Hold the Rice: Uncertainty Threatens Paribas-SocGen Vows

Analysts wonder whether a surprise isn't waiting in the banks' books.
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FRANKFURT -- Excitement has turned to concern in Paris.

Banking analysts emerging from a meeting this morning with representatives of

Societe Generale

and

Paribas

, which plan to merge in a stock deal worth about $18 billion, found themselves less confident of the merger's prospects.

The banks Monday set a

megamerger that will turn the new

SG Paribas

into Europe's third-largest bank. But the market has been decidedly cool: SocGen was off 3.2% and Paribas, 2.6%.

There were whispers this morning that the stocks were struggling based on concerns that SocGen paid too much for Paribas and that a big negative surprise might be lurking in the banks' balance sheets.

Moreover, one institutional trader in London said some market skeptics believe the merger arose more from political imperatives than market possibilities. Euroland banks are seeking to consolidate after the Jan. 1 launch of the euro, the stinging losses many suffered in the second half of last year and the need to compete with U.S. giants such as

Citigroup

(C) - Get Report

. Nonetheless, the French nuptials have raised eyebrows, looking very much like a shotgun wedding.

Also, concern about how much the banks know about each other has arisen in the wake of the merger announcement. Traders recall last September's merger of

Bayerische Hypotheken- und Wechsel-Bank

and

Bayerische Vereinsbank

. After that deal was set, it was learned that Hypo-und Wechsel-Bank had bad property loans, forcing the merged bank to make provisions of 8 billion marks. Shares again slid late last week after press reports said the German bank would be forced to make an additional 11 billion marks in provisions to cover bad real estate loans.

An equities analyst at a big U.S. investment house in London said representatives of SocGen and Paribas confirmed that both banks took losses in investment banking in the second half of 1998 that would largely negate the large profits made in the first half of the year.

When asked whether a so-called due diligence of the banks' books had been done, representatives of the two banks said no.

"This certainly leaves the analysts extremely uncomfortable," the analyst said. And with a chuckle, he added, "SocGen is just assuming that French banking auditors have done a good job."

The analyst said his clients were being alerted to be cautious with the two banks, although he stressed that he did not think the merger signaled that one of the banks was in big trouble. "But I do think there might be a small skeleton or two that will be found when the books of the two banks are integrated," the analyst said.