Italys Alessandro Profumo has long since stood out from the crowd. As one of Europes most admired bankers, he jump-started domestic consolidation in Italy a decade ago, turning a motley group of seven local banks into the countrys most efficient and profitable lender, UniCredit. Then he took his act to a bigger stage, making a string of acquisitions across Central and Eastern Europe before pulling off the Continents biggest cross-border deal, the E19.2 billion ($23.2 billion) acquisition of Germanys HVB Group in 2005. As he went from success to success, he used his high pro½le to champion shareholder rights and transparency, and to criticize Italian corporate intrigue.
So when Profumo reached an agreement last month to pay E21.8 billion in shares to acquire Capitalia, an institution known for its opacity and boardroom machinations, many investors had concerns. The Rome-based bank has been plagued for years by bad loans and anemic returns. Its chairman, Cesare Geronzi, was convicted last year of fraud in the failure of a real estate company and faces possible charges related to the 2003 collapse of Parmalat. Geronzi, moreover, had engaged earlier this year in an extraordinary public feud over strategy with his chief executive, Matteo Arpe, and stripped him of the authority to pursue potential mergers.
Is Profumo risking his reputation, and his banks valuation, by doing a hasty deal at home rather than focusing on growth elsewhere in Europe?
The dapper executive insists not. I would never do a deal without value for shareholders, Profumo tells Institutional Investor. The takeover of Capitalia will generate E1.2 billion in cost savings and revenue synergies, he says, and boost UniCredits earnings per share beginning in 2009. In addition, by bolstering UniCredits domestic position to rival that of Banca Intesa, Profumo argues, he is strengthening his ability to pursue targets abroad as the consolidation game in European banking heats up. On a pro forma basis, the new UniCredit will have a market capitalization of E96 billion, ranking it second among European banks behind HSBC Holdings.
Profumo insists that integration and cost synergies will follow quickly the two banks will adopt a single IT platform next year, for example.
With HVB, we did more than expected. We have a good record on integration, Profumo says. I hope that we will continue to be able to deliver what we have promised at Capitalia.
The CEO has plenty of work to do to persuade investors, though. UniCredits shares fell 8 percent between early May, before it disclosed it was in talks with Capitalia, and the end of the month. Profumo also faced skeptical questioning from analysts and fund managers at road shows across Europe. The deal is all about power rather than shareholder value creation, says Tulio Salvatore, a bank analyst at Elliott Advisers in London.
Its a huge acquisition without any due diligence at all. Its just nonsensical.
To reassure investors, Profumo will need to move quickly to integrate Capitalia and deliver the promised bene½ts. The biggest downside of the deal is that it boosts UniCredits weighting in the Italian market. The bank will now get 47 percent of its revenues at home, compared with 36 percent previously. I think it makes the whole proposal less attractive as an investment, says Pierre Castela, an analyst at Gartmore Investments in London. Theres less exposure to Germany and to Eastern Europe.
Profumo notes that UniCredits business is growing faster outside Italy than inside, and he remains in acquisition mode. He believes the current wave of consolidation will produce four or ½ve clear pan-European banking leaders over the next ½ve years; hes determined to be among them.
The relative dimension of all the market players is in a range where everybody thinks they cannot be a target, he notes. So we have to talk of mergers of equals. It can take years. A merger of equals implies a company must be ready to change its own identity, which is not easy.
To be sure, this merger wasnt a ½rst choice for either bank executive Profumo was seeking to entice a French bank to the altar, and Capitalias chief preferred to remain independent but both felt that shifting alliances in the increasingly competitive European banking industry forced them to seal the deal quickly.
Arpe had been facing pressure from Barclays E65.3 billion bid for ABN Amro in April, which raised the prospect that the Dutch bank, or a new owner, would put Capitalia in play by selling ABNs stake. Suddenly, an Italian deal started to look attractive.
Before he began talks with Capitalia, Profumo had his focus on the market outside Italy. The UniCredit boss approached Société Générale CEO Daniel Bouton earlier this year about a potential merger. A tie-up with the French bank had clear attractions for Profumo: the heft of SocGens E63 billion market cap, a strong presence in another leading Western European market and a big boost to UniCredits fast-rising pro½le in investment banking and asset management.
But the potential for management turmoil in a merger of near-equals, combined with the risk of French political opposition UniCredit was obliged by Italian regulators to con½rm market rumors about its interest in the midst of the French presidential campaign appear to have sidelined that deal, at least for now.
With Profumo on the prowl and Geronzi looking for a white knight, it didnt take long for the two to tango.
The takeover was negotiated in just two weeks.
The ever-pragmatic Profumo explains to II: You do a deal when the deal is feasible. And we think that the conditions were right to do this deal. It was the last available option for us to reinforce our presence in the Italian market. It was also the last opportunity for others to enter that market, he adds.
Profumo is keen to stress that the controversial Geronzi will have no operational control at UniCredit. The only casualty of the deal is Arpe, who resigned as Capitalia CEO late last month. Clearly, Matteo did good work at Capitalia, Profumo says, but adds, Its not so easy to have two leaders in a company.