Jan Cienski reports from Warsaw on the complex, drawn-out merger of Pekao SA and BPH – an alliance that has created the largest bank in Poland.
Jan Krzysztof Bielecki stands atop the largest bank in Poland and central Europe, a journey as improbable as his unexpected ascension to become Poland’s prime minister 17 years ago at the age of 39.
Mr Bielecki led his bank, Pekao SA, through the most complicated merger in Polish banking history, a process he likened to a “madhouse” thanks to the determined opposition of the Polish government of the day.
Pekao is owned by Italy’s UniCredit group, which acquired the troubled state-owned bank in 1999. In 2005, when UniCredit bought Germany’s HVB, it also acquired HVB’s Polish affiliate, BPH, Poland’s third largest bank.
Facing opposition
The merger of Poland’s second and third largest banks caused a storm of protest from the right-wing opposition, which in late 2005 won parliamentary elections and formed a government.
The new government swiftly began to intrude in the merger process, changing it beyond recognition.
“We call it a merger but it isn’t any sort of a merger; we call it a takeover, but it turned out not be a takeover. Business words lost their meaning during this transaction,” says Mr Bielecki.
The first business combination agreement, signed on June 12, 2005 by UniCredit and HVB, called for all of the merged bank’s central European operations to be combined into a single unit under the control of Vienna-based Bank Austria Creditanstalt, also owned by UniCredit.
“Because Bank Austria already owned 70% of Bank BPH, in effect BPH would take over Pekao,” says Mr Bielecki. “At the beginning of this transaction, a lot of people thought BPH would play a dominant role, both in business and in personnel.”
That it did not was in large measure due to the reluctance of Polish authorities to give the merger the green light.
Further conflict
Although Unicredit owned 70% of BPH, it was unable to take control because the Polish banking regulator would not allow it to exercise its votes.
The Poles felt UniCredit had violated its 1999 agreement, made during the purchase of Pekao, which forbade it from acquiring other Polish banks.
In early 2006, the Banking Supervisory Commission, headed by central bank governor Leszek Balcerowicz, who supported the merger, entered into open conflict with the government of Kazimierz Marcinkiewicz, who opposed it.
The government worried about job losses and the over-concentration on the Polish banking market, despite reassurance from both Polish and European competition authorities that there was no such danger.
Nationalists also fretted about foreign control of Polish banks, although Poland, with about two-thirds of its banks owned by foreigners, stands in contrast to countries such as the Czech Republic and Slovakia where outsiders own the vast majority of local banks.
Infringement process
The European Commission also became involved, launching an infringement procedure against Warsaw, arguing the government’s hostility to the deal may have violated EU rules guaranteeing the free movement of capital in the Union, and that Poland’s actions breached the EU’s merger rules, which give the EU antitrust regulator exclusive powers to decide on UniCredit’s takeover plans.
Despite the outside backing, UniCredit was forced to compromise, creating a Polish division separate from Vienna’s control. As part of that transaction, UniCredit had to buy the 70% of BPH shares owned by Bank Austria.
“Suddenly Poland found itself outside of Vienna’s control,” says Mr Bielecki. “We could probably have won in court but it would have taken a couple of years and the sick situation of two banks operating independently would have continued during that time, that’s why (UniCredit CEO Alessandro) Profumo decided to go for the compromise.”
The agreement, struck between UniCredit and Mr Marcinkiewicz’s government, called for UniCredit to sell off 200 of BPH’s 485 branches, while moving the corporate banking, investment funds and stockbroking parts of BPH into Pekao. Pekao ended up taking about 1.3 million clients, leaving the rump BPH with 650,000.
New banking law
While that might not seem an unusual requirement from a government overseeing a large banking merger, the conservative Law and Justice Party government hedged the new pact with an enormous number of conditions.
“What was unique here, and a signal of a lack of trust on the government’s side, was that you first had to split BPH, join with the bit you wanted to keep and sell the rest. Instead of the more normal process of taking over and then disposing,” says Mr Bielecki.
“In order to do this stupid transaction, you had to change the banking law, which was done on the fly and set a Polish record for the speed of the passage of a law since 1989.
‘The new law went through parliament, was signed by the president and published in the government gazette in three days.”
As a result, BPH continued to function as an independent bank, with its own management and strategy, despite also being owned by UniCredit. Pekao and BPH only co-operated in areas related to the merger; in all others the banks were completely separate.
A split
BPH was split into two units, dubbed OPE 1 and OPE 2 (for Organized Part of Enterprise), all of which remained invisible to customers.
“It’s easy to say, ‘split BPH into two parts’, but it meant that in one bank you had people working together who knew that their futures were different, and in fact competitive,” says Mr Bielecki.
He mentions one recent example.
The two banks had to put out a joint press release, which was the result of eight hours of negotiations between the two public relations departments, instead of Pekao’s spokesman simply dictating the text of the release to his counterpart at BPH.
Many departments migrated wholesale to one or the other of the banks, but Pekao had final call on cherry-picking the best staff for itself.
Towards approval
Before the merger could get final regulatory approval, UniCredit had to sell off the remaining rump of BPH to another investor, which left the bank in a very weak negotiating position.
In the end, the leftover part of BPH was bought by GE Money of the US for €625m, in a transaction that will probably be finalised in the first quarter of this year.
The new bank will continue to be managed by Jozef Wancer, BPH’s CEO, who has pledged to swiftly rebuild his bank’s corporate banking and investment business. Still, the new bank will no longer be the competitive threat that BPH had been before the merger.
“GE and BPH will be one-fifth the size of Pekao, it will be in a completely different category. It’s a bit like in football when you are dropped from the first to the second division,” says Mr Bielecki.
The merger gained official approval on October 3, and was consummated over the first weekend of December, when teams went in to rebrand the 285 BPH branches with Pekao’s bison logo.
The final steps of the complicated and multi-year merger dance will take place this year, with the transfer of BPH’s computer system to that used by Pekao, and with the issuing of new account numbers to the former clients of BPH.
Leading position
The end result has left Mr Bielecki as the dominant player in Poland’s banking market, instead of being left without a job in a bank controlled by Bank Austria. Pekao has now passed the government owned PKO BP as the country’s largest.
The journey was as unexpected as his swift rise to head the Polish government in 1991. An activist in the anti- communist Solidarity labour union and active in the underground movement during martial law, Mr Bielecki spent time in prison for his activities.
He also set up a business consulting firm in Gdansk during the 1980s, which in addition to making money served as a front for underground activities such as importing printing presses to publish anti-government materials.
A newly elected MP, he was selected to head the government by Lech Walesa, Poland’s first post-communist president, where he brought an antipathy toward state ownership and an economic liberalism that helped Poland to its first economic boom, but also ended up alienating many voters hurt by the radical changes.
Mr Bielecki then spent a decade in London working for the European Bank for Reconstruction and Development, returning to Poland in 2003 to head Pekao. He retains a keen interest in politics, and is a close friend of Donald Tusk, Poland’s new prime minister, but for now his main task is to continue Pekao’s record-breaking profits in what promises to be a more difficult business environment this year.
