Banking consolidation in Europe is back on the agenda. The merger of Banca Intesa and Sanpaolo IMI, unveiled earlier this week, has once again fuelled speculation about a wide range of possible deals as executives and investors try to work out how the landscape has changed.
At first glance, the merger of Italy's second- and third-largest banks would seem an unlikely trigger for cross-border activity. Although the combined Intesa-Sanpaolo will rank as one of the euro zone's largest banks by market value, it remains an Italian player with little clout beyond the country's borders.
But the deal's real significance is it is likely to be one of the last big mergers between banks in the same country to take place in Europe.
In most countries - with the exception of Germany - that process has largely been exhausted. As a result, executives are now more likely to go after overseas targets.
"The more the consolidation in the domestic market is over, the more likely cross-border consolidation will start in a bigger way," says Stefano Marsaglia, global head of the financial institutions group at Rothschild.
"Until now, consolidation has [ consisted of] stronger banks buying weaker banks, but since there are not that many weak banks, I think more consideration will be given to mergers of equals. It is not a question of if, but when."
Several other factors support the shift. The European Commission is encouraging cross-border consolidation as a way to speed the introduction of a pan-European market in financial services and create a group of large banks capable of competing with the largest US players.
After several years of benign economic conditions, banks are generating excess capital. And institutional investors appear to have shaken off their scepticism about cross-border deals and have eagerly applauded transactions such as the takeover by BNP Paribas of Banca Nazionale del Lavoro, the mid-sized Italian lender.
Deals such as Santander's acquisition of Abbey in the United Kingdom in 2004 challenged the conventional wisdom that cross-border acquisitions do not generate significant cost savings.
By improving Abbey's cost controls and combining information technology platforms, Santander has convinced investors the deal made sense.
Most bankers now assume that large banks will be able to cut 10 per cent of the cost base of a cross-border acquisition, thereby making it worth their while to pay a premium for the deal.
That said, genuine cross-border mergers remain hard to pull off. Although many banks have explored possible deals, national rivalries and disagreements about the distribution of top jobs in the combined group have proved insurmountable.
Even Intesa and Sanpaolo - with headquarters a few hundred miles apart in the north of Italy - had to take the unprecedented step of creating a two-tier board structure to provide jobs for both their chairmen.
Given the complexities, many European banks have instead decided to expand by pursuing bolt-on acquisitions in other countries.
Although smaller, these deals are seen as attractive because they are clear takeovers, leaving no doubt about who is in charge.
Smaller targets may also make better acquisitions from a financial perspective. A recent analysis by Mercer Oliver Wyman, the financial services consultancy, concluded banks had enjoyed better returns from small deals than from larger mergers.
