The European Commission’s review of the Royal Bank of Scotland/Santander/Fortis bid for ABN AMRO could make it easier for banks to navigate the regulatory risks involved in high-profile takeovers, providing the lessons are taken on board.
Merger regulation carried out at a European level is less prone to national interference, even if financial probity issues remain with national capitals, but Brussels will be thorough to the point of pedantry in its reviews.
As in any industry, antitrust regulators become more sophisticated with each review carried out and it should be no surprise that, in the case of a hostile deal or one in which rival bids are vying for control, the commission will be amply assisted in its research. A fact of life in industrial mergers, acquisitive banks need to recognise that their rivals will work diligently and quietly – often through third parties – with resource-strapped regulators to raise potential or perceived problems.
Close inspection
The review of the Fortis part of the joint bid for ABN AMRO showed how closely European regulators were working with their national counterparts in drilling down to individual markets, even to the provincial or local level. In that review, regulators examined Fortis’ attempts in the previous years to grab market share from its bigger rivals, and the commission was aided in that task by going back over very public pronouncements in years past that appeared to underline the bank’s role in the market. To some extent, this issue was exacerbated by the commission dealing with a relatively concentrated market that was also very competitive.
There is little that a bank, or any company, can do about information that is in the public domain, particularly in the internet age when that information is not just recorded but easily accessible. With cross-border and national consolidation likely to take some years to wind its way through the industry, banks need to be cautious in their marketing, particularly where they are portraying themselves as the price-cutting David against an industry Goliath.
Hostile, or at least unwelcome, mergers are more prone to difficulties, particularly in attempting to get though in a short time at Phase 1 antitrust review, the standard 25-day merger examination. Third parties – including the target – are required to answer questions put by commission regulators that can be quite detailed, as in the Fortis case. And if the commission does not get the information required or still has concerns, it has little choice but to suspend the review or open a full four-month probe.
The regulatory environment in the financial services industry is anything but benign.
‘Outrageous profits’
Competition commissioner Neelie Kroes has consistently targeted financial services, from retail banking to payment systems and clearing and settlement, for regulatory scrutiny. Indeed, in language that harked back to a time when politics was more complicated and debate simpler, she kicked off her review of the financial services sector shortly after coming to power with an attack on “outrageous” bank profits.
The final quarter of 2007 will be particularly insightful as the commission works through a green paper on retail banking, the final report on business insurance and a decision against MasterCard on interchange fees with serious implications for the entire payments industry. Antitrust officials are also pressing for answers from the European Payments Council, a forum of Europe’s banks and banking associations, over standard setting for the use of payment cards in Europe’s nascent single payments area.
And it is not just the antitrust officials who are sharpening their pencils. Single market commissioner Charlie McCreevy has until now taken a soft approach to regulation and a tougher line on enforcement. That could change. To date, the Commission has resisted calls from some member states for tighter control of hedge funds, private equity and ratings agencies – but one significant event could trigger a change.
As the subprime meltdown shows, events can move swiftly and banks need to quickly take advantage of opportunities. The financial services sector, however, will be increasingly scrutinised with all the risks that such scrutiny entails.
Robert McLeod is founder and editor-in-chief of MLex market intelligence.
