The environment is ripe for continental consolidation this year and everything points to there being some mega cross-border deals.
For an age it seemed like an idea whose time would never come, and the standard CEO response to the great European cross-border banking merger was “one day but not now”. Suddenly the race is on for continental consolidation and 2006 could be the year in which several mega-deals are sealed.
The decision by France’s BNP Paribas to move in on Italy’s Banca Nazionale del Lavoro (BNL) is the event that turned an occasional deal into a trend. Indeed, BNP’s CEO Baudouin Prot seemed to be in the “wait and see” camp right up until the deal’s announcement, having responded dispassionately to UniCredit’s purchase of HVB last year. His conversion can be seen as marking open season in European M&A.
With hindsight, the true kick-starter of the process was Spain’s Santander, with its purchase of the UK’s Abbey in 2004, a deal that turned the theory of cross-border mergers on its head. Previously, the industry was negative on cross-border transactions, on the basis that national regulators would resist them and that the cost and revenue synergies possible in a domestic merger were not readily realisable.
The Santander-Abbey deal showed that the opposite could be true. First, UK banks did not bid for Abbey because they feared the UK competition authorities would reject them and second, Santander’s use of its IT platform and products at Abbey has achieved considerable financial results.
Upturn expected
UniCredit/HVB cannot be seen in quite the same light because the east European dimension involves a series of in-country mergers, but BNP/BNL paves the way for cross-border activity on a grand scale. A recent financial study revealed 60% of bank CEOs expect an upturn in strategic acquisitions and such sentiments are particularly strong among European bosses.
Changed environment
What has changed? Three things. First, EU regulators are pushing consolidation as shown by commissioner for the internal market and services Charlie McCreevy’s tough stance in Italy. Second, the euro’s entrenchment in western Europe and imminent expansion eastwards has made retail banking, consumer finance and asset management easy to replicate across borders. And third, the adoption of common accounting standards is making valuation much easier.
The time for talking is over. Some markets, such as Germany, stand out as candidates for consolidation. Expect some key deal announcements in 2006.
