When bankers put together a $23.8 billion loan to back Olivetti SpA's hostile run at Telecom Italia SpA, the repercussions of the deal went far beyond the companies immediately involved.

The syndication's success gave the European loan market a whole new look, one that was remarkably like its "anything goes" counterpart in the United States.

Before the Olivetti syndication, which at the time was the largest bank loan ever, the European loan market was a pretty staid place, dominated by cookie-cutter credit lines to investment-grade companies.

But the record Olivetti credit alerted bankers to the possibility that loans could be a key vehicle in Europe's nascent mergers-and-acquisitions boom.

Olivetti was "the most blatant example of U.S. financing in Europe to date," said Robert Woods, the current head of loan syndication in the Americas for Societe Generale in New York, who guided Citicorp's market- leading syndications team in the late 1980s and early 1990s.

Added Fergus P. Elder, vice president of European loan syndication for J.P. Morgan & Co.: "You can basically finance huge M&A deals through the bank market ... with speed, with secrecy, and the greatest flexibility of all."

This year Europe is on track to report $1 trillion worth of mergers. In the first quarter alone, 2,829 continental deals were announced, worth $348 billion, according to Securities Data Co. This amounts to more than half of the $597 billion worth of deals announced during all of last year. And 1998 accounted for record volume.

Yet even as the continental M&A market exploded, bank loans were not used to finance most deals.

In the first quarter, bank loans funded fewer than 100 deals, worth less than $30 billion.

But the Olivetti syndication, denominated in euros and oversubscribed by more than $10 billion, suggests that there is a greater potential for huge sums to be raised than most people had considered possible.

Olivetti "dispelled the myth that had been building for several years that you can't raise that kind of money for that kind of deal," said Peter Combe, head of structured finance for Lehman Brothers in London.

Bankers point to two key changes that have made cross-border M&A and jumbo financings like Olivetti possible.

First, restrictions across Europe limiting intracontinental deals have been eroding. Olivetti's bid, in fact, is the result of new M&A laws inside Italy enacted last year.

Secondly, the common currency of the European economic union was unveiled Jan. 1. Using the euro makes funding megadeals far easier because banks across the continent can participate.

These two changes have resulted in "a whole world of difference," according to J.P. Morgan's co-head of global M&A advisory, Klaus Diederichs. "Overnight, the equity market has become unified and comparable."

But the promise of Olivetti also comes with caveats. Sure, jumbo M&A deals financed by bank loans can now be done, but many doubt that the typical borrower will be able to shell out the kind of money it took to make Olivetti work.

"It'd be very rare to find people who would be willing to pay $600 million in fees to banks to do the deal," Mr. Elder said.

While many view Olivetti as a harbinger of what the future may bring, others see it as a rare bird, the kind of transaction that comes along only once or twice a decade.

After all, the largest loan on record before Olivetti was a $15 billion loan to Philip Morris Cos. in 1991.

And the biggest leveraged loan-in which a company pays higher-than-usual fees and interest-was $13.8 billion in 1988, when Kohlberg Kravis Roberts & Co. arranged the leveraged buyout of RJR Nabisco Inc.

Those loans, along with a similar deal to finance a failed LBO for United Airlines in the late 1980s, riled regulators, who were concerned that banks were lending huge sums of money for questionable enterprises.

That led to a Securities and Exchange Commission requirement in the early 1990s that banks must report all highly leveraged transactions in federal filings.

Bradley Y. Smith, head of the banking group and a partner at Davis Polk & Wardell in New York, said that Olivetti does not raise the same kinds of issues. Although priced at leveraged levels, he said the company expects to maintain its investment-grade credit rating should the deal be completed.

"You're talking about significantly stronger credits than what we saw in the late 1980s," Mr. Smith said. "It's a critical distinction."

And as it turned out, Olivetti was not unique.

Little more than a month after the loan was funded, Chase Manhattan Corp. and Goldman, Sachs & Co. syndicated a $30 billion credit for AT&T Corp.

Unlike Olivetti, AT&T, which was buying MediaOne Group Inc., had better ratings and name recognition.

The AT&T loan was also syndicated in the United States, a market bankers say is far more liquid and able to support a deal of that magnitude.

Furthermore, the AT&T deal was investment grade-paying lenders less than 125 basis points above the London interbank offered rate. The maturity, at less than a year, was also shorter than that set in the Olivetti deal, making the AT&T loan lower-risk for the banks involved.

However, there is little doubt that without Olivetti, the AT&T credit would not have met with such success.

Those involved with the AT&T syndication "felt relatively comfortable" with the size of their deal, Mr. Elder said. "They had seen some sums around that number already being raised."

In addition, AT&T used the same "drop dead" fees, or large one-time payments to banks participating in the syndicate, which had made the Olivetti loan so popular.

But the story is not over yet. Olivetti must win its bid for Telecom Italia so that a secondary syndication can take place and the loan can be issued.

As of late Friday, reports showed that Olivetti had won more than 50% of Telecom Italia's shares. Bankers arranging the loan predicted that the final loan amount needed to finance the buyout will be about $14.2 billion, or 60% of the original $23.8 billion syndication.

Even reduced, the effect of Olivetti is not diminished, said Stephen P. Hickey, managing director of loan syndication and sales for Donaldson Lufkin & Jenrette, and one of the central figures in the deal.

"We raised $33 billion in the market," he said. "That's what's important."

Tim Ritchie, head of syndicated finance for Barclays Capital, the investment banking arm of Barclays Bank PLC, agreed that the loan does not have to fully fund. "It would be positive for the European market for this transaction to go through," Mr. Ritchie said. "If this is a successful bid, it sends a very strong signal that other bids like this can succeed in the future."

Now it seems there may be no limit to the kinds of deals that can be financed, said Nigel Pavey, a director of syndicated finance for Barclays Capital. "You've seen a progression of the size of deals that have been completed," Mr. Pavey said.

Donald H. McCree, the head of Chase Manhattan Corp.'s European lending operation, who played a key part in putting together the Olivetti loan, said: "The European market has come of age. This market used to be about working capital revolvers. Now you're seeing change-of-control transactions dominate."

J.P. Morgan's Mr. Elder predicted that "people from Morgan and Chase will be on planes from all over the place saying, 'We can raise this for X and Y. So if you're thinking of a big acquisition facility and you need a large (financing) ... Well, presto, you've got it now."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.