A rude shock to domestic bliss

Within days of the EC unveiling proposed conditions on the merger of SEB and Swedbank, the banks called the marriage off. Had Brussels scuppered a sound deal, or were the fainthearted suitors getting cold feet anyway? The row hinges on the commission’s curious focus on the dominance the new combine would have boasted in its modest domestic market, not the European market as a whole. Critics argue this discriminates against smaller EU states and will curtail cross-border bank mergers.

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Lars Thunell

When the decision was made two months ago by the boards of Sweden's Svenska Enskilda Banken (SEB) and Förenings Sparbanken (Swedbank) to abort their proposed merger, the recriminations were swift. The banks blamed the European Commission for imposing penal conditions that wrecked the logic of the deal, one of Sweden's largest.
But Brussels shrugged off such criticism, pointing out that the suitors failed even to wait for the final conditions to be negotiated. Could it be that the banks had repented of their marriage and were mightily relieved for an excuse to split?
The case raises thorny competition policy issues. Not least is the continued relevance of the notion of monopoly in smallish national markets when the talk among finance ministers is of creating a mighty single market in financial services within the EU by 2005.
At the outset, the boards of the two banks had seen themselves as an ideal fit, combining SEB's strength in Sweden's corporate market with Swedbank's expertise in the small- and medium-sized enterprise and retail sectors. The institutions also believed the merger would give them an excellent foundation for expansion in the Nordic and Baltic regions and provide a strong revenue base for investment in business expansion. Lars Thunell, president of SEB, speaking before the plug was pulled, said: "The merger will allow us to become stronger in our home market and give us the base for international expansion. The merger will also allow us to rationalize costs."

Looking further ahead, Thunell also saw this as an important step on the road to consolidation of the European market: "With the merger, we will have also created a Nordic player that will participate in the restructuring of the European banking scene," he said.
Göran Collert, chairman of the board of Förenings Sparbanken, declared: "Our intention was to create value for customers, personnel and shareholders and create the conditions to take a strong step into the pan-European banking market."
Yet by September, the commission announced that it would insist on large-scale divestitures in the new bank's retail market share if the marriage was to get its blessing.
The banks then abandoned the alliance with almost indecent haste and in a joint statement made it clear whom they saw as the culprit. "The board of directors of both banks have unanimously made this decision," read the statement, "since they have established that an approval of the planned merger by the EC implies such extensive concessions that the value of the merger would be lost through, among other things, a lack of synergies."
Jacob Wallenberg, chairman of the board of SEB, elaborated: "The European Commission and the banks have different views of the Swedish bank market. The commission claims that the new bank would gain such a dominant position that not even Nordea and Svenska Handelsbanken would be able to compete with us. We do not share that opinion."
Although the banks were prepared for some concessions, including scaling back their operations in the Baltic states, looking at their position in fund management and even limited divestments of their retail business, Brussels was insisting on sacrificing more in retail banking.
But this raised a question with profound implications. If the merger fell under the purview of the European competition commission, then surely the banks' plans should have been assessed in terms of their Europe-wide impact? By focusing solely on dominance in Sweden, critics argue, Brussels was wrong-headed and has disadvantaged the industries of smaller member states.
The activities of Nordic banks in recent times, particularly the cross-border expansion of Nordea, would seem to suggest that a truly pan-Nordic banking market is developing. Looking beyond that, the Scandinavian banks also view the Baltic states as a natural extension to their business. "We see the whole region, including the Baltic nations, as part of our natural home market, not just Sweden," argues Birgitta Johansson-Hedberg, chief executive officer at Förenings Sparbanken. For the commission to refuse to look outside Swedish borders when assessing the banks' competitive position was, in the banks' opinion, plain wrong.
Contradictory viewpoints
One competition lawyer based in London declares: "You could argue this both ways. It seems strange that the commission talks of a single market on the one hand, then seems to contradict this when looking at a specific merger. While a merger may ultimately be designed to give a bank the basis from which to move into a wider market, the Commission must take into account that bank's position in its home market and take a view as to whether any merger would have a detrimental effect on the local customer." If this is the case, then it becomes merely a question of whether the newly created bank can leverage its position in such a way as to exploit its strength. Accepting this, those involved argue that the SEB-Swedbank venture would not have harmed its local client base anyway.







Wallenberg (left) and Collert: claimed to seek value for customers not overweening market share

Kent Karlson, a partner at Linklaters Lagerhof in Stockholm, one of Förenings Sparbanken's legal advisers on the deal, outlines the surprise the banks felt at the commission's position. When work was started on the deal the banks and their advisers felt that there was little chance the commission would object on collective dominance grounds. Although the merger would effectively leave Sweden with just three major banks, the possibility of these three acting as a cartel in the market was never seriously considered. The Swedish competition authorities had already indicated that this would not be a problem and there was no reason to believe that the EC would view the case otherwise. So the banks turned their attention to the case against single dominance. "We felt the banks had a good case against single dominance as the new bank wouldn't have a tremendous market share in the market as a whole. In certain sectors, yes, but not overall," argues Karlson. He believes that the strength of Handelsbanken and the growing power of Nordea would be sufficient to counterbalance the new SEB-Swedbank venture and prevent it from abusing its position.
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