An Italian Bank Pulls The Trigger

UniCredit's deal for HVB marks Europe's first big cross-border bank merger

It's a high-stakes gamble, Italian-style. On June 12, Alessandro Profumo, chief executive of Milan-based UniCredit, announced Europe's first major cross-border bank takeover, snapping up Germany's No. 2 HVB Group for $18.7 billion. The deal turns Italy's second-largest bank into a European powerhouse, with a $51 billion market capitalization and $733 billion in assets stretching across a wealthy triangle between Bavaria, Austria, and Northern Italy. The linkup also makes UniCredit (UNCFF ) dominant in the fast-growing economies of Eastern Europe.

But turning around HVB won't be easy. The German bank lost $2.3 billion in 2004 and has been plagued by bad loans. By contrast, UniCredit posted a profit of $2.6 billion last year. Germany's overcrowded banking market and sluggish local economy mean Profumo will have to cut costs and overhaul everything from risk evaluation to backroom operations to create a profit generator. But streamlining divisions and setting tough performance targets could trigger resentment. "That will be his big test," says one senior Italian manager working in Germany.

REHEARSING FOR THE ROLE

The odds might appear to be stacked against him, but the 48-year-old Italian banker has been rehearsing the demanding role for years -- and he knows his part cold. Over the past decade, Profumo has pulled off more successful overhauls of underperforming financial institutions than most bankers rack up in a lifetime, including seven in Italy, seven in Eastern Europe, and one in the U.S. After joining UniCredit's precursor, Credito Italiano, in 1994, Profumo transformed a torpid former state-owned institution into one of Europe's most profitable banks, with an 18% return on equity and operations stretching from Boston to Warsaw. Along the way, he forced a revolution in Italian finance by championing shareholder value and transparency. "Profumo has shown great skill in pursuing his vision of creating a truly international bank," says Stefano Caselli, banking and finance professor at Bocconi University in Milan. "That makes it likely he'll succeed in this merger."

With no room to expand further in Italy, Profumo was determined to clinch a cross-border deal and kick-start the long-delayed consolidation machine. "I believe our operation will act as a catalyst for the system," he says. While analysts have grown doubtful that cross-border deals in Europe can pay off, Unicredit's move is forcing rivals to reconsider their options. Its new girth ups the pressure on midsize rivals such as France's BNP Paribas and Société Générale (SCGLY ) to pick off some of the weaker players in large markets. One possible target: Germany's Commerzbank (CRZBY ), analysts say. "The fact that somebody has pulled the trigger will accelerate consolidation in European banking," says Marco Mazzucchelli, European head of investment banking for Credit Suisse First Boston (CSR ) in London.

Rivals will be watching to see if Profumo can make his bet pay off. To do that, the Genoa-born banker must wring some $1.2 billion in annual cost savings from the new combination, including about 9,000 job cuts. Analysts say UniCredit should have no problem fusing HVB's Eastern European operations with its own, creating a regional leader with $84 billion in assets. But boosting performance at HVB will be harder. Standard & Poor's (MHP ) and Moody's Investors Service (MCO ) warn they might downgrade UniCredit's debt as a result of the acquisition. "After the deal closes, financial discipline will be a key word. On this we will be very, very tough," says Profumo.

Those close to Profumo say he is a charismatic leader whose strength is building teams. "It's a matter of listening," says Roberto Nicastro, head of retail operations at UniCredit and future head of the combined banks' retail operations. He notes that one of his boss's favorite proverbs is "If God gave us one mouth and two ears, there must be a reason." No question, Profumo will be listening hard in Munich to make sure the Italian giant wins a center-stage role in European finance.

By Gail Edmondson in Frankfurt, with Maureen Kline in Milan

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