ABN Amro's long and apparently successful battle to secure a 30 percent controlling stake in Italy's Banca Antonveneta raises the prospect of more foreign takeovers in the European banking sector.¹ If that does happen, the question will become how to create more value from such mergers. Indeed, the results of past European cross-border deals have been disappointing, especially compared with domestic bank mergers. The typical explanation is that synergies such as trimming the overlap in branch networks are not available when banks from two different territories merge. Moreover, cultural differences, as well as political and regulatory obstacles, tend to make the execution of cross-border deals more challenging.

No one should underestimate the challenge of successfully executing any sort of merger, particularly one that spans different countries, jurisdictions, and traditions. European banks that choose their targets well and negotiate firmly, however, can create plenty of value in the future. A chief insight from our research is the realization that companies, with the help of farsighted and determined managers, can anticipate and overcome the hostile behavior of home country stakeholders.

Since many European banks may ultimately consider the cross-border route, this issue is an important one. Large-scale domestic consolidation remains a possibility in Germany and (to a lesser extent) Italy. But ambitious institutions in highly concentrated markets such as Belgium, France, the Netherlands, and the United Kingdom will have to look beyond their borders to expand. The regulatory authorities, after all, are likely to bar any further big bank takeovers within these markets.

To assess the legal barriers facing these transactions and to determine why certain acquirers left money on the table, McKinsey and Freshfields Bruckhaus Deringer studied 15 cross-border bank deals (10 of which were completed) undertaken from 2000 to 2004. A previous McKinsey study identified a significant gap between the announced synergies of deals and the amount of value that was theoretically available in them.²

Obstacles can be grouped into two categories: barriers to transactions (which make the deal itself impossible) and efficiency barriers (which limit an acquirer's ability to extract synergies from a transaction or to initiate stand-alone improvements in the target bank's performance).

• Transaction barriers. EU law does not permit discrimination between domestic acquirers and acquirers from other member states. Obtaining information about a bank's loan book, cross- shareholdings, or restricted voting rights, can admittedly be difficult—but that is just as true at home as it is abroad. The obligation to treat foreign and domestic acquirers in the same way, moreover, also applies to the prudence test, a standard that national banking regulators use to verify that an acquirer would be a suitable owner of a bank.³
• Efficiency barriers. Different national laws and regulations do impede the harmonization of retail products and services across European countries. But the extent to which these factors prevent acquiring banks from extracting cost efficiencies is likely to be small, given the domestic nature of retail banking. Although bank secrecy, data protection, and outsourcing laws may be more complex when institutions operate across borders, there is evidence that these obstacles are not insurmountable.

If the transaction and efficiency barriers specific to cross-border deals cannot explain the value gap, what does? The answer lies in the actions of national regulatory authorities, unions, and incumbent management—and, more specifically, in the way foreign acquirers react to them. These measures represent potentially serious impediments to improved performance in all types of deals. Typical steps by national stakeholders include implicit threats (real or perceived) against foreign acquirers in order to frustrate any subsequent restructuring or to limit access to local opportunities.

The responses to such behavior in the ten completed transactions we examined reveal a pattern. The acquirer's management, in an effort to maintain good relations with local stakeholders, often entered into lengthy and complex negotiations that ultimately guaranteed the status quo at the target bank, thus severely curtailing the acquirer's freedom to integrate it and to generate stand-alone performance improvements. Such voluntary agreements covered issues such as future head counts, the composition and size of local management teams, the continuation of bank sub-brands, and a rigid commitment to the structure of the regional headquarters.

Acquirers have not provided similar guarantees to banks in Central and Eastern Europe, where cross-border takeovers have been much more successful. In general, such guarantees are uncommon there because these countries have generally welcomed foreign capital and recognized the importance of banking skills to the development of their markets.

Before this year, evidence had already indicated that a tougher approach could pay off. When the Portuguese regulator wanted to use the prudence test to block Banco Santander Central Hispano's fiercely resisted bid for Mundial Confianca, in 1999, the Spanish bank promptly filed a complaint with the European Commission. Thanks to the pressure this move created, BSCH was subsequently able to acquire Totta, a subsidiary of Mundial Confianca. The time has come for other acquirers—heartened by the tougher attitude of the European Commission and by recent events in Germany and Italy—to negotiate firmly, thereby ensuring that banks can extract the full value of cross-border deals.

ABN Amro, for instance, didn't back down when the Bank of Italy opposed the company's original bid for Banca Antonveneta. Such tactics clearly caught the attention of the Brussels authorities, the international media, and the European financial community in general. Elsewhere, the terms of UniCredito's pending offer for Germany's HypoVereinsbank, put forth in the summer of 2005, do not seem unduly restrictive.

Given experience and very recent events, a future acquirer could choose to take a tougher approach by informing a target's management that voluntary guarantees of the kind that marked previous deals are unacceptable. Moreover, when management is reluctant to provide general information about market and operational risks—or about the loan book, in particular—the acquirer could mobilize other stakeholders (such as shareholders and the press) or sympathetic regulators. A bank could also appeal to outside opinion, though any tough stance should be accompanied by a clear willingness to work with the regulatory body.

That said, unsolicited bids have a greater chance of succeeding when the target is perceived to be weak and the acquirer strong. Shareholders in such cases will be more inclined to sell, the potential for value creation will be greater, and nationalistic forces will be less likely to defend a badly managed institution.