Quiet German banker outflanks rivals to seal cross-border merger

Albrecht Schmidt has achieved that rare thing in European banking, a cross-border merger. While his Frankfurt rivals were struggling to overcome a string of merger flops - first Deutsche and Dresdner, then Dresdner and Commerzbank - the 63-yearold chairman of HypoVereinsbank and his counterpart at Bank Austria, Gerhard Randa, announced in July that they had quietly negotiated a deal to create Europe's third biggest banking group in terms of assets and twelfth biggest in terms of market capitalisation. The new group would have eight million customers, 2,000 branches and 70,000 employees. It has long been a dream of the most ambitious European bankers to buy or merge with a foreign bank to create a continental powerhouse. But few schemes have come to much. There were cultural clashes, the price was high and governments were sometimes reluctant to see a strategic part of the economy pass into foreign hands.

That Mr Schmidt has pulled off a deal is testament to his careful, methodical approach. He can reasonably claim that the bank's earnings figures, released last week, are proof of "its special position". They showed a strong fourth-quarter performance in 2000 - unlike other German commercial banks. Mr Schmidt has his share of difficulties: the bank's return on equity is still too low, it is caught up in a complicated web of cross-shareholdings that constrain it in Germany and he was the architect of an earlier merger, with Hypo Bank in 1997, that very nearly ended in disaster. Yet his approach provides lessons for the consolidation that he believes will be played out across the continent.

Nobody can doubt the scope of his ambition. The Bank Austria deal placed him in European banking's big league. HypoVereinsbank now boasts the largest banking network in central Europe, spanning Germany, Austria, Poland, Hungary, the Czech Republic, Slovakia and Croatia. Not bad for a bank that just a year ago had 90 per cent of its branches in Germany. "We are the market leader at the heart of Europe," says Mr Schmidt. HypoVereinsbank is "in the fastest-growing region of the continent - (Europe's) new tiger economies". The deal also finally put some flesh on the bare bones of the self-effacing Leipzig-born lawyer's cherished vision of a "European bank of the regions", a network of local banks, each with its own identity but plugged into a single transactions platform. In effect, such a vision amounts to an acquisitions strategy. The bank is now focused on deals in Italy, Spain and Portugal. Mr Schmidt would not have won a seat at the top table of European banking if his ambition were not tempered by caution. He is reluctant to entertain the big-spending, swashbuckling ways of his investment banking-driven rivals in Frankfurt.

Mr Schmidt has secured, in the words of one investment banker, "low- to no-premium" mergers and acquisitions. At €60 a share, for example, Bank Austria was sold at a lower earnings multiple than many smaller institutions with less attractive franchises.

A good price is the fruit of careful negotiation. The deal was hammered out in secret - well away from the Frankfurt media spotlight, unlike the Dresdner-Commerzbank talks that were played out in the columns of newspapers.

"Schmidt is a stickler for details as well as being a tough negotiator," says a banker who knows him. "In the end he got a bargain."

After the negotiations comes the execution. Here, Mr Schmidt can draw on the lessons of Vereinsbank's merger with its cross-town rival, Hypo Bank, in 1997.

At first the deal was heralded as the long-awaited first move that would kick-start consolidation in Germany's fragmented banking market. It did not - although it did allow Vereinsbank, with a little help from Munich's politicians, to escape the amorous embrace of merger-hungry Deutsche.

But it also landed Mr Schmidt with an almighty headache. Hypo had been throwing money at east German real estate projects in the wake of unification. When the boom turned to bust, Hypo was left with a 3.5 billion deutschmark (€1.79 billion) hole in its property loan book.

The scandal eventually forced the mass resignation of Mr Schmidt's erstwhile merger partners from the old Hypo Bank, leaving him and his Vereinsbank colleagues in full control.

Ultimately, however, it was control that enabled Mr Schmidt to drive through the merger well ahead of schedule, shutting 250 overlapping branches and integrating the banks' information technology systems.

Mr Schmidt is proud of his achievement. "We formalised the merger in 18 months. Now we are one bank with one IT platform and one culture," he says.

Mr Schmidt is now focused on wringing the maximum savings from the Bank Austria deal and fusing the banks' operations. This year, he says, "will see lots of internal restructuring at the banks."

He aims to complete the merger by 2003. By then he will have extracted cost savings of about €320 million a year from the reduction of overlaps and the creation of a common IT platform, System Europe.

There is much still to do. The bank's return on equity is currently about 9 per cent, well below many of its European rivals.

"I can make my share attractive by aiming for a return on equity of 15 per cent by 2003," says Mr Schmidt. "I know investment banks can make much higher returns - 20-30 per cent. But their cost of capital is a lot higher and so are the risks. I am confident that with our strategy - our low cost of capital - our way will show through this year and next."

And it is here that a shadow of doubt appears. Mr Schmidt's professed preference for a "modern retail bank" over an investment bank does not tell the whole story. HypoVereinsbank earns a chunk of its profits - up to 30 per cent by some analysts' estimates - from investment banking. Indeed investment banking services, aimed mainly at its mid-cap European clients, are being quietly strengthened, with hirings in sales and trading. The bank is also on the lookout for more equity analysts.

For the time being, Mr Schmidt insists the bank's capital markets business is there to provide corporate and private clients with the products they need. Such statements are reassuring to his shareholders, who remain wary of the excesses of his investment banking-driven competitors.

But Mr Schmidt knows that corporate and real estate lending cannot generate the returns shareholders are increasingly demanding. One possibility would be to build a domestic franchise in "bancassurance", combining retail banking with other financial services. However, in Germany, Mr Schmidt's room for manoeuvre is constrained by ties with Allianz and Munich Re, the insurers, which have strategic shareholdings.

That only strengthens the logic of looking abroad. In future, Mr Schmidt's knack for cross-border mergers may be greatly in demand.