M&A: Europe plays the takeover game
M&A advisers flock to Europe
KKR targets Europe
Is French banking embracing Anglo-Saxon business style and finally bowing to shareholder value? The escalation of events since February would certainly suggest so. The bitter takeover battle currently being fought by Société Générale (SG), Paribas and their hostile suitor Banque Nationale de Paris (BNP) looks set to be decided for the first time by investors rather than the government.
The situation may get more complicated if other suitors step in. Governor of the Bank of France Jean-Claude Trichet might want to intervene in the national interest if a foreign bank decided to enter the fray. But at a time when he wants to prove that he would make a forward-looking European Central Bank governor, he would have to come up with a convincing reason to reject a German, Dutch or Italian bid after accepting the unsolicited one from BNP.
A breakthrough in the consolidation of the fragmented French banking sector had been brewing throughout last year. In the words of one prominent French banker: "Everybody had talked to everybody." It was no surprise that the launch of the euro acted as a catalyst for the emergence of deals, but it was not clear who the parties would be. "It was important for both SG and Paribas to find a merger partner," says Philippe Blavier, head of investment banking at Paribas. "They couldn't stay alone much longer. They needed critical mass." In the frenzy for banks to tie the knot, SG and Paribas managed to put a deal together quickly and discreetly and got to the altar first. Or at least this is what they had thought before the intervention of BNP.
Both parties had been in talks with other banks at various times in 1998, and both had previously considered a deal with BNP. SG and Paribas had themselves held merger talks two years ago which were then revived just after the new year, helped by the momentum of the euro. "We knew all the players," says Blavier at Paribas. "After a careful review of the strengths and weaknesses of the partners available, we chose SG." Rumours in the market had suggested that Paribas would team up with a foreign investment bank, but in the end the executives felt it was important to consolidate domestically before trying to forge international partnerships.
During the last two weeks in January a tight-knit team of six people worked on the deal in secret. The group consisted of the chairmen of the two banks - Daniel Bouton of SG and André Lévy-Lang of Paribas - plus Philippe Citerne and Patrick Duverger of SG and Jean Clamon and Bernard Müller of Paribas. By the time Pierre Servan-Schreiber, a partner at law firm Sullivan & Cromwell, was hired by SG on January 23, 14 people were informed of the plan. "There was no intention of having anyone else involved before the launch," he says. Rothschild, Morgan Stanley Dean Witter and Merrill Lynch were only brought in as advisers after the launch of the deal.
Servan-Schreiber describes the deal as a "French-style" merger: quick, simple, and secretive, but leaving some details unresolved until later. "The focus was on structuring and launching the SG Paribas project rather than speculating on possible hostile bids. We decided to cross that bridge when we came to it. It was perceived that speed was the key, as it would be hard to preserve the confidentiality of a such a huge deal for very long," he says. "They did not want to give anyone time to throw a spanner in the works." It was well known that Michel Pébereau, the chairman of BNP, would feel marginalized by the teaming up of SG and Paribas, and Bouton and Lévy-Lang were wary of what his reaction might be.
Two times fourth biggest
On February 1 1999 Bouton and Lévy-Lang announced their plans for SG Paribas, as the new entity would be called. With total assets of €670 billion ($710 billion), and shareholder equity of €21 billion, SG Paribas would be the fourth-biggest bank in the world after Bank of America, Citigroup and HSBC in terms of shareholder equity. It would be the fourth-largest bank in the eurozone by market capitalization after ING, Fortis and BSCH.
The deal is planned as a public share exchange offer in which SG will buy eight Paribas shares for five of its own. This structure gives Paribas shareholders a premium of 17% and SG shareholders an upside of around 4%, therefore transferring much of the value of the deal to the selling shareholders. Restructuring and integration costs could total up to €1 billion, but in its initial estimates the new bank expected to make cost savings of €800 million a year for the next three years. These savings were to be found in eliminating overlaps in information technology, offices and personnel, cutting the bank's loan portfolio and by reducing the amount of capital allocated to investment banking by €1.2 billion.
The SG Paribas deal was characterized by Bouton and Lévy-Lang at the launch as the coming together of the two most international and shareholder-friendly privately-owned French banks, to create the largest bank in France and a formidable competitor in Europe. They highlighted the complementary nature of their businesses and lack of duplication. "This is a more expansive and cooperative deal built on the production and distribution model," said Bouton at the launch of the deal in London. Success would be based on distributing Paribas' high-quality financial services products to more customers through SG's extensive retail network.
Non-retail banking is to be restructured and divided into investment banking and corporate and wholesale banking. Bouton likened the deal to the structure of Chase Manhattan, and said that they were well prepared for the challenges of combining a commercial and an investment bank. It was estimated that, from a current level of just under 12% return on equity for both banks, SG Paribas could achieve 15% ROE by 2000.