Europe: The Making Of A Monolith
By Stanley Reed
The numbers are dazzling. London-based Barclays PLC's (BCS ) proposed $91 billion takeover of ABN AMRO (ABN ) was looking like the biggest financial-services merger ever. Then on Apr. 25, the Royal Bank of Scotland Group tabled an even higher offer—$98 billion—for the giant Dutch bank.
As breathtaking as the numbers are, whatever deal ultimately emerges isn't the real story here. Far more significant is what such a deal says about the global financial stage. A monster bank merger of this scale promises to hasten the long-awaited financial integration of Europe, and with it the creation of a zone of financial power that is the logical outcome of a continent-wide trading bloc with a common currency.
The economic implications are enormous. Increased financial integration in Europe will mean billions of dollars in savings for European companies in the form of cheaper capital. Not only will that help businesses expand more readily but it will also lower the cost of trade among European countries and, at long last, weld them into a single economy with the heft to challenge the U.S., Japan, and China.
The prize for banks is the vast pool of European savings. After decades of dutifully putting away cash, Europe's aging population is sitting on a colossal reservoir of wealth. Tapping into that pool represents a huge opportunity for banks as they unleash their investment banking operations on Europe's big corporate customer base. It all points to an explosion of deals, not to mention the growth of corporate finance transactions in Eastern Europe, China, and India.
The deals are already happening. Once something of a backwater, Europe now surpasses the U.S. as a source of mergers and acquisitions. Europe-targeted M&A volume hit $495 billion in the first quarter of this year, well ahead of the $442 billion booked in the U.S., according to market watcher Dealogic. Having a single currency has certainly helped. But European corporations are also responding to pressures from hedge funds and other activist investors.
Adding to the momentum of financial integration, European Union authorities are finally acting to halt political interference in cross-border banking deals. National regulators in some countries, especially France and Italy, have tried to fend off hostile takeovers by foreign banks. Now new rules, approved last month by EU finance ministers, could make such meddling harder to do. With that change on the horizon, some potential takeover targets are already looking for friendly tieups with other banks. "Why wait and be eaten by Citigroup (C )?" says Jean-Pierre Lambert, an analyst with investment bank Keefe, Bruyette & Woods (KBW ).
Nowhere is the rise of European financial clout more evident than in London. While Britain has chosen to stay outside of the euro zone, London may well be the euro's biggest beneficiary. The British capital is home to packs of dealmakers who rove the Continent during the week. And the city's new financial district, Canary Wharf, has attracted the cream of global banks and is a hotbed of new financial products.
Lighter market regulation figures into London's attraction. But a favorable tax regime, geography, and a cosmopolitan atmosphere play even larger roles. The city has become the natural place for listings by companies from nearby emerging markets, as tycoons such as Russian mogul Roman Abramovich snap up London mansions. As startups from emerging markets have flocked to offer shares on the London Stock Exchange, its total listings have risen nearly 15% since 2004, while those on the New York Stock Exchange (NYX ) have fallen by 0.6%, according to the World Federation of Exchanges, a trade group.
The integration of Europe is part of a larger trend toward deeper financial ties across the globe. And that has U.S. financial institutions vying for a piece of the action in London. NASDAQ has acquired nearly 30% of the LSE, while the NYSE just bought Paris-based Euronext. "The European capital markets are more important than they were a decade ago because they are functioning more as a single market," says Alan McIntyre, who heads North American banking for Mercer Oliver Wyman, a financial services consultant.
Barclays is a classic example of the metamorphosis. A decade ago it was a troubled British commercial bank. But the century-old institution has been turned upside down by a hard-charging group of mostly American investment bankers. Barclays President Robert E. Diamond Jr., a native of Massachusetts and a veteran of Morgan Stanley (MS ), has taken the lead. He has made Barclays a huge player in the fast-growing businesses of structured finance, credit derivatives, and commodities.
There's little doubt that, on the heels of Barclays' bid for ABN AMRO, other European banks will be hurrying to shore up their positions. CEOs of even Europe's biggest banks are realizing that their institutions are simply too small to play on the world stage. With the exception of HSBC (HBC ), no European bank has the $200 billion or so market capitalization that's needed to compete. There is plenty of money to be made by signing up new clients everywhere from China to India to Brazil. But setting up offices and investing in the hugely expensive automated trading platforms needed to slash transaction costs requires piles of capital.
That has turned up the heat on other bankers to find partners. There are reports that France's Société Générale is talking with Italy's acquisitive UniCredito. Other potential targets include KBC bank in Belgium and banks with strong footholds in fast-growing Eastern and Central Europe, such as Austria's Erste Bank and Greece's EFG. "When you compare banking consolidation in Europe with the U.S., it's clear the U.S. banks are much further along," say Herbert Walter, CEO of Germany's Dresdner Bank. But with so much action shifting to Europe, that's soon likely to change.
With Mara Der Hovanesian in New York, Jack Ewing in Frankfurt, Carol Matlack in Paris, and Joseph Weber in Chicago