BBVA, the Spanish bank, was recently frustrated in its attempt to acquire Italy’s Banco Nazionale del Lavoro (BNL). The case demonstrates, once again, the protectionist and nationalist ways of regulatory agencies in some countries. BBVA’s abortive attempt to buy BNL has reawakened debate about whether it makes sense to protect foreign markets against foreign companies and whether this sort of protectionism conflicts with the goal of creating a unified Europe.


On July 22, 2005, BBVA, Spain’s second-largest bank, ended its Italian adventure, a mere four months after it began. BBVA said that it would not go ahead with its previously announced offer for Italy’s BNL. From the start, BBVA, which is headed by Francisco González, found itself on a collision course because of Antonio Fazio, governor of the Bank of Italy. Fazio has the power to approve corporate takeovers within the banking sector. However, Fazio is credited with having promoted the idea of a counter-offer in order to prevent BNL, Italy’s sixth-largest institution, from falling into foreign hands.


The battle, which involved more than merely financial institutions, was ultimately won by the Italian bank. BBVA withdrew from what had been its largest financial deal ever. Its takeover of BNL would have brought some competitiveness into Italy’s banking system, which is not very efficient. BNL will now remain in Italy under the control of Unipol, a small Italian insurance company. However, Unipol may not have enough skills to manage BNL, nor the scale to compete in Europe.  


A Never-Ending Tale


The story of Italy’s indifference to BBVA is hardly something new. As early as 1999, BBVA attempted to merge with Unicredito, Italy’s second-largest institution. That would have been the first cross-border banking deal in Europe. However, after the agreement was finalized, it was aborted because of opposition by the Bank of Italy, which feared that BNL would become a mere division of BBVA. Fazio’s power was also a factor when the Dutch bank ABN Amro attempted to purchase Banca Antonveneta, a mere 10 days before BBVA announced its offer for BNL. On that occasion, an Italian competitor also showed up to prevent a foreign takeover. It was Banca Popolare di Lodi, a modestly sized institution whose managing director is a friend of Fazio.


Fazio’s detractors complain that, during the two takeover offers, he helped the Italian banks, not the foreign banks. Moreover, the powerful governor of the Bank of Italy is known for displaying his opposition to opening the door to mergers with foreign institutions. Fazio’s behavior has attracted the attention of the European Union, which has spent quite a lot of time promoting the idea of cross-border mergers between banks in an effort to create a unified European banking system with major players that can compete with their U.S. counterparts. Although Europe is in a position to find out if Fazio has intervened unfairly against these takeover offers, it will be hard for the E.U. to make a decision. They would have to demonstrate a clear conflict with E.U. regulations regarding market competition.


A Protectionist Mentality


What could Italy gain from closing its own borders? Doesn’t the protectionist mentality of Italian regulators contradict the idea of a unified Europe? “A protectionist ideology still exists, although it is passé in the context of an integrated Europe,” notes Wharton management professor Mauro Guillén. In reality, the topic of protection comes up often in the speeches of politicians and business leaders who believe that it is important to safeguard the system against foreign arrivals. Those arguments have little validity for economists. Not only do they not believe in the role of the so-called Paternal State; they wonder why more efforts have not been made to improve the competitiveness and efficiency of Italy’s banking system, which is one of the most expensive in Europe, in terms of the costs incurred by customers.


In Italy, Guillén adds, “some institutions and individuals apparently do not understand that consumers are harmed when foreign institutions are restricted from coming into a market. Italian banks are not very competitive, and there is nothing wrong when a foreign bank brings in capital and knowledge for restructuring [Italian banks].” Alvaro Cuervo, professor of international business at the University of South Carolina, agrees. “The result of this opposition is that consumers in that country lose out, because there is lower quality and less variety of products and services as a result of less competition. In addition, shareholders of the company lose the opportunity to get a higher price when there are fewer potential buyers.”


It is not only the Italian banking system that loses its competitiveness. Italy itself is damaged by the protectionist character of its regulators, according to some observers. Participants in the Italian financial system agree that the opaque way of doing business in the country occasionally acts as a force that dissuades foreign investors. Addressing the Italian parliament, Luca Cordero di Montezemolo, president of Confindustria, the Italian confederation of business organizations, said, “What happened in recent months in the Italian banking system has not contributed to building a good image of our country abroad.”


“One lesson that Italy can learn from this enormous protectionism is that its economy has not been very competitive with the rest of Europe for ten years,” suggested an article in The Financial Times. “Another lesson is that, apparently, its economic, political and judicial systems don’t get along very well with each other.” Their article was entitled, “A Cloud over the Bank of Italy: A Proud Institution is Battered by Controversy.”


Nevertheless, Italy is clearly looking for assistance from outside its borders. Both Banca Popolare di Lodi and Unipol have joined forces with foreign investment banks in an effort to raise funds. Both banks need guarantees because they are smaller than their takeover targets (Antonveneta and BNL, respectively). In addition, although Lodi has cloaked its counter-offer with the Italian flag — changing its name (Lodi) to include a reference to the country (Banca Popolare Italiana) during the process — Lodi is counting on the support of a consortium of ten banks, including Dresdner Bank, Deutsche Bank, BNP Paribas and Royal Bank of Scotland — which are prepared to deliver €4.9 billion. For its part, Unipol is counting on a bridge credit of €4.3 billion from a consortium headed by Credit Suisse, Deutsche Bank and Nomura.


National Pride


If Italians are known for their protectionism, the French are known for boasting about their national pride. The latest example of that came in a case involving PepsiCo and Danone. Days before PepsiCo, the U.S. soft drink and snack manufacturer, announced its intention to acquire Danone, French authorities revealed their opposition to any takeover attempt. Patrick Ollier, president of the French parliament’s economic affairs committee, told the press that the executive branch could use CDC, a public-sector bank, to thwart any takeover attempt by a foreign company. “I think it is scandalous to watch the jewels of French industry move overseas, especially under the Pepsi Cola brand; we are talking about Danone, a symbol of French dairy products and national quality,” Ollier told Les Echos, a French daily.


The takeover attempt by PepsiCo was regarded as a matter of national pride. Jacques Chirac, president of France, declared that “The government and I are particularly vigilant, and motivated by Danone.” Prime minister Dominique de Villepin noted that “Danone is one of the jewels of France, and we will defend our interests.” For his part, French interior minister Nicolas Sarkozy suggested that “Europe needs an emergency strategy to deal with industries that are emblematic” of Europe.


When all was said and done, there was the usual outcome. National interests held sway over the laws of the free marketplace. PepsiCo withdrew its offer for Danone because of political pressures and intervention by the French government. “If PepsiCo had taken over Danone, it would have been viewed as a national affront, following France’s failure to win the competition to become the seat of the 2012 Olympic Games,” wrote the Financial Times.


A similar campaign, equally based on patriotism, took place last year against Novartis, the Swiss pharmaceutical firm, when it attempted to buy Aventis, the French research firm. Novartis had to withdraw its offer as a result of pressure from the French government and a counter-offer from Sanofi-Synthélabo, another French pharmaceutical firm. Once again, chauvinism triumphed. For all that, France has shown less antagonism against foreign firms when lesser-known French companies were involved. For example, Colonial and Metrovacesa, two Spanish real estate firms, faced no barriers when they acquired the assets of French firms. Colonial acquired Société Foncière Lyonnaise, and Metrovacesa took control of Gecina.


Isolated Fears


France and Italy are not the only countries that have dedicated themselves to protecting their own companies. Making a takeover offer in a foreign country always stirs up some apprehension. “Governments can be suspicious of outside companies because of the simple desire to preserve their independence, and to avoid having their assets and key sectors controlled by foreigners,” notes Cuervo. “Another reason for their fears is the likely increase in competition that will result; that’s why local companies put pressure [on their governments] to prevent the takeover. A third obstacle is economic nationalism on the part of the government, which wants to have large national companies — national champions that demonstrate the importance of their country in comparisons with other countries.”


Although some countries are more likely to prevent foreign companies from entering their markets, every country is fearful of the unknown to some extent. Normally, countries block incoming foreigners only in isolated cases. In the United States, for example, CNOOC, the Chinese oil firm, tried to buy Unocal, the American oil firm. The deal wound up failing because some American leaders believed that the deal could potentially undermine U.S. security. “The justification for opposing the purchase of Unocal was to avoid control of a strategic asset like petroleum,” explains Guillén. “The problem with this justification is that petroleum is a product that is not differentiated, and it makes very little difference who owns Unocal. Besides, petroleum has an international price. In addition, most of Unocal’s assets are in Asia.”


Another case of protectionism unfolded when Lenovo, a Chinese computer company, made a bid to acquire IBM’s personal computer division. The bid provoked suspicions in the U.S. that Lenovo would use its seats on the IBM board to engage in industrial espionage. Ultimately, the Chinese company did manage to take over the IBM division, however. In Spain, there have been similar cases, including several years ago when two Portuguese companies were thwarted in their attempts to acquire Banco Atlántico, a Spanish bank, and Hidrocantábrico, an electricity provider.