McElvaine: So here's a company that was unfocused for most of the 1980s and the early part of the 1990s. And management is doing two things: First, they're disposing of some of their portfolio. And, second, they're taking the proceeds and injecting more capital into their wholesale investment bank.

OID: Nobody's perfect.
   McElvaine: In effect, they're getting rid of the secondary assets and focusing on the primary business.

OID: Which you like.
   McElvaine: Absolutely. I also like the fact that they've repurchased a significant amount of their stock
   Cundill: Although, as we've mentioned, there is still a little bit of doubt about that.
   McElvaine: Incidentally, Paribas' wholesale bank has had extremely volatile earnings -- which is what you expect from that type of business. And the question is whether it's worth half of book, two times book or book.

OID: And part of the answer is management.
   McElvaine: The big part of the answer.

OID: How would you rate management? And what can you tell us about their paper trail?
   Cundill: It gets a little complicated. But I think management at the top, like a lot of European bankers, knows what they have to do -- they've seen the cost cutting and everything else being done by their American cousins.

OID: And if they weren't prohibited by law and cared more about shareholders, they might even do it, too?
   Cundill: Their operating environment is more difficult because of these draconian labor laws. Plus, my sense is that there've always been a lot of fiefdoms in Paribas and a lot of internal politics. So making change isn't easy.
   But progress is being made -- both at Paribas and elsewhere in Europe. We see an evolutionary process taking place in France -- where companies are not only trying to refocus their businesses, but they're also trying to clean up the remnants of interlocking share ownership.

OID: How has that progress translated into returns on shareholder equity?
   McElvaine: Over the last four years, Paribas' return on equity has been mediocre at best. But management has kind of set an 8% return on equity as its internal target. And that doesn't sound like anything to write home about, but an 8% ROE would mean earnings of FF45 per share. And with Paribas at FF300, that wouldn't be bad at all.

OID: And in Paribas' year end letter to shareholders, their chairman actually set the target at 10% and said that they were hoping to get it up to 15%.
   McElvaine: I didn't realize that. But I like it.

OID: Here's what he said:
   "Our ambitions remain unchanged. Over the past three years, our ROE has ranged between 3% and 7% excluding specific items. This is somewhere around the mean for French banks, but we don't regard it at all as a satisfactory level. Our recently announced target of 10% by 1998-99 may seem modest, but it's a first step toward the 15% level which has already been achieved in certain areas and in certain subs."

   McElvaine: They actually did set a 15% goal about five years ago, as well. But they have yet to achieve it.

OID: I can certainly relate there.
   McElvaine: However, I don't want to discount their management's recent comments -- because I think they're a lot more focused today than they were five years ago.

OID: Sounds promising, if unproven.
   McElvaine: However, with Paribas at FF300, we figure that we're paying nothing for the operation. So it's all gravy.

OID: Because you're paying less than 55% of NAV.
   McElvaine: Exactly.
   Cundill: Similarly, an American banker might say, "What are you talking about?! If I earned 10% on equity, I'd be out of a job."
   On the other hand, you're starting from a lower base. So if they were able to get their returns up to 10%, the earnings progression would be pretty good.

OID: They'd become growth companies -- and momentum investors would jump on board.
   Cundill: Exactly.

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