Societe Generale's (SocGen) survival as an independent bank has been thrown into doubt after it lost 4.9 billion euros ($7.2 billion) in a rogue trader scandal but France's number two lender may still escape the clutches of a predator.
The reason is simple: Rarely has there been a better time for a bank to guard its independence and ward off suitors.
A global credit crisis, triggered by a meltdown in US subprime mortgages, has driven up capital costs, stretched balance sheets as many banks take charges on exposures and dramatically reduced the risk appetite of bankers.
All of which could play into the hands of Daniel Bouton, SocGen's independent-minded executive chairman, as criticism rains down on him over the bank's handling of the affair, setting off speculation that SocGen is in play.
"I think one bank going for another bank will be tricky because the credit risks have been spread by the subprime crisis and that impacts everybody," said Ian Harnett at Absolute Strategy.
A French investment banker who spoke on condition of anonymity expressed a similar view: "There are far fewer candidates to go out and buy a bank because a lot of them are busy cleaning up their own shop."
SocGen has blamed losses on Jerome Kerviel, a 31-year-old trader who secretly placed huge bets on future movements of stock market prices while skirting around the bank's sophisticated systems.
Talk of a take-over by another French bank, BNP Paribas or Credit Agricole has been set ablaze by the dizzying fall from grace of SocGen, which has acquired a global reputation for innovation in financial derivatives.
The bank has faced the wrath of French President Nicolas Sarkozy, who has said top SocGen managers should be called to account for their actions. Meanwhile, regulators have taken SocGen's risk-monitoring procedures to task.
While stopping short of openly inviting a French rival such as BNP Paribas or Credit Agricole to bid for SocGen, the government has said the bank should stay in French hands and any foreign predators-in-waiting should keep clear.
"There is a desire to have a French national champion. A huge international bank but a successful one," said Stephen Hughes, a Zurich-based fund manager at Swiss private bank Clariden Leu.
But Sarkozy, said by analysts to dislike Bouton because of his links to former President Jacques Chirac, may have unintentionally thrown Bouton a lifeline. The SocGen board once more rejected Bouton's offer to resign on January 30.
"Firing Bouton would have given the impression that we were giving in to Sarko (Sarkozy) and that the bank was in a sense being nationalised," an unidentified SocGen board member told closely watched satirical French weekly Le Canard Enchaine.
"That would have been a very bad sign, especially for the directors of the American banks J. P Morgan and Morgan Stanley which are underwriting Societe Generale's 5.5 billion euro capital increase," the director told the weekly.
SocGen is pushing through the capital increase - which reports say could come as early as this week - to plug a hole in its balance sheet left by the trading loss. Investors have said they expect a discount of about 30 percent.
Brokers and analysts have unleashed a string of reports analysing the chances of either BNP or Credit Agricole mounting a bid or of the two teaming up to dismember SocGen and divide up the spoils between them.
US investment bank Merrill Lynch said there was a 70 percent chance that SocGen would be taken over, saying the bank's woes could present BNP with a "once in a lifetime" opportunity to boost its position in France.
SocGen shares fell to 66.80 euros after the scandal was revealed on January 24, their lowest level since August 2004. Merrill has a price target of 116 euros and a buy recommendation on the stock, which closed at 79 euros on February 05.
It said speed was of the essence. "It is in the French interest to find the optimal domestic solution for this deal as soon as possible," said Merrill in a report.
BNP and Credit Agricole could even join forces with a friendly foreign bank, such as Italy's San Paolo Intesa in which Credit Agricole holds a 5 percent stake, to carve up SocGen, said Merrill Lynch. A source close to BNP, who asked not to be identified, said SocGen had little chance of survival. "It's strategy of independence is illusory. It can vegetate for another 6 months, or a year, maybe." But a French take-over would take a big toll on jobs, because of the need to close overlapping branches and prune units, such as SocGen's flagship corporate and investment banking division.
Politicians frequently stress the number of jobs at stake, with SocGen employing 130,000 staff and BNP Paribas 140,000. Unions say they will fight any merger that cuts retail branches.
"If there is a French solution it would result in more job losses in France than if Societe Generale were to be associated with a foreign partner," said Jean-Pierre Lambert at Keefe Bruyette & Woods. "The corporate and investment bank would have a lot of overlap with Credit Agricole or BNP. It would be a jobs bloodbath," he said.
By effectively barring foreigners from buying SocGen, the government would also deprive SocGen shareholder's of a full-blown take-over battle, which would bid up the share price.
Lambert said he did not believe SocGen's share price, at 88.20 euros on February 05, up from a year's low of 66.80 euros on January 28, four days after SocGen revealed the rogue trading losses, was discounting an imminent take-over bid.
Pressure on SocGen to fall into the arms of another bank may subside once it has completed its capital increase. "This is Bouton's moment of weakness.
That is why the pressure is there now for an outside CEO to come in," said Simon Maughan at MF Global. "But in 3 months he can say he does not want a merger." For the coming weeks the pressure on SocGen is likely to remain intense.
Comments
Comments are closed.