Big Cross-Border Mergers May Remain Rare Occurrences In Europe's Financial Sector

Global Finance, Sep 2005 by Platt, Gordon

CORPORATE FINANCING FOCUS

When Abbey National, then the sixth-largest bank in the UK, agreed in July 2004 to a takeover bid of about $15.5 billion from Banco Santander, Spain's biggest bank, analysts said the deal could herald a wave of major cross-border bank mergers in Europe. The long-awaited consolidation of the European Union's financial services industry was under way, and the creation of a pan-European system would result, they said.

It wasn't until a year later, however, that the next big crossborder acquisition took place in Europe's fragmented banking sector.

In July 2005 Italy-based UniCredito agreed to acquire Germany's HVB and its Bank Austria Creditanstalt unit with an extensive network in the fast-growing economies of Central and Eastern Europe.

The $18.7 billion bid to take over Germany's second-largest bank followed failed attempts by UniCredito in recent years to form alliances with Spain's Banco Bilbao Vizcaya Argentaria, or BBVA, and with Commerzbank, also of Germany.

"Together, UniCredito and HVB will be a strong new force rooted at the heart of Europe," says UniCredito s chief executive, Alessandro Profumo. "We will become the first truly European bank."

While the deal was the largest cross-border banking merger ever in Europe, analysts say that mega-mergers that cross Europe's borders will remain an anomaly. This is not the start of a frenzied game of musical chairs that will have Europe's big banks aggressively seeking new partners, they say.

Politics and cultural differences, as well as differing legal, regulatory and tax systems, make it difficult for any EU banking monolith to emerge, industry participants and analysts say.

"There won't be many more transformational deals," says Stephen Jancys, vice president of mergers and acquisitions at New York-based Trenwith Securities, an independent investment banking affiliate of BDO Seidman and BDO International, which has a global network of 600 offices that provide financial advice and consulting services.

The volume of middle-market deals in the European financial services industry will continue to be much larger than that of the major mergers, Jancys says.

Trenwith securities represents both US and non-US companies in middle-market transactions. Its clients range from middle-market businesses to multinational corporations seeking to acquire or divest middle-market companies.

"European banks need to step up their domestic mergers to avoid being absorbed by international rivals, including the big US banks," Jancys says. "They need to become bigger fish so that they are not takeover targets themselves," he explains.

There will be more consolidation in European financial services, particularly in the fragmented markets of Italy and Germany, Jancys adds.

Quality Assets for Sale

Private equity firms will increasingly be involved in the restructuring of banks and insurance companies, with many institutions divesting non-core businesses, according to Jancys.

"A lot of quality assets are available for sale, including credit-card businesses and consumer finance operations," he notes.

There also will be further consolidation in the asset-management industry, where costs have increased in order to keep up with the growing burdens of financial reporting, Jancys says.

Deutsche Bank signed an agreement in July 2005 with UK-based Aberdeen Asset Management on the sale of part of the German bank's asset-management businesses in the UK and the US, in a transaction valued at about $450 million, depending on future fee revenue.

Deutsche Bank said the deal followed a comprehensive and strategic review of its asset-management business globally.

"The objective is to create a stronger, more focused Deutsche Asset Management business that can provide greater value to our clients and shareholders," says Kevin Parker, member of Deutsche Bank's executive committee and global head of Deutsche Asset Management.

The German bank's UK-based hedge-fund and real-estate businesses and its Philadelphia, Pennsylvania-based high-yield business were not part of the deal and remain part of Deutsche Asset Management's global platform.

Meanwhile, Spain's BBVA is pursuing Italy-based Banca Nacionale di Lavoro, while ABN AMRO of the Netherlands is battling for control of Banca Antonveneta.

Overall M&A activity within Europe reached $427 billion in the year-to-date through July 15, 2005, according to Dealogic. That represents an increase of 33% compared to the same period of 2004, it says. Finance was the most-active industry for intra-European M&A activity, with $75.8 billion from 331 transactions. The UK remains the most-targeted country for M&A in Europe, Dealogic says.

Turkish Banks Targeted

The rapid growth of the Turkish economy and the onset of EU-accession talks stimulated a number of acquisitions in Turkey's banking sector this year by European financial institutions.

Rabobank of the Netherlands agreed in July to buy a controlling interest in Sekerbank, the bank of the sugar-beet cooperatives, for about $350 million.