By Dr. Jim Leontiades
Cyprus International Institute of Management
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The recent spate of merger and acquisition activity should not have surprised anyone. Moreover, it is far from over. Membership in the European Union has opened our formerly closed economy. The greatest interest to foreign investors are not the smaller, profitable Cypriot firms with under-priced shares, of which there is a considerable number, but rather the largest and strongest companies — the banks.
There are a number of reasons for this, the most obvious being the renewed profitability of the Cypriot banking sector. Less obvious but also relevant is the fact that relatively few of these Cypriot banks have a rather high market share of what is increasingly seen from abroad as a very profitable Cypriot banking environment. This has made our major banks (the Bank of Cyprus and the former Laiki) formidable opponents on their home ground. Foreign penetration through toe-to-toe competition being difficult, acquisition became the preferred method of acquiring a large share of the Cyprus banking market.
Mr. Vgenopoulos has shown that it can be done but the most recent attempted takeover has so far not been successful. It deserved to fail. Firstly, on the basis of its commercial merit, offering to acquire the Bank of Cyprus for a premium of only a few cents over its price at the time. This menial initial offering was most likely only an opening gambit, quite possibly to be followed by more serious offers. But the real stumbling bloc to such proposals is the issue of control. The Bank of Pireaus proposal was for a takeover, not the “cooperation” which was initially hinted in the media.
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Role of the Cyprus Central Bank
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The Central Bank of Cyprus has already demonstrated that it has a role to play here and quite rightly. The European Union notwithstanding, the takeover of a bank such as Bank of Cyprus cannot simply be left to market forces. The fact is that BOC represents a substantial part of this country’s banking sector. It has a crucial, not to say dominant, role in the Cyprus banking system which the Central Bank oversees and is largely responsible for. The banking system in turn plays a key role in determining the economic prosperity or otherwise of the nation.
Does it make a difference if the control of national banks is exercised by foreigners or local citizens? Although the importance of the national control is often exaggerated, there is little doubt that when it comes to certain strategic sectors, it does make a difference.
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Restructuring of the European Banking Sector
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Even within the European Union, with its open market legislation, this has been evidenced quite clearly. The greater freedom of cross border commerce has brought increased competition between banks and a major restructuring of the industry. At first this was largely defensive, domestic banks merging with each other both to take advantage of the enlarged banking market but also as a defence against foreign acquisition. This domestic merger activity in Europe between local national institutions saw the rise of some of the worlds’ largest banks, such as ABN bank in
Whatever the European Union might wish, cross border takeovers of banks have been opposed by national authorities. There were no foreign takeovers of French banks until 2001. The former head of the Italian Central Bank surreptitiously obstructed all foreign takeovers and resigned recently amid related scandal. The few cross border takeovers within the European Union have been limited to a small market share.
The situation in Cyprus is quite different. BOC accounts for approximately a third of the Cypriot banking sector. Marfin Popular Bank and potentially USB already have a significant foreign interest. It is very doubtful that the Cyprus Central Bank would permit a takeover of BOC.
That still leaves the problem of the how BOC will respond to the increasing amalgamation and size of its foreign competitors, particularly as regards its penetration of foreign markets. Strategic alliance with another bank to penetrate foreign markets is something which the Central Bank could find acceptable. Even the merger of BOC’s foreign operations with those of another bank is something which might receive favourable consideration.
