"Boy, when the Italians do something, they don't do it in halves," says Alister Hibbert, European portfolio manager at
Invesco Asset Management
Indeed. While some parts of the investment community are often chastised for hyperbole, it is not too hard to argue that the weekend
announcement of two major bank mergers in Italy does represent a sea change in the way the country conducts its business affairs. This should ultimately pay dividends for investors in Italy.
Italian business has been long dominated by a powerful elite that prefers to do its wheeling and dealing behind closed doors.
, a secretive investment bank with no branches and just 300 employees, exemplified this system. Mediobanca holds stakes in most major banks and industries and has held a virtual monopoly on corporate finance in the country.
While these cozy relationships suited the political and business elite, they offered little in the way of benefits to the shareholder.
The Italian Affairs
Of the two deals announced Sunday, the merger that has been cheered the loudest is
stock-swap bid for
Banca Commerciale Italiana
. UniCredito said it would offer eight shares for either five ordinary or five savings shares of BCI. Based on BCI's closing price Friday of 8.46 euros, the terms value BCI's ordinary shares at an 18% premium and its savings shares at a 45% premium. This might seem extraordinarily generous to those savings shareholders, but those shares amount to less than 1% of the bank's total capitalization, so the cost of this largesse is small.
The new bank, to be called
, will be Europe's seventh-largest bank, with a market capitalization of $42 billion. But size isn't the only thing that matters. In 1997, UniCredito offered a miserable return on equity of 7.6%, but the investment bank
Warburg Dillon Read
estimates a return on equity for Eurobanca in 2000 of 20.1%, which is well on the way to the bank's own forecast of 23% by 2002.
The scope for cost-cutting is great, given that the banks have a similar size and considerable overlap in areas such as asset management and investment banking. Hopes that these savings will actually materialize are not misplaced: UniCredito is run by the irrepressible Alessandro Profumo, one of those rare managers in Italy who isn't afraid to wield the ax.
"Profumo is the perfect man for the job," says Klaus Martini, the head of European equities at
Deutsche Fund Management
. "He has the perfect idea of what a bank should be. There will be cost savings and a fast integration, which is essential for these things to work."
Sunday's other announcement, much less expected by the market, was that
would bid for
Banca di Roma
. San Paolo will offer two of its shares for 19 of Banca di Roma's, which would imply an 18% premium based on Friday's closing price.
This merger is more complementary than the one between UniCredito and BCI, so the opportunities to cut costs are fewer. San Paolo has two-thirds of its branches in the north and northwest, while Banca di Roma has more than half in central Italy. Furthermore, the headquarters of San Paolo and Banca di Roma are in different cities (both UniCredito's and BCI's headquarters are in Milan) and it would be hard to close one.
As such, Warburg estimates the combined entity can achieve a return on equity of 14% by 2000, compared with 4.9% in 1997.
The creation of these two national champions should essentially complete a process that began in 1997 when
joined forces with two northern regional banks. Focus has now inevitably turned to Italy's insurance industry and the increasing number of joint ventures between banks and insurers -- known as bancassurance -- and the future of Mediobanca itself.
The King Is Dead; Long Live the King
Mediobanca, which had long treated the banks somewhat imperiously and was trying to engineer a deal between BCI and Banca di Roma, will now find that Eurobanca is its largest shareholder with a stake of 16%. The shoe is definitely on the other foot.
One of Mediobanca's most prized assets is its 12% stake in the insurer
. According to the investment bank
, Mediobanca has already been talking to Generali to organize its defenses. Another possibility would be for it to try to cut itself a role within Eurobanca, but that of course would involve some loss of independence and a further erosion of its power.
The bank mergers will shake up the bancassurance ventures. There is some debate whether insurers will ultimately merge with banks or whether the industry will follow the French model and insurers will merge among themselves. Deutsche Fund's Martini favors investing in the independent insurance companies such as
, which should benefit in either scenario.
Italy's business world is in convulsions, to put not too fine a point on it. Together with
audacious bid for
and the fashion war going on over
, it looks as though Italy's business world will never be the same again. For the investor, this is surely not a bad thing.