M&A deal of the year: UniCredit €15.4 billion stock-funded acquisition of HVB

There were many bold and audacious cross-border M&A propositions in 2005, some of which didn’t quite come off. Chinese oil company CNOOC’s $18.5 billion bid for Unocal of the US is a prime example. Had that deal not been scuppered, partly by US political and national security concerns, it would have been by far the largest foreign acquisition to date by a Chinese company.

However, UniCredit’s acquisition of HVB, the largest-ever cross-border bank acquisition in Europe, announced last June, was also a transformational deal. It created the first genuinely pan-European bank, with total assets of $953 billion, 28 million customers and operations in 19 countries. The combined group will have leading positions in three of Europe’s wealthiest countries (Austria, Germany and Italy) plus the undisputed number one position in the continent’s fastest-growing region, central and eastern Europe.

“This was really the first cross-border European banking deal, which in practice will be more of a merger than anything else,” says Claudio Costamagna, chairman, European investment banking, at Goldman Sachs. German executives at HVB will take one-third of the seats on the combined board, UniCredit’s Alessandro Profumo will be CEO, and Bank Austria-Creditanstalt will retain control of the group’s operations in central and eastern Europe. Costamagna points out that by contrast Santander’s stock-funded deal with Abbey National in 2004 was clearly an acquisition, as was the cash purchase of Banco Antonvenata by ABN Amro last year.

But UniCredit also significantly increased the scale of what it will be possible to achieve in European cross-border deals by successfully funding the deal entirely with its own stock. This opens the way for much larger cross-border deals in Europe than companies can fund with cash. “The market currently likes deals where companies optimize their balance sheets, but UniCredit/HVB is a blueprint for large stock-funded transactions and has removed the fear of many CEOs for large cross-border share deals,” says Dirk Albersmeier, head of M&A for Germany, Austria and Switzerland at JPMorgan.

Santander’s acquisition of Abbey National in 2004 was also stock-funded, but the UniCredit/HVB combination was far more complex, involving three parallel equity exchange offers in three different countries – for HVB in Germany and its listed subsidiaries Bank Austria Creditanstalt in Austria and Bank BPH in Poland. At first there was opposition to the deal from some HVB shareholders, leading UniCredit to worry that it would not get enough acceptances to take full control of HVB. In the end, though, the exchange offer got a 94% acceptance rate in Germany. “The acceptance rate of many previous deals has been much lower than that,” says Albersmeier.

In fact, the exchange offers were a great success in all three countries. Although UniCredit’s share price suffered just before the deal’s announcement, its shares and those of HVB have substantially strengthened since. UniCredit’s share price went up 30% during the offer period, which not only suggested that the market was buying into the upside potential of the alliance but also made it difficult for another bank to come in with a superior hostile bid.

The deal indicated a change of sentiment on the part of European investors: whereas previously they had protested vehemently about being offered the shares of a company in another country, this is becoming less of an issue now that the majority of stock is managed on a pan-European basis. Investors increasingly don’t mind whether they hold Italian or German stock, says Costamagna. “It’s a test of how pan-European stock-funded acquisitions can be. Without the euro, this never would have happened.”

The need for exchange offers in three different countries was pretty ambitious and the deal has had some bureaucratic obstacles to overcome. It closed in November without the formal approval of the Polish government to the acquisition of Bank BPH, as it would have meant the whole three-way transaction would have been held up. Yet the success of the transaction has definitely opened up the potential for large stock-funded cross-border deals in Europe. Costamagna says: “After the deal, a lot of French, British and Spanish banks have been asking, ‘Why haven’t we done this? Why have we been so reticent?’”