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Friday, February 15, 2002


Merging Is So Hard To Do

The much-heralded mega-merger between National Bank of Greece and Alpha Bank, the country’s two largest commercial banks, has been aborted, setting the stage for a new round of M&A (merger and acquisitions) activity that might produce new bank alliances in the next few months. Consolidation thus remains the name of the game.

The failure of the merger vindicated those bankers, analysts, and some government officials – such as current defense minister and former finance minister Yannos Papantoniou – who were against it on the grounds that it would create a larger but less competitive bank. Some argued that the new bank’s management would have adopted a consensus-driven approach with an eye to balancing the interests of different groups from each merged bank. This approach would have hurt the financial results of the new entity, as well as the return to its shareholders, while pulling down the Athens bourse in the process, given the large weight the new bank would have had in local stock indexes.

With regard to the causes of the merger’s collapse, National Bank of Greece claimed that Alpha Bank sought a significant amendment of the original agreement, while Alpha Bank blamed the failure on differences over major issues such as principles governing the operation of the new bank. What is certain is that Alpha employees were lukewarm toward the deal right from the beginning. Their objections seemed to mount as some National Bank employees began to act as if they would be in charge. “They [the National Bank] behaved as if it would absorb us and run the show,” a mid-level manager at Alpha told me.

It looks as if this bitterness found its way to the top echelon of Alpha when the management structure of the new entity was revealed and responsibilities were allocated, setting off a chain reaction. The new bank was to be governed by an executive committee that included the chairmen of the two merged banks, three members of the National Bank’s top management, and two members of Alpha’s top brass. The composition of the new executive committee reflected the relative size of the two banks but deviated from the initial understanding of “a merger of equals,” according to Alpha Bank.

More than anything else, however, the failure of the merger highlighted how difficult it is to merge two local banks with different corporate cultures in a country where much needed cost-cutting has always been hard to implement since it is discouraged by labor legislation. Some analysts thought that the early dissolution of the merger was a welcome development, a view shared by many in the market and reflected in the two banks’ share performance since the announcement of the split. On the other hand, other analysts pointed out that the merger’s failure “isolated [the two banks] in a consolidating and more competitive European sector” and “could also deter foreign interest in Greek banks due to the increased implementation risk of cross-border M&A in Greece.”

National Bank officials have stated in private that the bank would refocus on domestic growth and expansion in the Balkans. National Bank owns majority stakes in Bulgaria’s United Bulgarian Bank and FYROM’s Stopanska Bank, and also has a presence in Serbia, Albania, Turkey, and Romania. Chairman Theodore Karatzas wants the share of revenues from international activities to increase to 20 percent in three years from seven percent at present.

Moreover, top National Bank officials have made no secret of their opinion that forming an alliance with a foreign partner would bring little benefit to their bank and simply enhance the foreign bank’s product sales in Greece. They do not rule out, however, the possibility of merging or buying out another domestic bank, and some market pundits already think Piraeus Bank may be the next likely candidate. Piraeus Bank recently signed an agreement with ING to expand in bankassurance, asset-gathering, and employee benefit products. It will buy a 20-percent stake in ING’s Greek subsidiary in exchange for 5 percent of its own.

The collapse of the merger finds Alpha Bank at a crossroads, however. It will have to expand rapidly in retail banking and reduce its exposure to corporate banking in order to widen its interest margin and boost profitability, while trying to reap the full benefits of its merger with Ionian Bank. At the same time, it will have to address a potential capital deficit in 2002 by raising equity through a subordinated loan.

Many analysts agree that one of the most important tasks facing Alpha is a reassessment of its position on forming a strategic alliance with a foreign, most likely European, partner. The names of French BNP Paribas and Italian UniCredito have been mentioned again in the local press as likely candidates, although there is little evidence these banks are still interested in obtaining a significant equity stake in the Greek bank. Alpha Bank came close to clinching a deal with BNP Paribas last summer but it did not work out, reportedly because of the premium BNP would have had to pay over Alpha’s share price and the timing in handing management over to the French side. BNP Paribas wanted to take over the bank’s management in three years, but Alpha wanted to extend the period to seven years. Alpha is regarded as a potential takeover target because of its large free float, and the Latsis Group reportedly controls (directly or indirectly) about 10 to 13 percent of Alpha’s equity.

Following the collapse of the National-Alpha merger, the Greek banking system finds itself back on square one. It has already undergone a massive transformation. A series of mergers and acquisitions took place at the same time that banks tried to adjust to much lower euro-level interest rates, which helped fuel credit expansion in excess of 20 percent per year but resulted in tighter net interest margins. After reaping the full benefits of Greece’s nominal economic convergence with the rest of the eurozone in the form of enormous capital gains from their bond and stock portfolios from 1999 to 2000, local banks have seen their trading gains come down to much lower levels in 2001 on the back of a sliding Athens stock market.

Nobody doubts that more consolidation is on the way in the banking sector. However, the failure of the National-Alpha merger has highlighted the difficulties of merging large domestic banks, primarily because all large Greek banks offer, more or less, universal banking services. That means that any merger will result in extensive branch-network overlaps, potential revenue disruption, and market-share losses. The burden of adjustment in the case of an in-market mega-merger falls on cost-cutting, therefore, but cost synergies are hard to achieve given strict local legislation on redundancies. On the positive side, Greece is an underbanked market, offering much growth potential in the years to come in certain areas such as asset management, bankassurance, and retail banking, especially consumer loans and mortgages.

Forming some sort of an alliance with a large foreign bank, such as those between Commercial Bank and Credit Agricole, EFG Eurobank Ergasias and Deutsche Bank, or Piraeus Bank and ING, is another option for local banks. The main goal is to obtain know-how in certain fields, get better access to foreign capital markets, and offer more sophisticated products to your clients. However, alliances based on a small equity stake do not seem to have added value to Greek banks so far. The experiment of Nova Bank, which is the product of a deal between Portugal’s BCP and Interamerican, now fully owned by Eureko, is different in many respects. The top managers are mostly Greeks but the bank, which is very much focused on retail banking and bankassurance, is majority-owned by the Portuguese.

So far, no Greek bank has signed a strategic agreement with a major foreign bank to sell a significant equity stake in excess of 20 percent and hand over the management. So there is no precedent to judge the effectiveness of such a deal. General Bank seems to have embarked on this process with its major shareholder, the Army Fund, reportedly willing to reduce its current equity stake. Five European banks – two French, two Italian, and a Spanish one – are examining their options, but it is not clear if they’ll choose to submit bids.

Dimitris Kontogiannis is a financial columnist for the Greek daily, Eleftherotypia.
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