Commentary: Thinking Beyond The Euro Zone

Why Santander's bid for Abbey, while daring, may make strategic sense

European financial markets have been transfixed by Santander Central Hispano (STD )'s audacious grab of London-based retail bank Abbey National (ANB ) PLC, announced on July 26. The $15 billion deal is the largest European banking merger of the year. But will it unleash the merger frenzy that Europe's bankers have predicted since the launch of the euro in 2001? Unfortunately, the banks may still find themselves waiting for Godot. "I don't see this as being the first of a wave of European cross-border deals," says Neil Cumming, senior fund manager at Hichens Investment Management in London.

In fact, Emilio Botín, Santander's shrewd chairman, has made an interesting choice. Spurning the supposed efficiencies of a single currency, he is not linking up with another euro zone lender. Instead, he is plunking down a little cash and a lot of stock to buy a bank in Britain, where competition for customers is fierce and the pound has been strong against the euro. For Botín, it seems, the benefits Britain offers, including more flexible regulation, outweigh the possible gains of operating in euros. "This deal puts us in a unique strategic position," Botín said on July 26. "There aren't many banks like Abbey in Europe."

There certainly aren't many for sale. Most big euro zone countries don't want foreign banks snapping up the home team -- even if a shot of foreign capital might help. The German Finance Ministry, for instance, wants domestic consolidation, not acquisitions by foreigners. France and Italy have shot down most foreign bids for their banks. In Abbey's case, British regulators made the deal possible by shooing away potential local bidders. Although it is Britain's sixth-largest bank, Abbey has been a mess for years and thus prime acquisition bait. But British banks have stayed away since watchdogs blocked Lloyds TSB Group (LYG ) PLC's $33 billion hostile bid in 2001. So the smart money in the City was betting Abbey would fall into foreign hands. And there's speculation that Citigroup (C ) or France's BNP Paribas may yet try to trump Botín's bid.

If he wins his prize, Botín still has to turn around a bank that lost money last year even as rivals posted record profits. He may also have to unwind a stock position Santander has in Royal Bank of Scotland even though he doesn't want to. But Abbey, with its established name and 700 branches, could be worth more than Santander is paying, especially if Botín succeeds in his plan to cut $700 million a year in costs. Meanwhile, bankers on the Continent can only hope their regulators learn something from the competition-friendly British.

By Stanley ReedWith Laura Cohn in London and David Fairlamb in Frankfurt

Before it's here, it's on the Bloomberg Terminal.