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Western EuropeOctober 5 2008

Italians reap the benefits of buyouts

Two years of consolidation have transformed the landscape of Italian banking – and in the process the country’s financial institutions have become experts in extracting maximum value from merging companies. Writer David Lane.
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Will they? Won’t they? This summer’s spe­culation that Italy’s fourth and fifth largest banks, Banco Popolare and UBI Banca, will decide to tie the knot and overtake Monte dei Paschi di Siena into third place in the national rankings just refuses to die.

“We believe a potential combination between UBI and Banco Popolare would be backed by a strong strategic rationale and would be relatively simple to finalise as both players are co-operative banks,” Elena Perini, an equities analyst at Dresdner Kleinwort in Milan, noted at the end of June.

Despite assertions that the two banks were not in contact, the rumours have continued and, unveiling interim figures at the end of August, UBI managing director Giampiero Auletta Armenise did not dampen speculation about where the bank’s ambitions might lie when he said that a strong capital base allows it to consider acquisitions. Both UBI and Banco Popolare are themselves the results of the massive wave of consolidation that has swept through Italian banking, particularly in the past two years.

Born in April 2007, UBI brought together two banking groups, BPU Banca and Banca Lombarda e Piemontese, that were themselves the results of series of takeovers and mergers. Who now remembers Credito Varesino, Banca Popolare di Bergamo and Banca Popolare di Ancona, which were among the banks that formed BPU Banca? And the genesis of Banca Lombarda e Piemontese is still more complex; its component banks included Credito Agrario Bresciano, Banca San Paolo di Brescia and the Banca Regionale Europea, which itself merged the Cassa di Risparmio di Cuneo with a group of banks with origins in the Middle Ages that included Milan’s oldest bank, the Banca del Monte di Milano, founded in 1483.

Born three months after UBI, from the merger of Banca Popolare di Verona e Novara (BPVN) and Banca Popolare Italiana (BPI, formerly Banca Popolare di Lodi), Banco Popolare has an equally colourful pedigree. Joining forces in the wake of the scandal that hit Banca Popolare di Lodi, it had already brought together a varied col­lection of savings banks (Lucca, Pisa, Livorno and Pescara) and co-operative banks (Crema, Cremona, Mantova and San ­Geminiano e Santo Prospero).

The big banks at the top of the rankings have become far bigger under the impact of the consolidation that has happened since the surprise announcement in August 2006 that Banca Intesa and San Paolo IMI had agreed to merge. That deal gave the resulting Intesa Sanpaolo, then with 5700 branches within Italy (net of disposals to Crédit Agricole), a network almost twice as extensive as that of second-placed UniCredit.

Network expansion

The announcement three months later that the banks ranked sixth (BPVN with 1240 branches) and ninth (BPI with 975 branches) would merge to create Banco Popolare took this into third place above UBI, Capitalia and Monte dei Paschi di Siena. Subsequent takeovers of Capitalia by UniCredit and Banca Antoniana Popolare Veneta (Antonveneta) by Monte dei Paschi di Siena, put UniCredit firmly in second place with about 5000 branches and lifted Monte dei Paschi di Siena back into third.

Italy’s bankers can fairly claim to have accumulated unrivalled experience of bringing banks together and, as results have shown, squeezing synergies from their deals. A generation of senior and middle managers has overcome the challenges of deciding who should have which jobs and who should be left out, which branches should be kept and which should be sold or closed, how two or more accounting systems should be fused into one and how the integration of information systems should be tackled.

Information technology provides the brain, the heart and the nervous system of today’s banks and, not surprisingly, keeping them thinking, beating and responding has been a priority in all the mergers that have revolutionised Italian banking.

Choose the right platform

“Making the choice is rather like choosing a goalkeeper for a football team. The coach can only choose one,” says Francesco Micheli, the general manager responsible for overseeing the merger of Banca Intesa and Sanpaolo IMI. The systems of either bank could have served the merged business but Mr Micheli and his team opted for the one used by ­Sanpaolo IMI. “We looked at costs, complexity and sophistication and it turned out to be an easy choice. Sanpaolo IMI’s IT system was less advanced but it was simpler and less expensive.” Migration onto the chosen system was completed in July.

“The satisfactory transfer of IT is a ­primary condition to obtain synergies,” explained Marco Morelli, CFO at Monte dei Paschi di Siena, as his bank embarked on its takeover of Antonveneta. And the Sienese bank, which lays claim to being the world’s oldest, snatched another record on June 3, 2008, when, three days after it closed its purchase, it announced that it had transferred its information system across to the Padua-based subsidiary.

The work involved Antonveneta’s network of more than 1000 branches, 11,000 workstations, 1100 ATMs and its 9200 employees. “This kind of operation requires a huge training effort,” noted Mr Morelli.

“Migration of the ex-BPI’s information system onto our platform is an indispensable condition for aligning commercial structures and obtaining revenue and cost synergies,” says Marco Franceschini, the head of corporate centre at Banca Popolare in Verona. Banca Popolare di Crema was the first of the BPI group to switch, just two months after the merger, and one by one the others followed, the work being completed in February.

And Mr Auletta has attached the same importance to tackling IT integration at UBI as Mr Franceschini has at Banco Popolare. The former Banca Lombarda’s mainframe central system was chosen as this was considered the most robust and thought to provide the best guarantees during the tricky phase of migration. This has been reinforced by the best parts of the former BPU’s platform to beef up commercial management.

“Knowing the profitability of different relationships helps account managers,” observes Mr Auletta. The bank set up UBI Sistemi e Servizi last October as a specialist subsidiary to manage all the bank’s IT and back-office functions.

Tackling the IT issue was a priority at UniCredit when it acquired Capitalia in a deal announced in May last year, but there was no discussion about whose system would be used: that was a foregone conclusion.

“Capitalia’s system had hit a dead end in terms of innovation,” explains UniCredit deputy CEO Paolo Fiorentino. And the Milanese bank had no doubts about its ability to deal with the challenge of bringing the banks in the Capitalia group onto its platform.

“We have great experience in these matters. We know how to achieve successful IT integration,” says Mr Fiorentino. The big step of transferring Banco di Roma onto UniCredit’s system was completed in August and with the migration of Banco di Sicilia in November, all of the former Capitalia group will be using it.

Who stays and who goes?

According to Mr Fiorentino, getting the best out of mergers and turning paper synergies into solid profits requires tackling two issues above all. The IT choice is one. The other is staff, deciding who should stay and who should go. That job is probably easier where consolidation is the result of takeovers rather than mergers where the two banks partner as equals.

“Ours is a purely industrial plan,” remarks Mr Fiorentino of his bank’s integration of Capitalia. So no political equilibrium needed to be considered, no regional sensitivities taken into account and no compromises made.

“We had to move rapidly to identify those managers who were not up to scratch, didn’t fit or were simply surplus, and to cut them out,” says Mr Fiorentino. Very soon after the takeover was completed, almost all of ­Capitalia’s 15-strong top management tier had gone and about a third of the 350 who manned the third tier followed. By the end of this year, 4400 employees will have left and UniCredit’s payroll will be cut by a further 3400 by 2010.

Union involvement

Yet action affecting staff needs to be taken carefully. Keeping trade unions fully in the picture is essential and UniCredit acted quickly to reach agreement with them on how staff reductions should be managed. Employment law in Italy leans heavily in the employees’ favour and simply declaring staff redundant is not an option. “Employees must be offered a fair exit package,” notes Mr Fiorentino.

He adds that staff of a certain age have difficulty in accepting change and that staff in head offices are most resistant to change, “with reason, as their jobs are threatened by mergers”. Indeed, head offices, such as information systems and back offices, are the very places where cost synergies are won.

The situation that Monte dei Paschi di Siena found when it took over Antonveneta was different. Staff at the Padua-based bank had suffered more than three years of almost complete uncertainty. First, Banca Popolare di Lodi and ABN AMRO fought over it, in a battle eventually won by the Dutch bank. Then ABN AMRO itself became prey, and Antonveneta passed to Spain’s Banco Santander before being sold on to the Sienese bank.

“Staff welcome the stability that we bring and know that we can rebuild its regional ties. Regional banking is in our genes. Serving our region is something we do well,” says Mr Morelli.

In sharp contrast to UniCredit, for which Capitalia’s top management tiers were a burden, the merger that created UBI led to few reductions at those levels. But clearly cutting staff was one of the bank’s aims and 1700 employees will go by 2010 to leave a total payroll of 20,000. Staff numbers at Banco Popolare will be lightened by 1350 through incentives that all Italian banks use to encourage employees, generally older ones nearing retirement, to leave.

Meanwhile, although Intesa Sanpaolo’s creation was described as a merger of equals, it was Banca Intesa’s management evaluation that was used to decide who would stay and who would go when the merger became effective at the beginning of 2007.

“The two banks together had 1300 senior executives, and 350 went within six months of the merger. It was important to act quickly,” says Mr Micheli at Intesa Sanpaolo. He describes Sanpaolo IMI’s management as good in the branch network but less good in the centre, while Banca Intesa’s was the opposite.

“People said that we couldn’t do anything before the moment that the two banks became one, but during the autumn of 2006 we reached agreement with the trade unions for 4000 of the merged bank’s 75,000 employees to leave, on a voluntary basis,” he observes.

Another agreement in August last year involved a further 2300 and the bank is thinking that a further 2000 employees are surplus to requirements. From next year, staff cuts will be worth €425m annually, a substantial part of the total annual cost synergies of €1.1bn.

Right place, right time

The integration of IT and back-office functions, staff reductions, particularly in head office, and generally the cutting of duplication are the main areas where managers, in Italian banking as much as anywhere, look to obtain the synergies that make consolidation worthwhile.

Bank mergers may also offer the opportunity to rationalise branch networks. In the not-so-distant past, mergers were more often between banks with complementary networks, but as Italian banks have grown bigger and less regionally focused, so overlaps have increased.

“The competition authority told us to get rid of 185 branches and told us the regions where our cuts should be made,” says UniCredit’s Mr Fiorentino. Not surprisingly, Sicily and Lazio, the region around Rome, are regions where UniCredit has been required to cut back most.

With the networks of San Paolo IMI and Banca Intesa both concentrated in the north and north-west, the bank created from the merger was called on to make serious cuts. But Intesa Sanpaolo’s job of trimming its network was made easier by the deal under which Crédit Agricole, one of Banca Intesa’s shareholders, was sold about 650 bran­ches, including those of Cariparma and ­Friuladria, parts of Banca Intesa itself with networks around Parma and in Italy’s north-eastern corner. In addition, the competition authority required Intesa Sanpaolo to dispose of almost 200 more.

Italy’s competition authority has obviously been closely involved as mergers and acquisitions have changed the face of the country’s banking system. Indeed, as The Banker went to press, Monte dei Paschi di Siena was finalising the sale of the 150 branches whose divestment the regulator had set as a condition for the Sienese bank’s takeover of Antonveneta. (Last December, Monte dei Paschi di Siena bought Intesa Sanpalo’s controlling stake in Biverbanca, a bank rooted in the north-west.)

And in approving the creation of UBI, the authority ordered the disposal of 61 branches located in the provinces of Bergamo and Brescia, where UBI had a market share of more than 35%.

Like Banca Intesa, UBI has kept the names of some of its constituent banks and this leads to important decisions when branches have to be cut.

“We have to be very careful as there is always a risk of losing customers when branches are closed. Our experience of brand loyalty tells us that we shouldn’t necessarily close the weaker of two branches with different names that are located near each other,” says Mr Auletta.

Measured on the number of branches involved, about 60% of Italian banking was swept into the great wave of consolidation that has taken place over the past two years. This sounds like a massive workload for managers and some exciting prospects for management consultants. Yet outsiders were used rather less than might have been expected.

“We called in McKinsey for advising on strategic choices but reckon that we have great internal delivery capacity within the bank itself,” says UBI’s Mr Auletta.

Intesa Sanpaolo’s Mr Micheli adds: “Accenture helped in the evaluation of the IT system but we used internal resources mainly.”

“We were tired of paying large fees to consultants and decided to form an internal consultancy group, hiring senior managers from consultancies to head it. We are keeping expertise in house rather than having it passed to competitors,” explains UniCredit’s Mr Fiorentino with a smile.

Italy’s largest banks are now digesting the mergers and acquisitions that have made news over the past two years. But while pressures for consolidation now seem less, few bankers would bet that the process is over. And when the next big deal is announced, the bankers involved will know just what is needed for squeezing the most from it.

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