If there were a Grand Prix for bank chairmen, Albrecht Schmidt would be champion of Germany, having left Germany’s bankers trailing in his wake. Rupert Wright interviewed him in Munich.
At a gathering of the International Monetary Committee in Philadelphia in 1999, the two chairmen of central Europe’s biggest banks decided to hold a meeting of their own.
In a small room off the conference hall, Albrecht Schmidt, chairman of HypoVereinsbank, and Gerhard Randa, chairman of Bank Austria, first discussed the idea of merging their two banks.
This initial meeting was followed by a series of clandestine meetings in small hotels and country houses around central Europe. At one time, Mr Schmidt had to disguise himself in a baseball cap so that analysts did not spot him.
“We had to be sure we had the willingness to work together, that Bank Austria was the right partner, that this was the right opportunity, and that we shared the same business model,” says Mr Schmidt.
“This takes a lot of time to discover. It is no surprise to everybody that in banking terms we were not big enough to bring the best prices to the market or attract the best people. Bank Austria was in a similar position.”
Secrecy was one of the keys to pulling off the deal. In Bavaria, they are reluctant to criticise their colleagues in Frankfurt, but they acknowledge that it is difficult to pull off a merger or takeover when everybody knows about the deal. Mr Schmidt says that it is an advantage not to be in the spotlight in Frankfurt, but to be treated as a regional player.
This year has been spectacular for collapsed deals. It has been almost like watching a Grand Prix race just for the crashes. There have been plenty of spills: Deutsche Bank has failed to merge with Dresdner Bank; Dresdner Bank has also failed to merge with Commerzbank.
“It is hard to pull off a deal when only the basic agreement is in place,” says Marcus Fell, head of strategic development at HypoVereinsbank, who was one of the major players in the Bank Austria deal. Mr Fell took his devotion to secrecy so seriously that his Austrian wife only learned about the deal when it was announced on the news.
For a number of years, Mr Schmidt’s mantra has been to create a bank of the regions. He realised that he could not compete with Frankfurt or foreign banks at corporate finance or complicated structures. He and his colleagues decided to concentrate on regional businesses, offer them relationship banking and integrated corporate finance, and focus on private banking.
His strength is to rely on local managers to run the business. “All you need are three things – a clear strategy, a commitment to controlling risk, and one transaction platform.”
Despite acquiring businesses in the Netherlands, Switzerland and central Europe, HypoVereinsbank business was still based primarily in Germany. Up to 90 per cent of its branches are in Germany, and more than 80 per cent of its earnings. Mr Schmidt says that after these initial meetings it became clear that HypoVereinsbank and Bank Austria had similar business models.
The two chairmen could work together. There are close cultural links between Bavaria and Austria. Munich is closer to Salzburg than Frankfurt; Vienna is closer than Hamburg. The languages are similar. The question was: could they pull off the deal?
“Here in the hub of Europe, it was a nice idea to have a cross-border deal but we discussed more than 14 models before we found a structure that would be acceptable.”
Model 14, or Viaranter Vierzehn, as it was called in German, was an all-share offer. Because the deal was a cross-border bid, it would sidestep Austrian law that insists that all-share offers must be matched by a cash offer. Mr Fell is reluctant to discuss some of the other models or varianter, but will admit that they looked at boosting the capital of their Austrian subsidiary and having that make the deal with Bank Austria.
Another alternative was a plain vanilla offer. Politics threatened to put a stop to the deal in the autumn of 1999. The fear was that the isolation of Jörg Haider’s Freedom Party could provoke EU bureaucrats to derail things. At the same time, the current Austrian government is more open to foreign takeovers than some of its predecessors.
After the Austrian elections last October, Mr Fell and two colleagues, Dr Dietrich Munich, the legal adviser, and Günter Ernst began working on the deal in earnest, looking for ways round the problems. In February, JP Morgan was hired to help. Bank Austria got Goldman Sachs to help it develop a strategy.
“If you have a good idea then you have to find the right form of transaction,” says Mr Schmidt. “On the other hand, you need a good legal structure, capital markets story and acceptance from politicians and shareholders. Austrian culture could have been against the deal. Even in 1997 the Austrians were against the idea of Creditanstalt falling into foreign hands. There was a lot of activity against every foreign bid. Fortunately, the Austrian market is now more open-minded.”
Mr Fell, who describes the deal as a cross between a merger and a takeover, is convinced that everybody got a good result. The offer was to swap one HypoVereinsbank share for every Bank Austria share. Shareholders in Bank Austria thus got a 25 per cent premium on the share price, plus a chance to share in the growth of the new enlarged group.
HypoVereinsbank got an attractive deal, with the chance of enhancing earnings from day one. The new group will be the third biggest bank in Europe in terms of assets and the seventh largest in the world. It will be the fifth biggest in Europe in terms of equity and, probably the most important, twelfth biggest in terms of market capitalisation.
It will have 8 million customers, 2000 branches and 65,000 employees. It was the speed of the deal that left Mr Schmidt’s rivals floundering behind him. He attributes this to the fact that so much was done before the deal was made public. But the clearing of potentially fatal regulatory hurdles with a minimum of delay was just one of the deal’s notable features.
Equally impressive was the fact that the offer price was well below the e85 peak that Bank Austria shares hit in 1998. Bank Austria is being acquired at about 12 times current year’s earnings, a lower multiple than that attached to the privatisation of PSK, an Austrian savings bank with a less attractive banking franchise.
Another potential difficulty was the role of WestLB in the deal. WestLB had acquired a 10 per cent stake in Bank Austria, possibly as a springboard for a takeover of its own. When the announcement of HypoVereinsbank’s offer was made, WestLB said publicly that it would wait to consider how it would vote.
However, when it became clear that both sides wanted the deal to go ahead, and if it did not Bank Austria’s share price would plummet, WestLB had no option but to come on board. “This was a good deal,” says John Leonard, European banking analyst at Schroder Salomon Smith Barney.
“The offer of e67 ($57) was a large premium to where Bank Austria was trading at e50, and we would not have counted some of the synergies, but they did well to pull off the deal.”
HypoVereinsbank is claiming that the new group will have cost savings of e500m in the first year. Mr Leonard claims that Bank Austria already had e175m in savings earmarked. But Mr Schmidt declares himself happy with the conclusion of the deal, and the figures.
“A lot of people had a lot of concerns, shareholders had to agree; politicians; and the capital markets,” he says. “But now it is up to us to make the deal work.”
He says that with feeling. For although most people will admit that the three-year-old merger between Bayerische Vereinsbank and Bayerische Hypotheken-und Wechsel-Bank has been successful from a personnel point of view, from a business view it contained some nasty surprises.
As Germany was flushed with excitement at the reunification of the country at the beginning of the 1990s, senior management at Hypotheken decided that what the new Germany would need was land. They began an aggressive programme of land buying, particularly in eastern Germany, financing it by a complicated structure involving affiliate companies.
From a business point of view, this looked fine at the time of the merger because these loans were commanding good interest payments. However, when the price of land collapsed in 1995 onwards, the loans were not marked down.
Hypotheken’s enormous property loan portfolio was worth much less than had been attributed to it at the time of the merger. HypoVereinsbank suddenly acquired a black hole of losses: it was announced that they would need to make provisions of DM3.5bn ($1.5bn), which went up to DM5bn at the end of last year. “Because of what happened before, I was sure we were not going to make the same mistake again,” says Mr Schmidt.
“Last time I was very angry when I discovered what had happened. But everybody can make a mistake. I only made one mistake in my life, but this was enough. This time we went deeper into Bank Austria’s books with the help of accountants. All we discovered that we did not like were losses in Russia, in GKO bonds. The other problem is loans to mid-sized companies in the US.”
Mr Schmidt is banking that the new deal will help HypoVereinsbank become even more integrated. “We think this deal will help our own merger in Bavaria to work better,” he says. “The integration has gone very well. Now it is like a sport, in which two competitors have to work together to compete against another team.”
The new bank has a dominant position in central Europe. Together they will have the third biggest bank in Poland, and the largest under foreign ownership. Bank Austria owns PBK, which is based in Warsaw. HypoVereinsbank owns BPH, which is based in Krakow. When they are combined, which is not expected to be complete until 2002, they will have more than 2m customers, with more than 10 per cent of the banking market.
“I would say our biggest challenge is in Poland,” says Mr Schmidt. “Yes it is a good opportunity because there are 40m people in Poland. But it is also a place where there is much change and risk potential.”
Mr Leonard says that the most interesting opportunity is the overlap in Poland. “Poland has always been touchy about foreign ownership of banks. If HypoVereinsbank can make this work, whether it retains different front offices but just combines the back offices, there will be real opportunity.” In the Czech Republic, the new group will be number four in the country, again the biggest foreign bank in the country. In Hungary, Bank Austria is more dominant. The same holds for Slovakia.
All this integration has been planned on a slow-burn timetable. The major market of Austria will dominate the initial proceedings. Everything is planned to happen there by the end of 2001. By 2003 the merger will be complete. “Have we got enough management capacity to make this deal work?” asks Mr Schmidt. “I would say ‘yes’, but I am the one driving the bus. You will have to ask the people on the bus.”
Some of the people on the bus, including Marcus Fell, are convinced that they have the will and the knowledge to make the deal work. “If you look at what happened with the merger three years ago, you have to say it was a success,” he says. “We did not lose staff, we did not lose clients, and we now have one IT system. Everything was achieved before we anticipated [that it would be]. I think we can do the same with the new deal, and this gives us a great opportunity. We are convinced by the growth potential of the central European countries.
They will become members of the European Union, maybe not today or tomorrow, but the day after.” While the people on the bus are trying to make the deal work, the driver is looking for other places to go. Although Mr Schmidt is 62, and the rules of the bank say that he must resign as chairman at the age of 65, he shows little signs of slowing down.
He has few interests outside work, apart from classical music. “We are thinking about the next step. In business you do not have time for a nice sleep. You have time to discuss and plan the next step, but you have to be active in this direction. But do you have enough management capacity to prepare and realise such a step?”
He does not rule out a deal with a Frankfurt-based bank, but he does not think any of the banks have a similar business vision to his. For example, Deutsche Bank’s global investment banking business is not compatible with his regional business. “If there were a bank with a similar business model, then we would consider it.”
It is not the geographical fit that needs to work, so much as the business model. A London-based banking analyst thinks that while there are Italian banks such as Credito, which would go well with HypoVereinsbank, there are deals in Spain, Scandinavia, Ireland and even Scotland that might tempt the management of HypoVereinsbank.
“Spain’s Banco Popular Español could be a target; so could the Bank of Scotland in the United Kingdom. They would also probably like to get their hands on Dresdner or Commerzbank’s branch network, but they would not want the other parts of the banks,” says the analyst.
Mr Schmidt will not comment on particular deals or targets, but this is one bank chairman reluctant to go quietly.