One Europe: The Dream of Unity : Market Scene : Banks, Business Find Bigger Is Much Better : The grand scale of the unified Common Market has created investment opportunities and economic growth.

Continental, the German tire manufacturer, needed help--expert and fast. Pirelli, its Italian competitor, had just launched a hostile takeover bid, and Continental had no idea how to defend itself.

For financial advice, Continental turned not to a domestic bank but, of all places, to the venerable London merchant bank Morgan Grenfell. “We were looking for someone who had experience in this kind of international transaction, and Morgan Grenfell is where we found it,” says Jens Howaldt, Continental’s vice president and general counsel.

Nor did it hurt that Morgan Grenfell had recently been bought by Deutsche Bank, Germany’s biggest. Perhaps more than any other European company, Deutsche Bank has been spreading its wings into new countries and new lines of business as the European Community prepares to mold its 12 fragmented national markets into one.

A German-owned British bank protecting a German company from a hostile takeover launched in Italy: It is a microcosm of what is happening, to greater and lesser degrees, in business activity all over Western Europe as the end of 1992 approaches.

It is then that the European Community will bring down most barriers to the movement of goods, services, money and people among its 12 member nations.

Admittedly, the nitty-gritty of “EC ‘92” is not the stuff to make the blood race. Among its goals are uniform standards governing products sold in all 12 countries; consistent regulations for banks and other financial institutions that operate across national boundaries, and an end to woefully long customs inspections of trucks at border crossings.

Yet the mere anticipation of EC ’92 has helped trigger a six-year burst of business activity in Europe and subtly altered the character of the Continent. For a change, European economic growth--averaging 2.9% a year since 1985--actually outpaced America’s 2.3%. (Japan, at 4.7%, remained far ahead of both.)

What EC ’92 is doing for banking and many other sectors is freeing European industry from its divided past. Until now, Europe has lacked what the United States and Japan enjoyed: huge national markets that permitted economies of scale.

“Enabling EC companies to build the necessary scale in their home market is in many industries essential to assure EC industry competitiveness in an increasingly global environment,” the management consultant firm Booz Allen & Hamilton said in a 1989 report to the EC Commission.

EC ’92 is also making it easier for U.S. and other foreign companies to do business in Europe--a fact that has a number of major European companies such as France’s Peugeot (cars) and the Netherlands’ Philips (electronics) looking for protection not only from imports but also from foreign-owned factories in Europe.

Banking, by contrast, is one of Europe’s most dynamic sectors and, by all measures, Deutsche is one of Europe’s most dynamic banks. Valued at $1.5 billion, Deutsche Bank’s purchase of Morgan Grenfell was its most spectacular acquisition but hardly its only one; its buying binge has also taken it to Italy, Spain and the Netherlands.

Hilmar Kopper, Deutsche Banks’ chairman, credits EC ’92 with creating a favorable atmosphere for a more international posture.

“It was a psychological matter,” he says. “We needed that encouragement from the environment. It really opened our eyes, and . . . suddenly we found ourselves mentally ready to do it.”

Morgan Grenfell, whose chief executive had resigned in 1987 after a scandal involving another of its executives, profited enormously under its new parent.

“Our absolutely unique access to the German corporate world puts us in a totally different bracket from our American and British competitors,” says John A. Craven, who became Morgan Grenfell’s chief executive after the scandal.

When Booz Allen made that 1989 report, it noted that the five biggest European banks commanded only 21% of the EC market. By contrast, the five largest U.S. banks controlled 53% of the American market. Likewise, the accounting firm KPMG says the top 10 pharmaceutical companies in Europe (four American-owned) captured 33% of sales; the top 10 in the United States (two European-owned) had 42%.

More than that, different national standards discouraged sales across borders.

“A German who wants to register his car in France must first change headlights, wiring and windshield,” says Gary Clyde Hufbauer, a professor of international finance at Georgetown University. “Philips produces seven types of TV sets equipped with different tuners, semiconductors and plugs to meet differing national standards.”

Hence the single market, a plan hatched in 1985 by two members of the EC Commission: President Jacques Delors, a former French finance minister; and Arthur Cockfield, who had been Britain’s secretary of state for trade.

Directed by Delors and Cockfield, the EC bureaucracy identified 297 areas (now 282 after various deletions and additions) where regulations would be necessary to convert the EC into a single market. They ranged from establishing uniform safety standards for tractors to roughly equalizing the value-added tax (a sort of sales tax) charged by each EC member.

Rationalizing the European market will make life easier not only for European companies but also for Americans, Japanese and other foreigners who sell here. Early fears that the EC would adopt product standards that would be easier for local than foreign manufacturers to meet have mostly disappeared.

In some industries, notably automobiles, rules requiring minimum levels of locally produced components may discourage foreign manufacturers from building European plants. More than before, however, foreigners here are playing by the same rules as the locals.

“EC ’92 is highly attractive to American firms,” Hufbauer says, “It is ‘Opportunity Europe,’ not ‘Fortress Europe.’ ” Although neighboring Canada remains the single biggest foreign buyer of U.S. goods, the 12 EC nations together, at about $90 billion, import more from the United States than does Canada (about $80 billion).

So far, according to the American Chamber of Commerce in Brussels, 213 of the 282 single-market regulations have cleared the EC decision-making machinery. Denmark, at 121, has passed the greatest number of these regulations into national law; Italy, at 67, has enacted the fewest. Some of the regulations, including one governing banking, are already in force, and many others will take effect on Jan. 1, 1993.

Some regulations may never make it, at least not in the form envisaged in 1985. Those that would open up government procurement contracts to EC-wide competition are bumping up against the likes of buy-French and buy-Italian laws; only 2% of major EC government contracts now go outside the borders of the purchasing government.

Philip Bradstreet, director of EC services in the Brussels office of the Price Waterhouse accountancy, says the single market will become a reality, whether on next Jan. 1 or later.

“But the context of EC ’92 has changed,” he says. “As time has gone by, it has become clear that the single market is just another milestone on a much longer road that includes EC enlargement, the future of Eastern Europe and political and monetary union.”

Meanwhile, despite the approach of the single market, much of European industry is still foundering. Prominent is high-tech, which is hemorrhaging red ink. All the major European computer makers--Siemens Nixdorf of Germany, Groupe Bull of France and Olivetti of Italy--lost money last year. The French government, which owns most of Bull (whose losses in 1990 were a staggering $1.2 billion), agreed last week to sell about a 5% share in the company to IBM. “Europe is a poor third in computers, and it’s going to have trouble pulling out,” says Rod Dowler, chairman of KPMG’s European high-technology practice in London.

It is even worse in production of the tiny semiconductors that are the building blocks of computers. Europe makes about 10% of the world’s silicon chips, against Japan’s one-half and America’s one-third.

Overall, according to the EC Commission, Europe produces only about 75% of what it consumes in electronics and information technology, and it has to turn abroad (mostly to Japan) for the rest.

Much of what is made in Europe is made by foreign companies. IBM, with enormous manufacturing facilities on the Continent, sells more in Europe than the four biggest European-owned companies combined: Siemens, Bull, Olivetti and Philips.

But in many sectors, the drive toward a single market is already having one desired effect by encouraging corporate mergers and takeovers. According to KPMG, 1,388 firms in the 12 EC countries were sold in 1990 at a price of $41.9 billion, a substantial increase over just two years earlier (853 firms and $31.6 billion). Although takeover activity then fell in Europe, it dropped even further in North America, and 1991 became the first year in which takeover volume was greater in Europe.

Here in Frankfurt, Deutsche Bank has been doing its part to consolidate European business in at least one sector. “Deutsche is one of the truly European banks,” says Keith Brown, chief banking analyst at Morgan Stanley International in London.

After World War II, says Deutsche Bank Chairman Kopper, many Deutsche Bank officials refused to look beyond Germany.

“We’d lost all our foreign investments and branches after World War I, and we lost everything again after World War II,” Kopper says. “There were a lot of people who said: ‘No foreign investments ever again.’ ”

Attitudes shifted as a new generation moved into control and sought to extend Deutsche Bank’s activities beyond Germany’s borders.

“I’ve always considered myself one of the younger generation,” says Kopper, who was 10 when World War II ended. “There were many of us of my age who grew up after World War II with a firm belief that we should not have Europe as it was before.”

Except for France, Deutsche has major holdings in all the major EC countries and most of the smaller ones. Its retail banking operations include Milan’s Banca d’America e d’Italia (which it bought from Bank America) and the Banco Comercial Translantico of Barcelona.

Deutsche Bank is expanding just as its U.S. and Japanese competitors in Europe, plagued by financial troubles back home, are scaling back their European operations. Deutsche finds that its stiffest competition comes from the internationally oriented European banks, such as Germany’s Dresdner Bank and Commerzbank, Barclays in Great Britain and Credit Lyonnais and Banque Nationale de Paris in France.

The biggest feather in Deutsche Bank’s hat is Morgan Grenfell. Not only did the takeover establish the German bank in a new country, but it also propelled it into two lines of business--corporate mergers and acquisitions, and management of pension funds and other large pools of capital--in which it had previously done little outside its home market.

The 154-year-old Morgan Grenfell (named for Junius Morgan, J. P. Morgan’s father, and Edward Grenfell, an early British partner) had been rocked by scandal in 1986. Its chief executive had resigned because the bank had been financial adviser to Arthur A. Guinness & Sons, which had been charged with artificially inflating the price of its own stock in its successful effort to take over Distillers Co.

A year later, the French conglomerate Indosuez, whose holdings include the French bank of the same name, launched an effort to buy Morgan Grenfell. Craven, Morgan Grenfell’s new chairman after the 1986 scandal, was not impressed.

“The Indosuez group is a very large, complex bundle of industrial and financial holdings in which we could see little industrial logic and which could have created all sorts of possible conflicts of interest for us as an advisory firm,” Craven says.

That’s when Deutsche Bank entered the picture. Alfred Herrhausen, Deutsche Bank’s chairman, called Craven and broached the possibility of a takeover. “I was on a plane to Frankfurt the next morning,” Craven recalls.

The purchase of Morgan Grenfell, completed on Nov. 27, 1989, was Herrhausen’s last hurrah. He was killed three days later when a car bomb blew up his armored limousine on his way to work. The Red Army Faction, a terrorist group, claimed responsibility for the bombing.

Craven, who remained as Morgan Grenfell’s chairman and gained a seat on Deutsche Bank’s board, says the match between the two banks was nearly perfect.

Deutsche Bank, Craven says, is “transforming itself from being a large German domestic bank with an international network of branches serving essentially German companies to being a large international bank with a major presence in European countries.”

What Deutsche needed most in 1989 was to get into what Craven calls “financial engineering”--international funds management and merger and acquisition work. “They recognized that expertise in these areas is very much American and British,” Craven says.

Under its new ownership, Morgan Grenfell has managed 16 corporate acquisitions or mergers involving one or more German firms. Craven says Morgan Grenfell would have got little of this business without the Deutsche Bank connection.

“We were very satisfied with Morgan Grenfell,” says Manfred Fuchs, chairman of Fuchs Petrolub, a lubricants manufacturer in Mannheim that bought Britain’s Century Oils Group last year.

Morgan Grenfell is also proud of the deals it helped block--notably Pirelli’s attempted hostile takeover of Continental. Talks collapsed late last year as the Italian tire maker faced huge losses for 1991.

The aborted talks, Craven says, left Pirelli with a large holding in Continental on which it must recognize substantial losses. Says Craven: “We succeeded in stopping what could have been a very dangerous transaction to Continental.”

Relying on Trade Western European nations export more goods than the United States or Japan, but most of the trade is among themselves.

1990 MERCHANDISE EXPORTS Western Europe All exports*: $1, 584 (in billions of dollars) Percentage share of GNP: 23%Exports outside Western Europe: $459 Percentage share of GNP: 6.7% Japan: All exports: $504 Percentage share of GNP: 17% United States: All exports: $393 Percentage share of GNP: 7.2% * Includes export with other European countries.

THE COST OF BORDERS Within Europe, national frontiers delay road transportation. It can take nearly twice as long to ship products over the same distance in Europe versus America. A sample: Trip: Chicago to Tucson Distance: 1250 miles Time: 33 hours Pace: 38 m.p.h. Trip: Antwerp to Belgium Distance: 1250 miles Time: 57 hours Pace: 22 m.p.h. Source: General Agreement on Tariffs and Trade; A.T. Kearney, from “Reshaping Europe”