On September 15, HBOS, a British bank that showed interest in bidding for Abbey, announced that it will not make any counter-offers for the sixth-largest British bank. Meanwhile, European officials who are responsible for monitoring competition approved the deal, arguing that the two banks are pursuing business in different markets.


In London, the two pieces of news were greeted with praise by Emilio Botín, president of Santander, another interested bidder for Abbey. Botín was in London’s City district trying to convince investors and analysts of the merits of the takeover. He told the press that the way was now clear for “the anticipated closing of the deal during the first half of November.” It will be the first major cross-border deal in the European banking sector, and it can be a done deal within days, barring any huge surprise.


The deal comes at a time when other global financial institutions are also making moves. In the United States, over the past year, J.P. Morgan Chase purchased Bank One, and Bank of America took over FleetBoston. In Japan, Mitsubishi Tokyo and Sumitomo Mitsui are involved in a fierce struggle to take control of UFJ Holdings, the fourth-largest banking institution in that country. In Europe, the million-dollar question is whether the acquisition of Abbey will be merely an isolated case, or the start of a significant process of concentration throughout Europe. Experts believe that the apparent success of the Abbey deal means it is open season for new deals.


A Tendency to Imitate

According to Altina Sebastián, associate professor at the Complutense University of Madrid, “By purchasing Abbey, Santander has taken the first step in a series of major deals in Europe, much as it has done many times in other areas such as its launch of successful products and its commitment to specific markets.”


Sebastián adds, “You have to realize that, in every sector, there is always a certain tendency toward imitation after a major institution has taken a new approach toward growth. You don’t have to be an expert in the financial sector to know that we are going to experience a period of big corporate deals. Everyone who does any work in the banking sector is going to be very busy in coming months.”


Manuel Romera, technical director for the financial sector at the Instituto de Empresa, agrees that the road has opened up for mergers and acquisitions, and European institutions will be the major players. “It is clear that there will be more cross-border deals from now on. It is obvious that the Santander deal is the beginning of a new situation, although we don’t know how far things are going to go.”


That doesn’t mean that the path will be entirely clear. According to Sebastián, managers of major European banks believe “we are in a period of major cross-border takeovers in Europe. However, there is a gap between what people say, and what they do. When you do a deal between two institutions in the same country, things are already quite complicated. When you have two different nationalities, things become even more complicated because of different cultures, the positions of regulatory agencies, and the meddling of politicians.”


Experts say it is too early to celebrate, although the acquisition of Abbey will convert Santander into the largest bank in the euro zone, the fourth-largest bank in Europe and the eighth-largest bank in the world in terms of market capitalization. “I have my doubts about the success of the deal,” says Romera. “But I’m not the only one who has doubts.” The market has already demonstrated that.  Santander’s share price has dropped about 13% this year, the worst performance of any major stock on the Spanish exchange. “There are a lot of barriers to overcome, such as the language barrier — although almost no one is giving it importance — and the different currencies involved. All you have to do is look at the problems generated by acquisitions done in Latin America.”


According to Sebastián, “The problems don’t stem from regulations but from everything that comes along with the deal. Some of the problems with the United Kingdom are greater because we don’t have the same currency. Another major challenge is trying to achieve synergies.” Santander’s arrival is going to eliminate about 3,000 jobs, according to the Spanish bank.


Santander has already announced it expects to achieve synergies of €560 million ($687 million) from increased savings and revenues, starting in the third year, largely as a result of improvements in information processing and cross-selling its products.


Timid Reactions

The other major institutions in the sector have reacted hesitantly. José Ignacio Goirigolzarri, managing director of BBVA, the second-largest Spanish bank, recently gave his reassurances that BBVA will not take part short-term “in a European process of consolidation.” However, he acknowledged that it is possible that BBVA will take part in such a process in the medium or long-term.


On several occasions, Goirigolzarri has declared that Santander’s acquisition of Abbey will not necessary lead to changes in BBVA’s strategy of “profitable growth.” The bank prefers to move in other latitudes. It has just agreed to acquire a Mexican bank, Hipotecaria Nacional, for $375 million, in an effort to consolidate its leadership in that country.

HBOS, a British bank, is another major player in
Europe. After showing on several occasions that it intended to make a counter-offer for Abbey, HBOS had everything in place to get fully involved in the takeover competition. However, HBOS withdrew its bid, sending the message that its strategy will continue to be based on organic growth. HBOS will make acquisitions only “when opportunities are available at a good price,” it said.


According to Romera, the withdrawal by HBOS made sense. “In 2001, another British bank, Lloyds, already tried to buy Abbey, and the move was rejected by the authorities. It would be absurd if the European Commission’s competition board now gave official approval to an offer from another bank from the U.K.


All this banking activity has generated an avalanche of speculation on European stock exchanges. One of the latest rumors involves the interest on the part of Bank of Scotland in Bankinter, a Spanish bank. The rumor was fed by existing relationships between the two institutions. Royal Bank of Scotland and Bankinter share 50% control of a “guaranteed direct line.”


German banks play a major role in other rumors that are now circulating. At the start of this fiscal year, Deutsche Bank had contacts with Citigroup, the largest bank in the world. Apparently those talks stopped because of pressure from various people who did not want to see Germany’s largest bank fall into foreign hands.


The Problems of German Banking

According to Sebastián, “the sale of a major German bank to an international institution would be a blow to German nationalist feeling. At the very least, to succeed, they would have to sell it as a merger between equals. It is a contradiction that Brussels is encouraging mergers but governments are imposing obstacles. We belong to Europe, but we are not all equal. There is no homogenization, even in regulations.”


Other difficulties are involved in making a deal in Germany beyond political barriers, according to Romera. “No international institution is interested in a German bank, except at a bargain price, because they are very inefficient. The price of the deal would have to be a real bargain, because no one wants to buy a [German] financial institution, for example, like Commerzbank.”


Sebastián sees another problem. “Santander has bought a product bank; Abbey specializes in mortgages. But German banks are involved in every sort of business. Moreover, the situation is very different from the British market. In Germany, the system is only slightly concentrated; it is very segmented because a large share of business belongs to regional banks. Germany’s banking system is very fragmented, and this has a lot to do with regulation in the country. It has rules of the game that it does not share with the rest of Europe, and this complicates things. Deutsche Bank now wants to restructure in order to improve the terms of its profitability.”


When it comes to upcoming deals, Romera is looking at Italy. “The next cross-border deal in Europe could involve an Italian bank. In Italy, the financial system is much more developed than in Germany.” Goirigolzarri, managing director of BBVA, recently denied that his bank is preparing to increase its capital in order to raise its ownership in BNL, an Italian bank. In 2000, conversations between the Spanish bank and another Italian bank, Unicredito, collapsed because of opposition of Italian authorities.


Sometimes, a failed deal can set the stage for a future move, notes Sebastián. “The experience is very important if you have made other acquisition attempts. You know where you have gone wrong and you try to keep from doing the same thing again. In addition, you have a better idea of the skills you can draw on again.” Sebastián adds that Spanish banks have an advantage because they have been very active in acquisitions, especially in Latin America.


In Sebastian’s view, the institutions in the best position to take advantage of this wave of mergers are those that have the most consolidated internal finances. “Spanish banks have a lot of tradition and experience, while Dutch banks also have a broad concentration. If they want to continue growing, they will have to move abroad.”


BaselII: The Normative Impulse

In years to come, all this hustle and bustle will be taking place on a trampoline.  Basel II, as the new agreement on banking capital is called, will set the stage for regulating the solvency of financial institutions throughout the world. According to Romera, “This is the first set of regulations whose essence is a banking philosophy. In contrast, Basel I was a summary of technical requirements.  With the new regulations, a system of risks is spelled out for the first time. It is the base on which institutions have to develop their models for the banking business.”


The final text of Basel II could emerge in a few months and go into effect at the end of 2006 or the start of 2007. Basel II rests on three pillars: First, to calculate credit risk, institutions can choose between a standard model that is similar to the current model but has a greater sensitivity to risk. Or they can create a system for measuring their own risk. Second, supervisors will have to perfect control systems because they will have to respond to the systems functioning in each bank. Finally, Basel II demands greater transparency of financial institutions, so that the market has complete knowledge of the models that each bank is following.


According to Romera, “Mergers will continue to move forward when Basel II is put into place, but the correct functioning of these norms will facilitate mergers by making financial systems homogenous. That always helps when deals are so complicated.”


“I don’t know what the next step will be, but something is certainly going to happen,” says Sebastián. “Ever since the mid 1990s, the number of mergers has been accelerating, and the regulatory aspect is always a key. If they deregulate markets, the concentration process will be much simpler. As competition grows, you have to find new formulas for growth because profits must grow or, at least, hold steady. Mergers and alliances seem to be the fastest way to grow.”