European bank mergers. Never did run smooth

Date: 12/11/05

Official barriers are not the only hazards for cross-border deals

EVEN by the standards of the European Commission, "sub-optimal market functioning" is not a pretty phrase. Its meaning, though, is plain. In a letter to European finance ministers this week, Charlie McCreevy, the commissioner for the internal market, wrote that since 1999 only a fifth of financial mergers, by deal size, have involved firms from different countries, compared with nearly half of non-financial deals. This suggests that markets are not working as well as they should, as he almost put it, and that official barriers to cross-border financial marriages should be reduced.

Official blessing cannot, however, guarantee a frictionless courtship. Just look at recent developments in Europe's biggest cross-border banking deal, between Italy's UniCredit and Germany's HVB. Last week HVB's Stefan Jentzsch, earmarked to head investment banking for the merged group, suddenly resigned. So did Christine Licci, former head of Citigroup's retail bank in Germany. Morale at HVB can surely only improve.

This is embarrassing for Alessandro Profumo, head of UniCredit. At least he has had experience of similar difficulties before, when he merged an Italian commercial bank and a savings-bank group in 1998 to create UniCredit. The new institution has since become one of Europe's most successful banks.

However, the deal with HVB is possibly the most complex cross-border bank merger yet. Moreover, both Italy and Germany are heavily unionised. Union representatives on HVB's supervisory board have been sniping since the deal was conceived. Mr Profumo is still negotiating with veto-wielding shareholders at Bank Austria, HVB's 75%-owned subsidiary in Vienna, and with competition authorities in Poland, where UniCredit's Bank Pekao and HVB's BPH together command 17% of banking assets.

One of these problems should ease after November 18th, when UniCredit is due officially to take ownership of HVB shares and the resistance of the dissidents on the German bank's supervisory board will come to an end. Meanwhile Mr Profumo and his colleagues are urgently seeking a replacement for Mr Jentzsch.

Mr Jentzsch, a partner at Goldman Sachs before he joined HVB in 2001, may be on his way to Dresdner Bank, a German rival, to head a new corporate and investment-banking division. Allianz, a big insurer, bought Dresdner in 2001 but dithered about what to do with Dresdner Kleinwort Wasserstein (DrKW), its investment-banking arm. Only two months ago did Michael Diekmann, Allianz's boss, make it clear that DrKW was not for sale. Now it is being integrated with Dresdner's corporate-banking operation. Andrew Pisker, a Briton who runs the investment bank, would like to head the new division, but Mr Jentzsch, as a German, may go down better with the corporate bankers. Mr Jentzsch may also be better placed to manage relations between Allianz, whose head office is in Munich, Dresdner, based in Frankfurt, and DrKW, in London. There are some territorial barriers that only good management, not commissioners in Brussels, can overcome.

Official barriers are not the only hazards for cross-border deals.

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