danger of falling into second- or third-tier roles. Two strategies have emerged to avoid that fate, and the bitter battle among three of France's largest banks reflects the conflict between these approaches.

Strategy No. 1 focuses on building a huge and highly profitable domestic business, paying scant attention to investment banking and the global scene. That strategy is being pursued by the $381.3 billion-asset Banque Nationale de Paris, France's second-largest publicly traded bank. It is also the route being taken by a number of big U.S. banking companies, such as Bank One Corp. and Wells Fargo & Co., and by most British and Canadian banks.

"In-market mergers are the most logical," said Baudouin Prot, president and chief operating officer of BNP, in a recent interview. "There's no point trying to move cross-border before you've consolidated your home base."

Strategy No. 2 involves building a global powerhouse would provide a full range of sophisticated financial services, including investment banking, to the world's biggest corporations. This strategy is being pursued by $450.2 billion-asset Societe Generale, France's largest commercial bank. Others following this route include New York's Citigroup Inc., Frankfurt's Deutsche Bank AG, London's HSBC Holdings PLC, and Madrid's Banco Santander Central Hispano.

That helps explain SocGen's bid for the $309 billion-asset Paribas, which is known as a "banque d'affaires," combining commercial and investment banking. As France's third-largest bank, Paribas already has a significant presence in global investment banking as well as substantial positions in domestic leasing, mortgage banking, and other retail specialties.

Though the second option is riskier in the short term -- most combinations of commercial and investment banks have failed miserably -- those who adhere to it believe there is no alternative if they are to remain among the handful of banks serving global corporations.

They argue that if a bank like BNP cannot serve the full and most sophisticated needs of France's industrial giants, such as Pechiney and Peugeot, it cannot keep even their business.

"The key question for us is, 'Are we capable of becoming a global player?' " said Philippe Wahl, a member of the executive committee at Paribas. Mr. Wahl is in charge of coordinating the pending merger with Societe Generale. He said in a recent interview that SocGen's proposed merger with Paribas may be French banking's last chance to make it onto the global stage.

"We want to go to London and New York," he said. "BNP wants to go to Garges-les-Gonesse," a blue-collar suburb north of Paris. "We don't want to go the way of the English banks, making our money only in retail."

These ideological issues have shattered the traditional French penchant for inside deals arranged in concert with French regulators.

The battle began after SocGen announced its proposed merger with Paribas last February. A few weeks later, Michel Pebereau, BNP's chairman, stunned the markets when he made his hostile bid for both banks.

Since then, a ferocious six-month battle, which has slogged through the muggy heat of a Paris summer, has included a stream of public polemics, legal actions, and an abortive attempt by the French finance ministry to negotiate an amicable solution.

The French government has come down squarely on the side of BNP because it believes that its best chance of keeping France's commercial banks in French hands is to create a bank so big that no outsider could afford to buy it, according to French observers.

Keeping French banks French is tougher than ever because under the rules of the European Community, one nation-member must permit acquisitions of its banks by other members' banks.

Despite the EC policy, France warned Spain's Banco Santander Central Hispano against increasing its stake in Societe Generale in order to influence the outcome of the battle.

Shareholders of both Societe Generale and Paribas voted Friday on the competing bids, but the winner will not be known until Aug. 16 at the earliest. In the meantime, most market observers are predicting that BNP is likely to gain control of Paribas and wind up with a 30% to 35% minority stake in Societe Generale.

Whatever the outcome, most analysts say that France will not have a world-class contender.

"I can't see the BNP merger providing anything like that," said Bryan Crossley, a banking analyst at ABN Amro in London. "BNP's proposal is not aimed at doing anything for corporate clients, its investment banking capabilities aren't very great, and one questions whether, given the duress, the other two banks would be of much use to the combined group."

Even if a merger between Paribas and Societe Generale were to create "a stronger investment banking animal, it certainly isn't going to be a bulge-bracket firm," he said.

Like U.S. money-center banks 20 years ago, France's big banks are virtually indistinguishable from each other, operating as universal banks for decades across a broad range of activities.

Though the three banks have had international networks for more than a century, they have been slow to build cutting-edge operations, such as merger-and-acquisition units and asset management. Instead, their activities remain dispersed over a broad spectrum.

Societe Generale, for example, has an eclectic mix of international activities, ranging from retail banks in Argentina and the Ivory Coast to sophisticated trading operations in New York and London.

BNP runs everything from corporate finance in France to retail banking in the United States through its $14 billion-asset BancWest Corp. subsidiary.

Much of the lack of focus on profitability is because until only a few years ago all French banks with more than one billion francs of assets were government-owned.

In 1988, Societe Generale became the first large French bank to be privatized. BNP was privatized in 1993, and Credit Lyonnais was privatized last month after an estimated $25 billion government bailout to cover its losses.

And though French banks have been merging among themselves, the country's banking structure militates against high profits from domestic business. The number of commercial banks has dropped nearly 50% since 1984, to 517 at yearend 1998, and the number of other bank-like institutions has also shrunk dramatically.

Yet pressure on French banks is increasing. Foreign banks, such as Holland's ABN Amro and Spain's Banco Santander Central Hispano, are at the gates with thinly concealed intentions to expand in France.

Holland's ING Group and the insurance company Swiss Life Insurance and Pensionfull have just increased their stakes in Credit Commercial de France, France's sixth-ranking commercial bank. In addition to the Dutch and Swiss investors, Belgium's KBC Bancassurance Holding NV has a 15% stake. French bankers are now openly talking about the possibility that one or the other could soon take control of CCF.

Meanwhile, big French mutual banks such as $457 billion-asset Credit Agricole, $122 billion-asset Credit Mutuel, and the $40 billion-asset Caisse Centrale des Banques Populaires have expanded rapidly, as have quasi-state savings institutions, including the $40 billion-asset Caisse Centrale des Caisse d'Epargne. These savings institutions control slightly more than half of all deposits in France and have been expanding into commercial banking.

Credit Agricole took control of Banque Indosuez two years ago, Credit Mutuel took over the Credit Industriel et Commercial group last year, and Banques Populaires took control of Natexi, which was created when Credit National and Banque Francaise pour la Commerce Exterieure merged.

As the mutual banks have gotten bigger, opportunities have dwindled for France's commercial banks to merge with other institutions. BNP, in fact, launched its bid for Societe Generale and Paribas after failing in earlier bids to gain control of Indosuez, CIC, and Credit Lyonnais.

Still another reason France will find it difficult to create a world-class bank is the intense animosity generated within SocGen and Paribas by BNP's unsolicited bid, analysts said.

"Even American banks never dared to try a three-way merger," Mr. Wahl pointed out. "It's too complex, too risky, and too hostile."

Also, BNP and Societe Generale use incompatible computer software programs. Merging the two could take five or six years and would be enormously complex, analysts said.

And the French government is likely to block any effort by BNP to fire large numbers of employees or close many of the 4,800 branches that a three-way bank would have, making it extremely difficult to make moves that could substantially strengthen the merged bank.

In an even odder twist, a merger between Societe Generale and Paribas could trigger a rush for the door at Paribas. Below the most senior level at Paribas, many of the rank-and-file quietly support a merger with BNP, where they believe they would be running the show.

"The Paribas staff is pretty much cheering on a merger with BNP," said a senior French banker at Credit Agricole. "They see little future for themselves if SocGen takes control."

Some observers say there are other, more subtle difficulties preventing French banks from succeeding.

Herve de Carmoy, a partner at a private asset management company and a professor at the Institute of Political Studies in Paris, argues that the country's banks, like other corporations, have been too politicized, too inward-looking, and unable to come to grips with the forces of globalization.

In contrast to banks such as Citigroup and J.P. Morgan, where more than half the staff is non-American, French banks are still run by a closed circle of graduates of elite administrative schools. These top-level government bureaucrats spend their careers shuttling back and forth between positions in the finance ministry and at the banks. So far, at least, they have failed to allow non-French executives into their ranks.

"The international community considers the arrogance and lack of openness as the most notable characteristic of our elites, and the one that is most prejudicial to the success of our corporations," Mr. de Carmoy said in a recently published study of corporate restructuring, "Enterprise, the Individual and the State."

"The absence of any sanctions for financial scandals, the inability to apply standard performance criteria to the management of public establishments and the constant talk about 'the French exception' are a permanent source of incomprehension and stupefaction for foreign observers."

Putting it more succinctly, he adds: "They could, in principle, use a merger as a platform to build a global bank if they had the right mind set. But they don't."

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