If Santander’s takeover bid for Abbey proves successful, and it is able to turn around the ailing UK bank, it could, says John Rushton, have a lasting impact on cross-border mergers on the Continent
Santander Central Hispano’s (SCH) bid for Abbey is being billed as the largest cross-border bank takeover in EU history. It is unlikely to affect the structure of the banking industry in the UK, but if it succeeds then it could have a significant impact on the industry elsewhere on the Continent.
Banks have proved they can reward shareholders by extracting massive post-merger cost synergies inside national borders. However, bank executives and analysts have been remarkably downbeat about the prospects of doing the same cross-border. Received wisdom has been that the cost synergies are not there in the face of regulatory, behavioural and product barriers.
The proposed BSCH takeover of Abbey is therefore of considerable interest as it is predicated on the forced dissemination of best practice and the sharing of cross-border infrastructure and utility functions. If the Spaniards succeed then pan-European bank consolidation might be given a boost and shareholders in other banks might expect major rewards.
A long way to go
It is an indication of how far the single European market still has to travel that the possibility of the BSCH/Abbey deal could arouse such interest. In the US, the foreign ownership of the banking system rarely raises comment. European banks such as ABN Amro, Royal Bank of Scotland (RBS) and HSBC are now in the first division of US banks.
In Europe, by contrast, outside central and eastern European countries only Fortis and Nordea have major multi-country retail bank operations. Even in the UK only one foreign bank, National Australia Group, has any significant presence in high-street banking.
A Spanish takeover of the UK’s sixth largest bank is unlikely to set in train any significant new market dynamic in the UK itself, nor will it be repeated by further European takeovers. Only if it leads the UK competition authorities to re-examine their attitude to consolidation could it have a significant knock-on effect domestically.
The UK is at the top of the European bank profitability league and Abbey is the only UK bank which continental banks could afford. At the same time BSCH, as euroland’s second richest bank, is one of only a handful of financial institutions able to pay even the collapsed price for Abbey.
Spain, like the UK, is in the high profitability zone in European banking, with a model which sustains high market capitalization for its banks. The BSCH targeting of Abbey is similar to RBS’s targeting of Charter One: a bank from one high-profit country making an acquisition in another high-profit country through a deal which makes sense from a shareholder-value perspective.
Santander’s appetizer
Banks across Europe will be keen to see whether BSCH can leverage the skills it has built up in Latin American mergers and acquisitions to realize the identified cost savings, despite cultural, operational and regulatory difficulties. If it succeeds it might gain an appetite for more takeovers and set an example to others. Most interesting, from a structural point of view, would be deals between the high and low-profit zones in Europe, rather than between two countries within the high-profit zone.
In Germany, for example, bank profitability has been so weak as to deter foreign investment - no matter how low the price of local banks.
For a UK, Spanish or French bank to buy into Germany would signal a belief that higher margins can be extracted from the German market and that over the longer term such an acquisition would not dilute shareholder value. If a successful BSCH/Abbey deal hastens the day when deals of that kind may occur, then it will indeed prove to have had a structural significance.
