French fin de siecle IR
Claude Haberer, head of investor relations and financial information at Banque Nationale de Paris, put down his Monday morning newspaper and furrowed his brow. The headline announced rival bank Societe Generale planned a $13.7 bn merger with Paribas, France's fifth-largest bank. The surprise agreement meant BNP risked becoming odd man out in France's restructuring banking sector. Haberer shuddered.
But he and his colleagues in BNP's IR department could take some consolation. After the February 1 announcement, BNP's stock price remained stable while those of SG and Paribas dipped. 'The market's adverse response suggested a door was opening for us,' says Haberer. 'Our first reflex was to make a counter-bid for Paribas. But soon the scope of the only possible reaction began to dawn upon us.'
That reaction, a daring and unprecedented hostile $38 bn bid for both SG and Paribas, would send shock waves through France's financial establishment. The epic six-month struggle would be fought in the courts, the halls of government, the media – and in the minds of investors.
The market had expected a deal. The government wanted the country's banks consolidated before facing global competition. Paribas looked ripe for takeover and a friendly SG/BNP deal had been considered. In a break with tradition, however, where the chips would fall proved not to be entirely in government hands.
'If any deal was market driven, this was it,' says Haberer, a 19-year BNP veteran banker who took on IR responsibilities in January 1998. While BNP enjoyed tacit government support, the bank's IR strategy avoided reliance on it. 'Whatever the government's position, we kept a market-oriented approach to our business plan and communications strategy,' says Haberer. 'Deals done simply because the government pushes them will suffer afterward.'
Haberer, 42, has quickly come up to speed with the equity markets. With roots in credit analysis, he took up the IR mandate following three years as global head of sales for forex and treasury products. Haberer confides he knew nothing about IR but the equity-loving banker would soon learn it was a terrific opportunity. But also a crucible.
Yet Haberer would be prepared. With a corporate overview and close working relationship with management, he set out to make sure he and his staff would be a high profile IR team in tune with market sentiment and able to relay feedback to decision-makers.
In the end, BNP would snatch Paribas from its rival's arms but fail to clinch a menage-a -trois with SG. Along the way, however, IR sophistication blossomed and banks all over Europe are studying the IR lessons.
Capabilite, fraternite, credibilite
As France's biggest and most profitable bank, Haberer's opponents at SG saw BNP as a formidable but upstart competitor. The SG/Paribas strategy hammered away at the risks of a hostile takeover. Simultaneously, it attacked the ambitious scale of BNP's three-way plan, scoring points with risk-conscious investors. Government approval for the double bid recognized BNP's management ability, but the issue lingered.
Banking on shareholders to ride a winner, BNP remained optimistic. It believed it had come far and should deal with SG as a peer. Its IR department would reflect that confidence with a business plan that seemed to jive with market desire. While the saga was accompanied by countless squabbles over cost savings, synergies and the value of increasingly complex rival bids, credibility and market sensitivity emerged as key factors. One move that seemed to undermine SG credibility came at the end of March when, after BNP made its counter-bid for Paribas, SG responded with a novel plan featuring new financials and a strategy resembling BNP's. For SG, it was a big turnaround and the market applauded. However, the revamped offer had unexpected consequences.
'It badly damaged SG management's credibility,' says Benoit Vincenzi, an analyst with financial brokerage Fox-Pitt Kelton in London. 'They were saying all the right things, but if the new plan derived from managements' real belief in the strategy, it should have been presented at the outset and not once BNP had bid.'
Haberer says the market rejected the SG/Paribas project largely because of its very 'friendliness'. 'The market felt Paribas needed restructuring and SG's first deal didn't do that,' says Haberer. 'Investors appreciated our dealing with the issues that needed to be addressed.'
Shareholder mix
Whether BNP had a good strategic plan for Paribas is, of course, open to debate but it did have a convincing one. And it persuaded a key constituency. The reasons BNP captured Paribas, but not SG, have much to do with shareholder composition. Since French retail shareholders owned only about 15 percent of each bank, fund managers were left smack in the middle of the brawl.
Galling to some, foreigners own over 40 percent of each bank. Haberer believes that analyzing financial and industrial logic from a desk in New York or London allowed for a dispassionate assessment. He claims almost all foreign institutions backed the BNP deal.
The French institutional world, conversely, was in a quandary. This merger would affect personal and business relationships, involving a range of considerations. Says Haberer: 'We saw cases where fund managers would tender one position to one side and the other to the opposition hoping to please all parties.'
While core shareholders made up roughly 20 percent of BNP and a little more at SG, Haberer estimates only 7 percent of Paribas holders were 'strategic'. That left plenty who were ready to take what they perceived as the best deal. As for the arbs, they would follow the pack, and BNP had contacted them soon after the contest began. Ultimately, despite a 'hostile' overture, over 65 percent of Paribas shareholders tendered.
SG's shareholder roster was more stable. Core shareowners, employees and retail holders accounted for a big chunk of the bank's capital and fewer arbitrageurs rattled the pen. When the tender closed on August 6, most retail holders were tanning on the Riviera (advantage SG), while employees and core shareholders held on to their SG shares. BNP's capture of 31.5 percent of SG voting rights came mostly from foreign and French institutions.
Re-enter France's regulators to shepherd the battle's denouement. BNP had clearly won Paribas but now had to show its 'effective control' of SG to proceed with the three-way link. Regulators decided giving SG to BNP with less than a third of voting rights was a stretch – ironic, perhaps, since the government was committed to consolidation. Still, it may be best for all concerned. 'Blending SG and BNP would have been a mess,' comments one Paris-based analyst who supported the SG Paribas plan. 'There was considerable bad blood.'
Haberer sees French regulators' behavior as giving investors confidence. 'Our deal showed the limit of regulators' power,' he says, noting the Banque de France could not force a compromise. 'The French equity market's legal framework was strictly applied.'
Closed loop IR
Media rumors were a constant headache throughout the contest. BNP's IR strategy employed a disciplined closed loop among journalists, analysts and staff. IR practitioners worked closely with press specialists, but each stuck to a strict definition of roles: IR people dealt with investors and analysts, while press people spoke with media.
'People always look for inconsistencies,' says Haberer. 'If you keep the circle closed and information consistent, you can quash rumors.' Of course, the press also speaks with analysts, and analysts were prime targets in BNP's IR strategy. 'Understanding analyst sentiment is paramount,' states Haberer. 'Our IR team includes people with an analytical background who can quickly assess analysts' concerns and put forward arguments in familiar language.' Haberer says the tactic helped BNP retain 75 percent of analyst support.
But the ultimate target was investors. While making a quantum leap in IR systems and databases, BNP staffed up its IR team and assigned 50 institutions to each member. 'You must know within hours how your opponent has responded to your communications,' says Haberer. 'Closing the feedback loop means management can tailor arguments to match investor concerns. Any doubts or issues needing to be resolved would trigger a management visit.' With senior managements' offices a few doors away, ample opportunity existed to tell management who to see.
As the struggle attenuated, stamina was valued at a premium. 'It required a monk's dedication and a soldier's temperament,' quips Haberer. Mornings began at 7.30 when up to 30 people, half external consultants, converged for a meeting with BNP's president and chairman. With New York six time zones away, IR staff would often leave work after 11 pm.
Now the dust has settled, Haberer hardly has time to rest. BNP must commence Paribas' integration, and investor relations will be among the first departments effectively merged. He now spends weekends surrounded by Paribas financial data. The challenge is to learn a whole new global banking group. And sell it to investors.