Regulatory thicket makes banking M&A a slog
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Regulatory thicket makes banking M&A a slog

Bamboo thicket from Alamy 9Apr24 crop 575x375.jpg

Overgrowth of compliance is slowing down change

Société Générale announced on April 2 its cash equities joint venture with Bernstein Research Services, a deal the bank is excited about and rivals think could help it grow in equity capital markets.

Do I hear you double-taking? Hasn’t that happened already?

In a sense, it has. Bernstein SG is not just last year’s news, but the year before’s.

The tie-up was announced in November 2022 ― what has just happened is the deal being completed.

SG and Bernstein have combined their cash equities sales, trading and research operations into a joint venture, of which SG will own 51%, with the option to increase to 100% after five years.

By expanding SG’s research coverage in the US and Asia Pacific, especially of blue chip companies, the deal should give the bank’s equity capital markets team, which remains wholly owned, a better chance to compete for business in those regions.

“It’s good for them ― it improves their US distribution,” said a rival ECM banker. “I think they get to parity with BNP Paribas in the US, which is even better. Investors and corporates in the US care about your research quality, because it’s a sophisticated market. I’m sure they will use that to try and get back into the [ECM] market.”

In between the two announcements, SG had said relatively little about its plans, and the press release on April 2 contained little it had not said 18 months earlier.

SG had not even flagged in advance the date for the launch, April 1, and was notably tight-lipped when GlobalCapital wrote about it the week before.

One difference between the two announcements was the closing date, originally intended to be before the end of 2023.

SG insiders say the deal has involved enormous work for its equity, compliance and IT teams, partly because Bernstein was not set up as an investment bank in Europe.

Another change from the first statement is that Bernstein SG will not, as planned, be fully consolidated by SG. It will now consist of two legal entities. One, focused on Europe and Asia, will be fully consolidated. The other, focused on north America, will be accounted for using the equity method. Subject to regulatory approvals, they may merge later.

Another clue: on November 2 last year, the two parties signed “a revised structure to accelerate the transaction”.

Long haul

What all these elements point to is that the transaction was more difficult and time consuming to complete, from a legal and regulatory point of view, than SG had expected.

This regulatory drag is not unique, but nor is it even. When Deutsche Bank struck a deal to buy UK investment bank Numis for £410m at the end of April 2023, it aimed for completion in the fourth quarter.

The deal was sealed by October 13. A month later, Deutsche was global coordinator on a €300m accelerated equity capital increase for Zegona Communications, the London-listed telecommunications investor, to finance its acquisition of Vodafone Spain.

“That was Numis distribution and DB balance sheet,” said a banker close to the deal.

Quick work, for a deal only announced less than seven months earlier.

But Deutsche-Numis has had some sand in its wheels, too. On the research side, the two teams have not yet merged. They belong to different regulatory categories: Deutsche’s research is independent, Numis’s is not.

That means there is a serious risk of a “regulatory foot fault from collaborating too quickly”, one banker said. This part of the deal has been tricky to consummate. The parties hope to achieve research integration in the next couple of months.

A more famous example, though perhaps one that only a few will regret, was Credit Suisse’s failure in 2022-23 to spin off its corporate finance business into a separate entity, led by the investment banker Michael Klein, who had been a Credit Suisse board member.

The deal was under way, but highly complex, and could not be completed or even nearly completed soon enough to restore investors’ trust in Credit Suisse. When the US regional banking storm came in March 2023, Credit Suisse was blown from its moorings into the maw of UBS.

Way out needed

The securities industry has stumbled hundreds of times over the years due to a slapdash approach to risk, legality and probity. So it is no bad thing that such matters are now taken ultra-seriously.

But Bernstein SG would appear a fairly straightforward deal ― a far cry from the cat’s cradle Credit Suisse was trying to weave. Surely SG’s original hope of completing it within 13 months was not unreasonable?

That such deals are so arduous ― not to plan but to execute ― must be deterring other firms from trying.

In the decade to 2007, Dealogic recorded $4.1tr of mergers and acquisitions where the target was a financial firm. In the 10 years to 2023, despite substantial growth in the global finance industry, there were $3tr.

For regulators, the default action is to regulate; for supervisors, to supervise. Compliance professionals are paid to be cautious, and lawyers bill by the hour.

To investment bank CEOs and division heads, whose task is to think creatively and try new things to grow a business or make it more efficient, that can seem like an army of delayers ranged against them.

If the new political leaders in the European Union, UK and US after this year’s elections are serious about making financial services more dynamic and competitive ― and especially if they want to revive the EU’s stalled Capital Markets Union ― clearing some legal jungle to make transformative takeovers and recombinations easier should be high on their list. Reach for the machete.

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