Euro Finance: Rumors of Marriage

A wave of mergers could remake the Continent's industry

Senior executives at Skandia Insurance Co. got a nasty surprise on Jan. 24. Early that day, their cash-rich and acquisitive rival, Finnish banking and insurance group Sampo, disclosed it had built up a 5.3% stake in the company, whose shares have lost two-thirds of their value in the past 12 months. Sampo insisted the holding was just an investment. But analysts think otherwise and predict a future takeover bid--just what Skandia doesn't want. Its biggest fear is that if it is acquired, it will be broken up, many of its international operations sold off, and hundreds of jobs lost.

Skandia isn't alone. Dozens of other financial companies across Europe are feeling vulnerable right now. Three years of plunging equity markets and lackluster economic growth have weakened their balance sheets and eroded their share prices, making them bait for larger rivals. Banks and insurers are reshaping themselves in a desperate effort to bolster their bottom lines, boost their stock prices, and maintain their independence. Noncore businesses are being spun off, capital reallocated, and management structures overhauled.

Financial managers and investment bankers are especially intrigued by the constant rumors of mergers and takeovers--a portion of them fomented, of course, by the investment bankers themselves, who are starved for business. Some of the Continent's largest players may be on the block. One frequently mentioned target is Belgian-Dutch giant Fortis, whose specialty is "bancassurance," in which companies sell banking and insurance services out of the same office. With its share price down more than half since the beginning of last year, Fortis looks exposed--especially since French utility Suez announced in January it would sell off its 10% holding. British bank Abbey National PLC could also be forced into a merger if new CEO Luqman Arnold doesn't manage to drive its sagging stock price higher.

Fortis and Abbey aren't the only characters in the great Euro-merger drama. For every prey there's a predator. Among those that have hinted they are on the prowl: BNP Paribas and Spain's Banco Bilbao Vizcaya Argentaria (BBVA). And officials at Fortis say they plan to be among the acquirers rather than the acquired. Rumors persist that Germany's HVB Group and Commerzbank will get together, though both bank managements deny it, saying that their plunging profits and share prices are enough of a headache. "It wouldn't be very sensible at this stage," says HVB CEO Dieter Rampl.

How far will the merger mania go? Some analysts say the day may finally be at hand for the big cross-border mergers that have been predicted ever since the European Union launched the euro four years ago. Many observers remain skeptical. Politicians and central bankers in the euro zone are as determined to protect their national financial champions as ever. "Despite European Union efforts to create a single market in financial services, there's widespread resistance to cross-border mergers in some countries," says Peter Sutherland, chairman of Goldman Sachs International. But consolidation has already gone as far as it can go within Britain, Spain, and the Benelux countries. And now that Crédit Lyonnais looks set to be acquired by compatriot Crédit Agricole Indosuez, there are few domestic merger opportunities left in France.

So expansion-minded banks are looking abroad. "There's not much more room for acquisitions at home," says Ewald Kist, chief executive of Dutch bancassurer ING Group. ING wants to expand in Germany, and already owns DiBa, an online bank there, plus a majority stake in BHF Bank.

One possible deal: a merger between BBVA and Italy's Banca Nazionale del Lavoro. BBVA already owns around 15% of BNL and is raising $800 million by selling its Brazilian division to local Banco Bradesco. "The proceeds may well help fund an acquisition," says a Madrid banker who knows BBVA. Even an amicable deal between Lavoro and BBVA, however, would have to get past Bank of Italy Governor Antonio Fazio, who rules Italian banking like a fiefdom and doesn't like foreign takeovers.

There has already been a fair amount of cross-border consolidation on the insurance front. Germany's Allianz owns France's AGF, for example. And Italy's Assicurazioni Generali controls Germany's AMB. But there could be more to come. Apart from Skandia, several British insurers, including Royal & Sun Alliance, could soon come into play.

As the merger market bubbles, other, less conspicuous restructuring is going on. Munich-based HVB, for instance, plans to take the dozen or so mortgage operations it runs across Europe and bundle them into a new real estate financing group. CEO Rampl says the operation, with assets of $170 billion, will then be spun off from HVB. Real estate finance has long been a key activity of HVB, so the decision to leave the business shocked many staff. But Rampl says it's vital for the group to focus on its core retail and corporate businesses if it is to solve its bad-debt problems and restore profitability.

Similarly, Deutsche Bank, Germany's largest bank, is raising around $1.5 billion by selling parts of its global securities business to State Street Corp., a Boston financial services company. Deutsche's huge global custody business, in which it processes securities worth $2.4 trillion, is part of the deal. CEO Josef Ackermann has already raised more than $3 billion by selling industrial holdings over the past year, using some of the proceeds to expand Deutsche's fund management business, which it considers a key growth area.

In some cases, rival banks and insurers have actually been working together to forge new structures. In mid-2002, Germany's Commerzbank, Dresdner Bank, and Deutsche merged their mortgage subsidiaries into a jointly owned new unit called Eurohyp. With $130 billion in assets, it is big enough to benefit from economies of scale.

And it's not just the Germans, whose banks are the weakest on the Continent, who are thinking outside the box. Many other banks and insurers, including Fortis, Spain's Santander Central Hispano, and Switzerland's Zurich Financial Services, are busy selling off long-standing subsidiaries or shareholdings. Last year, Zurich sold Zurich Scudder Investments, a U.S. asset manager, to Deutsche Bank. This year, it hopes to find a buyer for British subsidiary Threadneedle Investments. "We need to sharpen our focus as an insurance-based financial services provider concentrating on chosen markets," says James J. Schiro, who took over as chief executive of Zurich last May.

Who will profit from all this action? Certainly the investment banks that shepherd the deals. But long-suffering shareholders of the financial companies should also benefit if all goes according to plan. The stocks of many banks and insurers have already started to rise. And, who knows, even the European consumer may share in the wealth. If cross-border mergers really are on the way--a big if--they might spur development of a single financial services market that could spur enough competition to bring down bank fees and help the little guy. An alluring prospect--but first the action has to begin.

By David Fairlamb in Frankfurt

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