THE CLOCK IS ticking for Société Générale chairman Daniel Bouton. Since failing to buy Paribas in 1999, when BNP’s Michel Pébéreau broke up a friendly merger and snatched the prize from him, Société Générale has not made a significant acquisition.
Four years on, his bank faces the same identity crisis it did then. It is big enough to be important and to count among the core banking group of major European companies but not of the size to play with the big boys such as Deutsche Bank and UBS Warburg.
Bouton has only two options: eat or be eaten.
Until recently, a merger between the two leading French banks looked like a fait accompli. “Everyone knows that the best match for Société Générale is BNP Paribas,” says a Paris-based financial institutions banker. “Their businesses slot together perfectly.” Société Générale’s strengths in retail banking and asset management fit well with its rival’s in securities services and specialized financial services. BNP Paribas has a retail hub on the west coast of America, Société Générale chose central and eastern Europe.
But a hostile bid by BNP Paribas for Société Générale – given their relative sizes that is how a deal would be structured – would trigger a long and bloody battle. True, some of their businesses are complementary, but there is significant overlap in other divisions, such as investment banking. And, more crucially, there is a deep-seated hostility between managers. Pébéreau calls it a “culture clash”. Bouton prefers to invoke recent history and the clash over Paribas: “The reason a merger will not happen with BNP Paribas is not because of culture, the cultures are very close,” he says. “It is because of the past”.
Unhappy memories may not persist, though. Intriguingly, Bouton himself says: “There is nothing that does not change with time.” But it could be that he has something better up his sleeve. A source with links to several senior European bankers has told Euromoney that Société Générale signed a memorandum of understanding with Dexia last year to the effect that neither would hold merger discussions with another institution.
Bouton and Pierre Richard, the CEO of Dexia, are known to share many of the same views and the two banks have done a lot of work together, mainly though Dexia’s Crédit Local division. The banks have historically teamed up to work on financing projects for local governments. “Credit Local always used to like having someone to structure deals for them, which they then sold to the local authorities,” says a source who knows both banks well.
A perfect partner SG is the perfect someone. It is famously strong in futures and options structuring and has an equity derivatives business that is the envy of rivals worldwide. A merger with Dexia poses no threat of competition in investment banking, as Dexia has little to offer here.
In fact, there’s little overlap at all between the two institutions. Where SG has been scaling back its balance sheet commitments recently, in common with other European banks, pan-European group Dexia, which operates in Belgium, France, Luxembourg and the Netherlands, has an ample balance sheet and open pockets, which could help pull in more fee-based business. It also has a broad and loyal client base, particularly among local authorities.
“The more I think about it, the more it seems like a no-brainer,” says a leading financial institutions group banker. “And I wouldn’t be surprised if management are thinking along the same lines.”
It would certainly be an easy merger for Société Générale. Dexia’s Richard, at 60, should be able to step aside gracefully and leave the chairman role to Bouton. But Bouton denies there’s anything in the pipeline. “We did not enter into any negotiation with any other bank in the last four years. Banks are always talking but if you ask if we’ve had any serious negotiation with any French or European bank then the answer is no.”
Insiders say Bouton has become so weary of rumours that he’s not prepared to speculate. But his choice of successor to Xavier Debonneuil, the former CEO of SG, the investment banking division of Société Générale, who died in a car accident in December, could provide a clue to his long-term ambitions for the investment banking division and for Société Générale itself.
The man entrusted with this job is Jean-Pierre Mustier, former head of SG’s debt finance division. At 42, he’s 12 years younger than his predecessor. He’s also the first board member with a trading background. Most significantly, he’s anything but the archetypal French manager. “When Debonneuil died, Bouton realized he had an opportunity to overhaul completely the investment bank,” says a senior source at Société Générale.
Bouton has had his eye on Mustier for some time. He has a formidable reputation among current and former colleagues. “He is one of the most inspirational leaders I’ve ever met,” says one. “He was always going to be CEO of SG but what happened just means he’s got there sooner.” A senior banker in Asia says: “He’s a real class act. Managers from continental Europe don’t necessarily have their finger on the pulse but he’s different.”
Mustier is one of a group of younger managers rapidly scaling the corporate ladder at Société Générale. In mid-January Hervé Saint-Sauveur, who is 59 and has been the bank’s CFO since 1995, was replaced by his 40-year-old deputy, Frédéric Oudéa. The appointment was announced at the same time as Mustier’s. Oudéa had been CFO in waiting for just over six months. Saint-Sauveur now serves as special adviser to Bouton. There is already speculation that the next casualty of the regeneration process could be Marc Bouhet, CEO of SG Americas and deputy CEO of SG, who is now 60.
In a US investment bank, a senior manager in his 40s is nothing unusual. But he stands out in a French commercial bank. Bouton is said to favour advancing talented managers quickly, having himself reached a lofty position in charge of the French budget by the age of 40.
It’s more than a personal preference though. Replacing a team of 55-to-60-year-olds with younger blood in their 40s sends a strong message to the markets that Société Générale intends to be seen in a more aggressive light.
Analysts approve. “If you look at the management of the French banks there are a lot of old people with a lot of experience but I think it is crucial to have younger people to create a new dynamic,” says Eric Hazart, an analyst at Exane. And though it won’t alter the bank’s fortunes overnight, it might at least help foster an image of an institution that is going places, rather than one that is stagnating.
After three years under the aegis of Debonneuil, SG had not got that far. “They have the leadership in equity derivatives, which we estimate comprises 20% net profit of the entire bank,” says Hazart. “Excluding that, they’ve made bad losses in cash equity, advisory and M&A.”
The investment bank fared reasonably well in 1999 and 2000 but then, who didn’t? And even at that point, analysts reckon its fixed income business was losing money. The next year was a disaster. BNP Paribas managed to keep revenues flat on 2000, despite worsening market conditions but SG’s profits plummeted by 88% in 2001. A e117 million write-down on a e900 million private-equity portfolio didn’t help but the main culprit was the cash-burning equity and advisory division. In 2001 it had a cost to income ratio of 239%, according to Jacques-Henri Gaulard, an analyst at Merrill Lynch.
One of the big problems is that SG is trying to provide a full complement of investment banking products across Europe. Outside of France it has no competitive advantage however. “We only worry about SG when we’re pitching to a French corporate,” says a managing director in equity capital markets at a rival bank.
Shouldn’t SG be cutting back to the regions and product lines where it is strongest rather than keeping loss-making businesses such as cash equities? More radically, does it need to have a customer-facing business at all? According to an insider: “The best business lines at SG are those that trade with banks and with corporates that act like banks.”
Though Debonneuil was clearly a well-liked and highly respected manager, he shied away from tackling these difficult questions. As a result, he presided over one of the worst periods in the investment bank’s history. Last year he made around 400 redundancies. Analysts say that was only a start. “Xavier was really quite distant from what was going on in the business,” says a senior manager based in London.
“Debonneuil was a very clever guy but his main problem was that he was a very nice person,” says someone who knew him well. He spent a lot of time pondering the bank’s future, and questioning what qualities US banks had that French banks didn’t.
Mustier, in contrast, is much more hands-on, practical and forthright. He is exceptionally close to SG’s various business units, having grown up a trader and worked in all three major areas of the bank. And he’s firmly focused on the bottom line. “He knows the name of every person who works for him, what they do, how long they’ve been doing it and how much they get paid,” says a former colleague.
On first meeting, Mustier certainly seems charismatic and likeable. He rearranges furniture to make the seating plan less formal for his conversation with Euromoney while pointing out Paris landmarks from his office on the 34th floor of the bank’s headquarters in La Défense. He’s good at the touchy-feely language too, no doubt a legacy of the early part of his career spent in the US. “Mutual confidence between the bank and its staff is the basis of our business,” he says at one point.
A shooting star
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Insiders put his meteoric rise down to a brilliant mind – he was later one of the brains behind SG’s awesome options business, along with Antoine Paille – who left to set up a similar operation at Commerzbank – and Christian Mianné, who now heads the equity derivatives group. He’s also responsible for restructuring SG’s debt capital markets and financing divisions.
While head of the bank’s fixed income and treasury operations in 2001, Mustier persuaded Bouton that the best way to revive the flagging debt business was to combine debt capital markets with the financing division of the bank. This brought products such as structured and specialized finance into the same group as loans and bonds, interest rate and currency hedging operations and treasury.
Overnight, the modest fixed-income division was replaced by a business employing 3,200 people. Mustier took over as head of debt finance and the former head of financing, Jean Stern, retired.
One of the biggest challenges was to bring the plain-vanilla debt capital markets products under the same umbrella as structured products. As in other investment banks, the two product teams had long resented each other. Structured finance is more profitable but debt capital markets businesses tend to have a higher profile. Sharing a P&L and a bonus pool was not a prospect either relished. “It was like mixing oil and water,” says an SG insider.
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Sceptics say creating a debt finance division was just window dressing. But if the 2002 debt league tables are anything to go by, the combination has been successful. From a consistent 22nd or 23rd position in global bonds, SG reached 16th in 2002; for European bonds it ranked eighth, up from 13th the previous year. Not such a big deal, perhaps, but break this down and the results look more impressive. For euro corporate bonds it ranked eighth, up five places from 2002, and it came top in financial institutions’ euro-denominated issues.
It has made progress with both French and non-French corporates this year. Rutbert Reisch, treasurer of Volkswagen, which used SG on its e1.5 billion bond deal last August, says SG now counts among his firm’s core relationship banks. “We were very pleased with the way the deal went. But obviously we would not have given the business to SG had we not been completely confident in the bank’s abilities,” he says.
In November, SG was joint bookrunner on a e1.6 billion asset-backed securities issue for RCI Banque, the financing arm of Renault. This was the biggest car loans securitization in Europe. SG also acted as a counterparty in a structured swap agreement with RCI. “They proposed a project that looked ideal and put it into practice extremely efficiently,” says Nicolas Duc, assistant treasurer at RCI.
Not only has Mustier proved adept at building businesses but he’s ready to pull the plug when they don’t work out. He has proved on a number of occasions that he has no problem with shutting down unprofitable businesses, even if that means big job losses.
Un-French attitude In 1996, the then head of investment banking, Patrick Duverger, asked Mustier to go to Hong Kong, where SG had just bought brokerage firm Crosby. Unfortunately it was the wrong time to buy. The Asia crisis hit in the summer of 1997 and Mustier found himself battling for to save his business, until it became clear it wasn’t going to survive. He then took the very un-French decision to make swift, deep cuts. Over 100 employees were fired and the Crosby name was ditched.
SG wasn’t the only bank making redundancies in Asia in 1998. But Mustier felt that in the context of SG’s sleepy culture he’d done something pretty exceptional – and something he’d like to see happen more often. Months later he ran an internal seminar on “How to close a business”, likening his actions to a military operation.
He clearly leads by example. In 1999, within months of taking over the debt finance division, he fired the entire mortgage repo business staff in the US.
And, according to one source, late last year, he issued an ultimatum to the weather derivatives team of twelve structurers and traders, who were recruited from US insurer AIG by Debonneuil. “Mustier called up and said: ‘We don’t believe you will make enough money this year’,” says an insider. He gave the team until the end of March either to find a buyer – or leave the bank. SG refuses to comment on this.
Mustier’s black and white attitude has won him admirers. Even those he has fired are said to respect him for his forthrightness. “He doesn’t mess around. He’ll tell people: ‘I’m sorry, it’s nothing personal but this business just isn’t working out as we’d hoped,'” says an insider.
Others are less favourable. “Debonneuil used to manage through respect, Mustier manages through fear and intimidation,” says someone who has been on the receiving end more often than he’d like.
A possible explanation for these differences in views is offered by another colleague who says that, because Mustier has the ability to focus on specific problems and see the solutions so clearly himself, he finds it hard to delegate. Although he tells managers that a decision is their responsibility, he expects to be consulted before they reach a conclusion.
For a slightly flabby investment bank like SG a ruthless, US-style manager could be just what’s needed. Some at the bank worry that Mustier takes too much of a short-term approach. One says: “He’s a typical trader, really. He rarely thinks beyond a year and that does run the risk of making him short-sighted. Debonneuil had a longer-term horizon, of around three years.”
As Mustier settles into his new offices in London – where he was based as head of debt finance and will be in his new role – and Paris, many are watching nervously for his next move. Given his proclivity for shake-ups, it can only be a matter of time before the investment bank gets the benefit of his particular style of haircut.
For now at least, he is under instructions from Bouton to sit tight and resist the urge to do anything major. “What I said to Jean-Pierre is that you do not need to focus that much on the organization,” says Bouton “You can be client-orientated and focused on risk control but I don’t think you need to propose significant changes to the organization in the coming quarters.”
But by the end of six months, Mustier is likely to be straining at the leash. SG certainly has no shortage of candidates for being cut or closed down. Given his background, some fear he may start to divert the bank’s resources from the more traditional financing activities and towards trading, where SG is reputed to make the largest percentage of its profits.
Analysts estimate that proprietary trading accounts for over 30% of the equity derivatives unit’s profits. SG’s debt trading business in the US is also responsible for a sizeable chunk of profits and is said to serve as the profit engine for the whole debt finance group. “If he could, he would shut all the financing operations and just be a trading house,” says someone who’s worked for Mustier for a number of years.
If that’s true, then one of the businesses that could be in his line of fire is the project finance division, now run by William Schmid out of New York. Its former head, Jay Worenklein, left the bank last month. Many banks have cut back or shut down this business line in recent years as it is capital intensive and decent returns are not guaranteed. Worenklein’s departure increased the speculation that US project finance was about to be closed.
This prospect looked very real last year. While Mustier was still in charge of debt finance, the project finance department began work on a collateralized loan obligation. The idea was to free some of the bank’s balance sheet to enable it to make further investments. But with the team ready to launch the deal, and with a group of investors lined up, Mustier pulled the plug at the very last minute. “Project finance activities as an asset class were slowing down last year and I couldn’t see how to use the balance sheet on other assets that would make sense in terms of risk-reward,” he explains.
Contentious acquisition There’s also SG Cowen, the US investment banking and equities division, which has been a contentious acquisition. No SG senior executives are in the unit; it’s run by Kim Fennebresque, who was hired from UBS after the acquisition. In 2002, a large part of the goodwill connected to buying Cowen was written off, an admission that SG got stung. “I think we have learnt a lot regarding investment banking and high tech,” says CEO Philippe Citerne. “Our business in Europe would not be the same if we hadn’t had the Cowen experience.”
In an interview with Euromoney last year, Fennebresque denied that Cowen lost money. But the rumours refuse to die. “The best that unit ever did, at the height of the boom, was to break even,” says an insider. Others mention annual losses of between $200 million and $500 million and SG’s employees in other departments complain that while they make all the money, Cowen bankers take home the best bonuses.
Another target for Mustier might be the Asian business. “He likes it, and likes the region, having lived in Hong Kong, but the unit has no competitive advantage,” says one source. London may also be in his sights. While explaining to Euromoney, in perfect English, his rationale for continuing to live in London, he says it’s important to be where the problems are, then corrects himself, saying he meant the challenges.
If Mustier’s remit is to firm up the investment bank ahead of a merger, it may make sense for him to concentrate on reinforcing the strongest parts of the business – the trading parts – and getting rid of the more traditional and capital-intensive activities.
Others claim such a judgement is unfair. Despite preparing to leave SG, Worenklein told Euromoney he had no doubts about the breadth of Mustier’s commitment, even to the more capital intensive businesses. “He devotes an enormous amount of time and energy to understanding the opportunities in the non-trading businesses and is very supportive of client-oriented initiatives,” he says. Mustier himself stresses that “our organization is driven by how we can improve for our clients. They represent a very large part of our revenues”.
It remains to be seen how Mustier will help resolve SG’s identity crisis. “We have always said we did not intend to become a hyper-market of financial services,” says Bouton. In comparison with its European peers, SG is small fry. It devotes e4 billion of equity to investment banking compared with e6 billion at Commerzbank, e8 billion at BNP Paribas and e12 billion at Deutsche Bank. “The question is, in the mid-term can we have a platform of that size being profitable or not?” Bouton adds.
That’s the question that Mustier answer, mindful of the need to shape SG into the right-size poker chip for the next round in the European banking consolidation game.
The results of the bank’s debt finance division to date and the views of its corporate clients suggest SG has something to offer in the traditional capital markets businesses. Says Brian Barker, group treasurer at the Hilton Group, which used SG as one of the bookrunners on its e500 million bond issue in March: “I think Deutsche Bank would be perceived as having a larger operation but in terms of ability to execute, there’s really nothing between them.” Perhaps Mustier will be able to effect a similar turnaround in the potentially much more profitable cash equities and advisory business. But it’s a far taller order.
Ambitions in this direction would also limit Société Générale’s universe of possible merger partners. If it worked then any marriage with an institution that had significant investment banking operations would be fraught with difficulties.
If Bouton is set on being an acquirer, then Mustier may well be given a free rein to do as he likes with SG. If, on the other hand, he is resigned to Société Générale being merely fodder, then Mustier’s job is more likely to involve beautifying SG and then waiting for a rival to pounce.
