Hostile EU bank M&A raises risk of winner's curse

Reuters

30-01-2025

LONDON, Jan 30 (Reuters Breakingviews) - Launching an unwelcome takeover of a rival bank used to be a sign of dangerous excess. These days, it seems to be the most logical option available to would-be acquirers. Three bids and one possible approach are currently on the table in Europe, potentially worth almost 60 billion euros in total, none of which are wanted by the targets. The deals are nothing like the hubristic hostile acquisitions of old, but there's still a risk that the aggressors will suffer from the winner's curse.
The key players in the current round of European bank M&A are Carlos Torres Vila, chair of 63-billion-euro Banco Bilbao Vizcaya Argentaria (BBVA) (BBVA.MC), opens new tab, and Andrea Orcel, the CEO of 69-billion-euro Italian lender UniCredit (CRDI.MI), opens new tab. Torres last May launched a 12-billion-euro offer for smaller Spanish rival Banco de Sabadell (SABE.MC), opens new tab. Later in the year, Orcel snapped up almost 30% of Germany's 22-billion-euro Commerzbank (CBKG.DE), opens new tab, partly through derivatives, and made it known that he favours a full acquisition if local authorities agree.
In November, the former M&A adviser then offered 10 billion euros for local rival Banco BPM (BAMI.MI), opens new tab, which in turn helped trigger Banca Monte dei Paschi di Siena's (MPS) (BMPS.MI), opens new tab 13-billion-euro swoop on Italy's Mediobanca (MDBI.MI), opens new tab last Friday. In all four cases, the banks subject to the takeover interest have either formally rejected an offer or made it abundantly clear that they're not interested, implying that the bidders may have to go straight to the targets' shareholders to get what they want.
In one sense, it's surprising that unfriendly approaches have reappeared, having all but vanished following the 2008 financial crisis. The history since the 1980s is grim. LSEG's M&A database lists 24 hostile and unsolicited $1 billion-plus deals attempted by European banks, of which only five closed, for a 21% completion rate. That compares with a 75% completion rate for the wider universe of bank deals in the region, according to Breakingviews calculations.
And many of the transactions that got over the line were ultimately disasters, most notably the 2007 Royal Bank of Scotland-led 71-billion-euro carve-up of Dutch group ABN Amro, which resulted in bailouts for several members of the acquiring consortium. Orcel, ironically, helped to orchestrate that deal as an M&A banker at Merrill Lynch.
Even before that, BNP's simultaneous 1999 hostile offers for Paribas and Société Générale led to the 'Trichet doctrine', named after the then-governor of the Banque de France Jean-Claude Trichet, who indicated that hostile M&A involving Gallic lenders was a no-no following what became a messy affair.
The recent uptick in unwelcome M&A therefore requires some explaining. It helps to start with the necessary conditions for hostile M&A: a determined bidder and a target board with the confidence to say no. Both became present, rather suddenly, in recent years for European banks.
Rising interest rates boosted returns on equity, valuation multiples and animal spirits across the sector. By 2024, would-be acquirers found themselves with excess equity capital and a relatively rich acquisition currency for the first time in many years. Since share buybacks make less sense with higher valuations, M&A rose to the top of the agenda.
Yet the same forces also made perennial underperformers – like Sabadell, BPM and Commerzbank – more viable standalone players, empowering their boards to reject takeover interest. If Orcel and Torres had laid down formal bids a few years ago, when smaller lenders' share prices and returns were much lower, it's harder to imagine much of a fightback.
In mid-2022, for example, just a quarter of the current members of the EURO STOXX Banks Index had a consensus 12-month-forward return on tangible equity estimate that exceeded 10% – a typical rule of thumb for the sector's cost of equity. Now, 85% of the same group are on track to exceed that key profitability threshold, according to Breakingviews calculations using analyst forecasts gathered by LSEG.
In other words, the very factors that encouraged the acquirers also gave the targets ​reasons to resist, making unwelcome or downright hostile approaches the only viable option. Orcel, for example, didn't bother to negotiate with BPM's board before bidding in November because of the likely intransigence, a person familiar with the matter told Breakingviews. Possible future aggressors, like 51-billion-euro Dutch bank ING (INGA.AS), opens new tab or 75-billion-euro Italian giant Intesa Sanpaolo (ISP.MI), opens new tab, might find themselves in a similar situation.
The most pressing questions now are whether any of the current possible deals will close, and whether the buyers' shareholders should even want that to happen. Politics and regulatory approvals will play a large role, but so will price. Visible Alpha data shows that analysts expect Sabadell, Commerz, BPM and Mediobanca to all clear a 10% return on tangible equity in 2026 and 2027, implying that investors should only accept an offer that comfortably exceeds tangible book value, after factoring in a control premium.
The live value of UniCredit's BPM bid and BBVA's Sabadell offer are currently roughly in line with tangible book value, implying that they might need to raise. The same may be true if MPS wants to clinch Mediobanca, whose shares are now trading 11% above the current value of last week's proposal.
That presents a dilemma for Orcel, Torres and MPS's Luigi Lovaglio. Newly confident target banks, and their relatively bullish investors, can hold out for a higher offer. That may explain the bidders' own share-price moves. MPS stock has crashed by more than a tenth since last Thursday.
And while there's no evidence of a lasting M&A penalty in the shares of BBVA and UniCredit, nor are they getting any obvious credit for the promised bumper cost savings. The performance of the Italian lender, for example, has roughly matched Intesa's since the mid-November BPM offer. That suggests investors are expecting one of two things: either the hostile deals won't complete at all, or the acquirers will end up paying away all the possible benefits to the target.
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CONTEXT NEWS
Italy's Mediobanca on Jan. 28 rejected a takeover offer by state-backed rival Banca Monte dei Paschi di Siena (MPS), saying a tie-up would be detrimental to its shareholders because it lacked any strategic and financial rationale.
MPS on Jan. 24 announced a 13.3-billion-euro offer for Mediobanca. The bidder's shares closed at 6.21 euros on Jan. 28, which was 11% below their Jan. 23 level.
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