In the second big European banking deal this year, Societe Generale of Paris agreed Monday to acquire the Paribas group for about $17.5 billion.
The transaction would combine France's largest commercial bank with the investment banking strengths of Paribas in a $792 billion-asset giant.
The announcement came two weeks after Banco Santander, Spain's largest bank, said it would merge with Banco Central Hispanoamericano, its third- largest.
Bankers said they expect similar deals to follow as European banks respond to the introduction of the single currency, the euro, and increased competition from financial institutions on both sides of the Atlantic.
"European banks face competition and cost pressures, so more and more power is being concentrated among a handful of banks that have the capital and scale to compete," said Herbert F. Aspbury, regional executive for client management at Chase Manhattan Corp. in London.
"You have a large, deep, U.S.-style capital market in Europe with the arrival of the euro," he said.
"Everyone's looking to developed markets like Europe," Mr. Aspbury said. "The result is that you have too many people trying to do the same thing, with too few clients, and that drives consolidation."
Societe Generale and Paribas, to be known as SG Paribas, would be the No. 2 bank in the world in assets, behind the proposed Deutsche Bank/Bankers Trust Corp. combination. It would be the fourth largest in shareholders' equity, with $24 billion.
According to a statement released in Paris, SG Paribas would have critical mass in retail banking in France, as well as in asset management and commercial banking, and a strong position in investment banking, proprietary investments, and real estate.
The merger is part of a trend among commercial banks worldwide to acquire investment banks to strengthen their position in capital market- related activities and in businesses such as asset management, analysts said.
Deutsche Bank, for example, is expected to close its acqusition of Bankers Trust by midyear. In France, Credit Agricole two years ago took over Banque Indosuez.
"There are too many banks in France, too many in Europe, and too few banks that have a European dimension," said Bernard Chauvel, North American general manager for Credit Agricole Indosuez in New York.
"With the arrival of the euro, it's become clear that if the European players don't get a European scale, the Americans are going to get it."
The two institutions also said they hoped to achieve cost savings of around $900 million a year after around $1.14 billion in merger related expenses.
On a pro forma basis, SG Paribas would have net income of $2.4 billion for 1998, and a return on equity of 11.3%.
A prime goal of the merger will be to increase return on equity to 15%, the banks said.
"Societe Generale and Paribas have had a real problem covering their fixed costs," said Daniel Davies, a banking analyst with Robert Fleming Securities in London. "Bringing the two businesses together pushes the break even point for each much lower."
Andre Levy-Lang, the 62-year-old chairman of Paribas, would become chairman and chief executive of SG Paribas. Societe Generale chairman Daniel Bouton, 48, would be vice chairman and chief executive, but would succeed Mr. Levy-Lang in 2002.
Analysts added that Societe Generale and Paribas are strong in underwriting bonds on the European market. They added that though the merger will help both banks become more cost-efficient, it is unlikely to have a significant impact on the French banking groups' activities in the United States
Paribas never went beyond building a small, specialized investment banking operation in the United States
Societe Generale has substantial U.S. commercial banking activities but did not start building up its capital markets and trading operations until two years ago. As part of that effort, the bank acquired Cowen & Co., a Chicago-based investment banking firm, for $615 million last February.
Bankers said the main impact of the merger in the United States is likely to be a stronger presence in specialized areas such as commodity lending and in the oil and gas sectors.
Structured as a stock swap, the transaction is scheduled to close by March 16, 1999, pending regulatory approvals.
