If it wasn't already obvious, HSBC's $15.4 billion deal for Chicago-based Household International Inc. last November erased all doubt: a new wave of transatlantic banking acquisitions is under way.
Of course, it doesn't take much to make waves in the current merger-and-acquisition doldrums in the United States. But consider that BNP Paribas of France paid $2.4 billion in March for United California Bank, months after it bought up the 55 percent of Honolulu-based BancWest Corp. it hadn't previously owned. In the past 18 months, Edinburgh-based Royal Bank of Scotland (RBS), working through Citizens Financial Group, the Providence-based subsidiary it acquired four years ago, paid $2.1 billion for the retail and small and midsize business banking units of Pittsburgh's Mellon Financial Corp., then bought Philadelphia's Commonwealth Bancorp and a small Massachusetts savings bank, Medford Bancorp. Indeed, spending by European companies on U.S. bank acquisitions has totaled just over $30 billion in the past year and a half.
The trend appears to be gaining steam. BNP Paribas, France's largest banking group with E825 billion ($877 billion) in assets, has set aside E9 billion for external growth, including international bank acquisitions, before 2005. "That E9 billion isn't just for the U.S.," notes Douglas Grigsby, CFO of BNP Paribas's BancWest unit and head of BancWest's M&A team. But the parent company is "clearly interested in expanding here" and is studying "transactions both large and small." For its part, HSBC claims in a recent Financial Times article to have identified 10 or more potential U.S. targets.
And while RBS chief executive Fred Goodwin has said only that his company still sees "lots of opportunities in the U.S.," Richard Bove, an analyst at the San Francisco investment bank Hoefer & Arnett, thinks RBS would consider buying "almost any bank in the whole of the northeastern portion of the country." Bove calls FleetBoston and PNC Financial two particularly interesting targets for RBS or one of its big European rivals. (PNC says that as a matter of policy it doesn't comment on merger speculation. FleetBoston, though, says it has "a clearly stated strategy of staying independent.")
Europe's banks don't always settle for easy pickings. U.K. critics of the HSBC-Household deal griped that Household's subprime lending business to lower- and middle-income families was a risky departure for HSBC. And weeks before the deal was announced, Household was in the news for its $484 million settlement of allegations that it duped homebuyers with hidden costs in lending agreements. Meanwhile, U.S. analysts noted that HSBC was getting Household at a bargain 1.71 times book value, compared with the 2.94 times book Citigroup Inc. paid a year earlier for Associates First Capital Corp., another big subprime lender.
Lessons of the Last Wave
The recent cross-border activity, say analysts, stems from the availability of profitable U.S. banking targets at reasonable valuation levels, and an expectation that acquisitions can be made with minimal regulatory interference. "That's pretty much the converse of Europe, where it's difficult to do deals and where there are relatively few targets," says Chris Ellerton, a bank analyst at UBS Warburg in London. Adds Bove, "Right now, American banks, from a capital position, are stronger than at any time in the last 50 years. I'd say it's a good time to be buying."
There's no assurance that new deals will go through, of course — or that they will go well once they're completed.
Several banks still feel burned by previous cross-border mergers. NatWest Bancorp — the old National Bank of North America, bought in 1979 by the UK's National Westminster — was sold off at a considerable loss to Fleet Financial in 1996, after years of disappointing returns. And HSBC took years to turn around New York-based Marine Midland Bank, acquired in 1987. "Marine Midland was a troubled company," says Bove. "It took at least five or six years for HSBC to get that thing under control to the point where they could run it profitably."
Two of the earliest ripples in the current deal wave — Deutsche Bank's 1999 purchase of Bankers Trust and Credit Suisse First Boston's acquisition of Donaldson, Lufkin, & Jenrette — also encountered problems, including high rates of employee turnover, glitches in integrating corporate cultures, and dissatisfied customers switching allegiances. And Allied Irish Bank (AIB) actually sold its disgraced Allfirst Financial subsidiary, acquired in 1989 (when it was known as First Maryland Bancorp), to M&T Bank Corp. of Buffalo last September. AIB, which bailed out of the deal after foreign-exchange trader John Rusnak ran up nearly $700 million in unauthorized trading losses, has been accused by critics of failing to exercise enough control over Baltimore-based Allfirst. In many cases, says Ellerton, "the U.S. is a graveyard for British and other European banks' banking capital."
But most experts think the European banks have learned valuable lessons from the earlier merger wave, and suggest that U.S. customers might not be so unhappy with the results of the new mergers. European banks now are aiming to acquire more retail banking operations, for example, rather than the higher-risk corporate-bank services that were often sought before.
Steve Elliott, senior vice chairman at Mellon Financial and its former finance chief, is one who believes that European banks are benefiting from the retailing focus. Elliott, whose final task as Mellon CFO in December 2001 was to help with the sale of its retail franchise to RBS, was impressed by the speed of Mellon's retail integration by RBS, ahead of schedule. "By focusing purely on the mass-consumer side, they're not trying to be all things to all people," he says. "When you have that singularity of purpose, you can do a fine job of pulling it off." Under terms of the Mellon-RBS agreement, Citizens gained 345 bank branches, supporting some 58,000 business clients, along with 650,000 households.
Still, Citizens has said it is eager to build up what middle-market business it did acquire, and it told the Pittsburgh Business Journal that "the reception has been very good" to Citizens' efforts so far.
European banking executives seem more willing to delegate responsibility than in the past. "While it's clear that BNP has a high level of oversight and a presence on the board, BancWest has an experienced U.S. management team running the company," notes Grigsby, a 25-year BancWest veteran.
One other lesson European banks may have learned is that many in the United States are indifferent to whether a suitor is foreign. "I don't think it's an issue," says Grigsby, who has no problems cutting deals, and considers the mergers mainly an injection of European capital. And indeed, these latest bank acquisitions by Europeans appear to be getting better reviews from corporate clients.
Still, there is bound to be resistance from some quarters of the U.S. banking industry, perhaps led by FleetBoston. And some defensive mergers could result, although not everyone agrees on that scenario. "I don't think we're going to see a lot of [mergers just] because a few European banks have come in and decided to make some acquisitions," says Lawrence White, an economics professor at New York University's Stern School of Business.
For one thing, few domestic buyers seem willing or able to do large deals right now. Citigroup did complete a $5.8 billion acquisition of Golden State Bancorp in November. But the last large U.S. retail-banking merger before that involved Charlotte, North Carolina-based Wachovia and First Union, in 2001.
A worsening U.S. economy, of course, could dampen all bank-merger activity here. Analysts say the low price HSBC paid for Household reflected fears of a "double-dip" recession, and there are still questions of "how the economy will affect Household's subprime lending business," says Joel Gomberg, an analyst at Chicago-based William Blair & Co.
In addition, if consolidation were to pick up in Europe, banks there could lose interest in U.S. acquisitions. BNP Paribas appears to have struck out in last year's bid for French rival Credit Lyonnais, but it is frequently linked with Société Générale. And BancWest's Grigsby admits that his parent firm's spending plans could be curtailed if a large-scale French consolidation had to be funded.
The prospect hasn't stopped him from scouting potential U.S. targets, though. "Our history has shown us to be quite opportunistic," says Grigsby, and the very growth of BancWest so far has allowed him to think about more and larger targets.
Ian Rowley is a staff writer at CFO Europe.
From Across the Pond
Large financial-services acquisitions by European companies.
1 Investment in operations.
2 Increase in stake from 45% to 100%.
|Acquirer (Country)||Target Company||Target's Business|
Value ($ millions)
|HSBC Holdings (UK)||Household International||Consumer financial services|
|Royal Bank of Scotland||Medford Bancorp||Bank holding company|
|Deutsche Bank||RREEF||Real estate investment advisor|
|BNP Paribas (France)||United California Bank||Commercial banking|
|Credit Suisse||Arch Capital1||M&A investing|
|Deutsche Bank||Zurich Scudder||Investment management|
|Swiss Re||Lincoln Re||Reinsurance|
|BNP Paribas||BancWest||Bank holding company|