inigo Lecubarri, 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 will 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." The banks aim to develop friendly alliances through cross-shareholdings as a prelude to eventual full mergers.

Bilbao Vizcaya's Uriarte wants to do just that with UniCredito, say insiders at the Italian bank. UniCredito Chairman Lucio Rondelli says he may cut a deal by yearend. The pair might start with cross-shareholdings of about 10%. But UniCredito is eager to bulk up first by buying Bilbao Vizcaya's 10% stake in Italy's Banca Nazionale del Lavoro. "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. It has a 5.2% stake in Italy's IMI San Paolo, but its prime target is France's Societe Generale, which narrowly escaped a hostile takeover in August by French rival Banque Nationale de Paris.

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, ING Direct. And there are rumors, which ING officials dismiss, that it may try to grab control of Credit Commercial de France. Insiders say ING rebuffed a recent approach from ABN-Amro about a possible merger.

MISSTEPS. The Dutch banks have tried, so far without success, to weld the 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 lost out when it tried to take over Belgium's Generale Bank and France's CIC, though it was the high bidder in both cases.

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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