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Even Andrea Orcel admits his recent M&A efforts haven’t quite gone to plan. The chief executive of Italian lender UniCredit, who is perhaps the best-known dealmaker in European banking, has repeatedly run into opposition in his attempts to take control of Germany’s Commerzbank and smaller Italian bank Banco BPM.
One might assume that rivals would be debating how best to avoid ending up in Orcel’s position. Certainly, there have been mistakes they could learn from: for example, don’t underestimate the importance of getting the support of politicians when seeking to do deals in a sensitive sector such as banking.
And yet UniCredit has done surprisingly well out of its muddle. The bank says its minority stakes in Commerzbank and Greece’s Alpha Bank have generated roughly 20 per cent returns on investment, even deprived of the benefits that could have come from full combinations. That compares with an 11 per cent return on its share buyback programme at current prices. Snapping up minority stakes in undervalued rivals has helped propel UniCredit’s stock up almost 70 per cent in the year to date to trade at a 50 per cent premium to tangible book value.
There may be a takeaway for Orcel’s rivals here. After years of improving their core businesses, many European banks have more capital than they can organically use. The obvious options would be to spend the excess on acquisitions or share buybacks. But as UniCredit and others such as BBVA have shown, large acquisitions are hard to get over the line. Meanwhile, share prices are around their highest levels in more than a decade, which reduces the relative appeal of a buyback.
Given all that, Mediobanca argues that taking minority stakes can be a “temporary substitute for consolidation”. It reckons investments in less richly valued rivals or areas such as payments technology could increase earnings per share much further than buybacks. Buying minority stakes has another advantage, too. Should conditions become more amenable for a full merger a few years from now, UniCredit would have a head start in buying up the rest, just as HSBC recently bought out minority shareholders in Hong Kong lender Hang Seng.
Of course, building up financial exposure to a business that you don’t control can be a risky process. Commerzbank hasn’t exactly welcomed Unicredit’s overtures, and even friendly combinations can be difficult — look how UK bank Lloyds recently decided to take full control of its wealth management joint venture with Schroders.
One area where Orcel was definitely correct was his prediction that conditions for European banks are getting tougher. Rising interest rates lifted all boats over the past few years, but with rates on the way back down, executives will have to get more inventive to drive further gains. Minority investments will not always be the perfect answer, but at least Orcel is prompting some good questions.
nicholas.megaw@ft.com
