If it wasn’t already obvious, HSBC’s $15.4 billion deal for Chicago-based Household International Inc. last November erased all doubt: a new wave of transatlantic banking acquisitions is under way.
Of course, it doesn’t take much to make waves in the current merger-and-acquisition doldrums in the United States. But consider that BNP Paribas of France paid $2.4 billion in March for United California Bank, months after it bought up the 55 percent of Honolulu-based BancWest Corp. it hadn’t previously owned. In the past 18 months, Edinburgh-based Royal Bank of Scotland (RBS), working through Citizens Financial Group, the Providence-based subsidiary it acquired four years ago, paid $2.1 billion for the retail and small and midsize business banking units of Pittsburgh’s Mellon Financial Corp., then bought Philadelphia’s Commonwealth Bancorp and a small Massachusetts savings bank, Medford Bancorp. Indeed, spending by European companies on U.S. bank acquisitions has totaled just over $30 billion in the past year and a half.
The trend appears to be gaining steam. BNP Paribas, France’s largest banking group with E825 billion ($877 billion) in assets, has set aside E9 billion for external growth, including international bank acquisitions, before 2005. “That E9 billion isn’t just for the U.S.,” notes Douglas Grigsby, CFO of BNP Paribas’s BancWest unit and head of BancWest’s M&A team. But the parent company is “clearly interested in expanding here” and is studying “transactions both large and small.” For its part, HSBC claims in a recent Financial Times article to have identified 10 or more potential U.S. targets.
And while RBS chief executive Fred Goodwin has said only that his company still sees “lots of opportunities in the U.S.,” Richard Bove, an analyst at the San Francisco investment bank Hoefer & Arnett, thinks RBS would consider buying “almost any bank in the whole of the northeastern portion of the country.” Bove calls FleetBoston and PNC Financial two particularly interesting targets for RBS or one of its big European rivals. (PNC says that as a matter of policy it doesn’t comment on merger speculation. FleetBoston, though, says it has “a clearly stated strategy of staying independent.”)
Europe’s banks don’t always settle for easy pickings. U.K. critics of the HSBC-Household deal griped that Household’s subprime lending business to lower- and middle-income families was a risky departure for HSBC. And weeks before the deal was announced, Household was in the news for its $484 million settlement of allegations that it duped homebuyers with hidden costs in lending agreements. Meanwhile, U.S. analysts noted that HSBC was getting Household at a bargain 1.71 times book value, compared with the 2.94 times book Citigroup Inc. paid a year earlier for Associates First Capital Corp., another big subprime lender.
Lessons of the Last Wave
The recent cross-border activity, say analysts, stems from the availability of profitable U.S. banking targets at reasonable valuation levels, and an expectation that acquisitions can be made with minimal regulatory interference. “That’s pretty much the converse of Europe, where it’s difficult to do deals and where there are relatively few targets,” says Chris Ellerton, a bank analyst at UBS Warburg in London. Adds Bove, “Right now, American banks, from a capital position, are stronger than at any time in the last 50 years. I’d say it’s a good time to be buying.”