There is no shortage of M&A bankers who would like to see a merger between BNP Paribas and Société Générale. Such a deal, they all agree, would make wonderful sense, as it would create a true French champion with a solid domestic retail base.
BNP Paribas’ decision to hold back from bidding for its stricken rival, however, is prudent, not least because a hostile bid would have faced enormous difficulties. Even a friendly one might not have been possible.
At the heart of the problem are the two groups’ investment banks, which overlap like twins. One might like tennis while the other prefers rugby, but they are very similar in most other respects. The process of combining the two would be fraught with difficulties and would likely lead to a substantial loss of market share.
Breaking off the unit and selling it to another buyer is also probably easier said than done in the present slowdown, while BNP Paribas might also be wary about selling its most important domestic investment banking rival to a potential competitor.
The state of the markets also makes it an inopportune moment to ask for the €48 billion or so that BNP Paribas might need to raise in order to fund a bid.
Then there are the political issues. Consolidating the domestic retail business wouldn’t be worth doing without shedding some jobs, which would not go down well with either French politicians or the combined bank’s staff, who, if they are anything like their compatriots in other sectors from taxis to universities, are not above taking to the streets.
Both BNP Paribas and SG, despite its recent stumbles, have decent growth prospects as independent entities. BNP Paribas has managed to produce record results in difficult market conditions, proving its resilience. SG’s operations in emerging Europe and now in Russia show considerable promise and are untainted by the fallout of a one-off incident.
The allure of cost synergy in domestic retail might be significant, but domestic retail banking would constitute only about 20% of a combined BNP/SG. Credit Suisse analysts estimate that improving the business’s performance by as much as 20% would only add 4% to the combined group’s earnings annually.
A combined BNP/SG might be a nice idea but BNP Paribas’ cautious management cannot be blamed for thinking that it isn’t worth the effort.