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Deal Making in Troubled Waters: The ABN AMRO Takeover Essay

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Updated: Nov 10th, 2021

The effects of the ongoing economic recession are irrefutable. From the last quarter of 2007, banks and other sub-prime lenders especially in the developed countries have been exposed to a strong upheaval in financial markets that has left many reeling under the heavy weight of bankruptcies and looming foreclosures. In the US and Europe, bail-outs, mergers, and takeovers have dominated the headlines in recent times as banking institutions try to navigate their way around a financial market that has drastically changed from buoyant optimism to threatening pessimism (Shenn 2006). The tumbling stock markets coupled with organizational and ownership shifts occasioned by the current financial meltdown has presented new challenges and opportunities in the banking sector. This essay aims at discussing and analyzing the ABN AMRO takeover in the hope of shedding light on how the takeover deal was made, its viability, and recommendations for future deal making.

The takeover of ABN AMRO is of particular interest to industry analysts and scholars alike since it is the largest banking takeover in history. Headquartered in Amsterdam, Netherlands, the bank is undeniably one of the largest in Europe. It has interests in asset management, commercial banking, investment banking, corporate banking, private banking, and retail banking (ABN AMRO 2009). In 2006, the bank, operating 4,500 branches in around 53 countries worldwide, had an operating income of € 17 billion. By the end of 2006, the bank had around 105,000 employees in its payroll, and an asset base of about € 987 billion. The bank reported a profit of € 10 billion in 2007 financial year (ABN AMRO; Keuleneer & Cossin 2006).

Despite the hugely pleasing figures described above, the ABN AMRO bank had been going through difficulties from 2003. First, it was evident that the bank had failed to gain a Return on Equity (ROE) figure that would have put it at a competitive advantage within the banking industry (Groenink 2003). ROE measures the return on equity invested by shareholders. Measured as a percentage of net income after tax over the shareholders equity, ROE is mostly used by organizations to measure how well they are able to generate profits from equity entrusted to the firms by the shareholders. Although ABN AMRO generated some profits, the bank was not anywhere near recouping the value of equity invested by its shareholders. The bank was also not doing well in the stock markets.

The woes facing ABN AMRO were far from over. In 2006, its operating expenses exceeded its operating revenue for the first time, causing the efficiency ratio to deteriorate further to 69.9 percent (Credit Opinion 2008). Operational blunders proved to be costly for the bank. For example, the ABN AMRO mortgage division was slammed with the largest-ever fine of $ 17 million for its infringement on Federal Housing Administration rules (Shenn 2006; Morris 2006). With non-performing loans increasing exponentially, the bank could only manage its operations through continued asset sales. It was against this backdrop that the besieged bank started to look for potential partners to help it navigate out of the woods.

The factors surrounding ABN AMRO banks takeover deal cannot be exhaustively discussed here. However, it is worth noting that the deal was being executed at a time when upheavals in the financial market were starting to affect the financial sector especially in the US and Europe. Previous reorganization by the bank into three independent strategic business units (SBU’s) to deal with wholesale customers; consumer and commercial entities; and private banking and asset management had already failed to produce the desired results of propelling the bank to the top 5 in its selected peer group (Keuleneer & Cossin 2008). The top management at that time utilized the Total Return to Shareholders (TRS), often measured against that of twenty leading players in the peer group, to measure the corporate success of ABN AMRO. But according to a letter sent to the bank by one of its shareholders prior to the takeover, it was evident that ABN AMRO shareholders had received no money from share price returns from 2000. In sharp contrast, the share price returns of ABN AMRO’s preferred peer group members had appreciated by around 44 percent. This alone was a valid cause to worry about the bank’s future (Keuleneer & Cossin).

ABN AMRO bank started exclusive talks with Barclays Plc of London and ING about the takeover bid. However, ING opted to terminate the negotiations in early 2007, leaving Barclays bank as the sole contender for a possible merger. But out of the blues, another British Bank by the name of Royal Bank of Scotland (RBS) led a consortium of other banks to propose a takeover bid worth about € 71 billion or € 38.08 per share (Keuleneer & Cossin 2008). This consortium comprised RBS, Fortis, and Banco Santander financial institutions. The consortium entered into this deal with the sole intention of breaking up the different divisions of the bank between them upon acquisition. At the end of the day, the RBS-led consortium won the deal by offering 20 percent more than what Barclays Plc was prepared to offer. By the time the deal was sealed, Barclays had indeed upped its bid to € 67.5 billion or € 35.73 a share.

Many financial analysts would readily agree to the assertion that in high profile mergers and takeovers, there must be outright winners and losers. Although the ABN AMRO takeover deal is still shrouded in secrecy as to who were the real winners, many analysts believe the deal went against the major players making up consortium (Keuleneer & Cossin 2008). First, it should be noted that the credit crunch started to be felt in Europe in August 2007, months prior to the finalization of the deal. The lead advisor to the consortium, Merrill Lynch, was either disinclined to offer the true picture of the turbulent financial markets during that period or had failed to do its homework well. To date, many financial analysts still question the rationale used by the consortium in financing the deal despite the fact that market upheavals had already started mauling the share prices of two key members of the consortium – RBS and Fortis (Keuleneer & Cossin 2008). The consortium took more than it could swallow by proceeding with the deal in such a hostile environment (Pratley 2009).

The impact of the 2008 financial meltdown on the acquisition of ABN AMRO bank by the RBS-led consortium proved undeniably disastrous. Some eight months after the acquisition, RBS was forced to announce a rights issue aimed at raising £12 billion to make up for some bad investment decisions, one of them being the acquisition deal of ABN AMRO at a time of financial upheaval and uncertainty (Carlsson-Sweeny 2009). This deal, done in troubled waters in the form of unprecedented global financial meltdown almost made RBS to go under. Indeed, the bank was one of the beneficiaries of a € 47 billion capital infused by the UK treasury to shield the financial sector from eminent collapse. Due to the loan, the UK now owns 58 percent of RBS. The rescue package from the government ultimately made the chief executive of RBS, Sir Fred Goodwin, to resign. According to Pratley (2009) this can only be described as a deal gone bad.

Although RBS had firmly maintained that LaSalle Bank must be included in the takeover bid, the latter was sold to the Bank of America for €14.7 billion, a figure that was far below what RBS was offering. But what astonished many industry analysts was that the consortium together with their lead advisors never revised the deal even after LaSalle was plucked away from them (Keuleneer & Cossin 2008). This again shows a lacklustre performance on the part of the deal makers representing the consortium. According to Keuleneer and Cossin, this miscalculation alone made RBS to incur additional costs in credit derivatives since they inherited the ABN AMRO wholesale division but failed to secure LaSalle, the bank that could have assisted them manage wholesale clients.

As a direct result of mismanagement blunder in ABN AMRO takeover bid, RBS shares lost almost half of their original value in 2008 (Keuleneer & Cossin 2008). Again, this can only be termed as a bad deal as it completely wrecked the bank’s business. Internal announcements made in February 2009 revealed that the bank had indeed made a loss of £24.1 billion, of which a substantial amount of this loss was due to the acquisition of ABN AMRO (Thomas 2009). It is worth mentioning that the UK government now owns 70 percent of RBS after transforming its preference shares into ordinary ones. This shows that the UK government now controls the ABN AMRO divisions that had earlier been allocated to RBS. In essence, this reinforces the fact that this deal could not have taken place in ‘troubled waters’ (Keuleneer & Cossin).

Some of the financial challenges experienced by consortium partners could have been averted if the lead advisors acting for both the RBS-led consortium and ABN AMRO gave preference to the strategic vision of the bank rather than financial superiority of the deal. It is a good thing for dealers to come up with the best possible price in any takeover. But it is also important to take into consideration other secondary factors that will affect the core business of any organization upon its acquisition (Coffee, Lowenstein, & Rose-Ackerman 1988). The financial woes that gripped some members of the consortium immediately after acquiring ABN AMRO are a useful pointer that such considerations were not taken into account. It is evident that speculation rather than hard facts on the ground was used to inform some of the decisions made by consortium members. It is true that financial speculation about the future is a healthy ingredient in deal making. But as Coffee, Lowenstein, & Rose-Ackerman rightly points out, “…the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of an organization becomes a by-product of the activities of a casino, the job is likely to be ill-done” (p. 15). This is exactly what happened in the ABN AMRO takeover deal.

Many industry analysts believe that Rijkman Groenink, the man at the helm in ABN AMRO bank during the takeover was right in supporting the Barclays Plc merger bid. Although Barclays was offering €67.5 billion for the merger in relation to the consortium’s €71 billion takeover super deal, financial analysts believe the Barclays deal could have made much more profits at a faster rate for dejected ABN AMRO’s shareholders than the deal that was arrived at. First, a merger between ABN AMRO and Barclays Plc would have occasioned the combined bank to become number two in Europe and number five globally if market capitalization is anything to go by (Keuleneer & Cossin 2008). Share prices would have appreciated within a very short time due to the improved ranking against selected peer members. This could have been a dream come true for shareholders whose share values had stagnated for a very long time. Sadly, this was never to be due to the manner in which the deal was haphazardly done and concluded.

The above notwithstanding anticipated pre-tax annual cost synergies clearly showed that the Barclays Plc deal was the best for either short-term or long-term financial investment. According to industry projections for annual cost synergies and revenue profits to be realized by the year 2010, the Barclays deal stood supreme over the consortium one. If the Barclays deal had won the day, the resulting combined bank was projected to make a cost savings of €2.8 billion and revenue benefits of €0.7 billion, totalling about €3.5 billion by 2010. The implementation and restructuring cost was estimated at €3.65 billion over the same period of time (Keuleneer & Cossin 2008). This means that the projected pre-tax annual cost synergies for the combined bank would have totalled €0.15 billion by 2010.

According to the projections done by Rabo Securities, the RBS-led consortium would make cost savings of €3.4 billion and revenue of €0.8 billion over the same time-frame, totalling to €4.2 billion. However, the implementation and restructuring cost for the consortium was projected at €5.54 billion by 2010. It therefore follows that the pre-tax costs synergies for the consortium would be €1.34 billion for the same period (Keuleneer & Cossin 2008). This is definitely a plus for the Barclays deal. The above coupled with the huge customer base and wide penetration in many countries would have informed the deal making process. Keuleneer and Cossin argue that such a merger with Barclays would have stimulated many growth opportunities especially in international trade and transaction banking. Sadly, the consortium deal, made in ‘troubled waters,’ overlooked all the above mentioned factors.

Lastly, it is indeed true that the majority of the shareholders wanted the ABN AMRO bank to be split into autonomous business units (BU’s) for easier management and as a way of facilitating a return of shareholders equity. Financial industry analysts are in agreement that such a process of integration and divesting was long overdue (Keuleneer & Cossin 2008). But how the division was done presented challenges to Fortis and RBS, while opening up opportunities to Santander. What is indeed clear regarding the takeover bid is that the process of dividing the bank, integrating the divisions into their new owners, and divesting had not been well prepared. For instance, Fortis had to commission a rights issue to raise around €13.2 billion needed to meet its part of the bargain in the takeover deal. Soon, Fortis sold a substantial proportion of Fortis investment to Chinese firm, Ping An, to finance its part of the deal (Keuleneer & Cossin 2008).

But the financial and economic woes that followed Fortis proved that the group had not prepared well to become a global player in the financial sector. Challenges of integration, customer retention, and deteriorating financial and market trends pushed Fortis into near oblivion after the widely anticipated acquisition of ABN AMRO bank (Keuleneer & Cossin 2008). In less than one year after the takeover deal had been completed between the RBS-led consortium and ABN AMRO, Mr. Jean Votron, the Chief Executive officer of Fortis was forced to step down due to a serious depletion of Fortis’ capital occasioned by the deal. It should be noted that the total worth of Fortis reflected in its stocks value had plummeted to a mere 33.3 percent of what it used to be prior to the acquisition (Starre 2008). This can undeniably be termed as a takeover deal gone sour.

The recommendations that can be offered from such a case study are many and varied. To mention only a few, no takeover deal of such a magnitude should be discussed or implemented during times of financial upheavals and economic recessions. During such times, there looms a general lack of confidence and uncertainty in global financial markets (Keuleneer & Cossin 2008). Takeover bids, acquisitions and mergers should only be implemented in times of calm and resilience in the money markets. Organizations willing to engage in takeovers and mergers must also do their homework well to ensure that they have all the information needed at their fingertips. Misrepresentation of facts in takeover bids can be devastating.

The advisors in any takeover deal must act diligently to ensure that all factors – micro and macro – are duly considered and possible alternatives sought before any deal is made (Forte, Lannotta, & Navone 2007). The advisors in any transaction must always act in the best interests of the parties they are representing. In the same vein, parties engaging in negotiations must always have a well organized plan of action that will be used to navigate away from unstable times witnessed immediately after the merger or acquisition bid has been concluded. A plan that deals with alerting the employees on how the new organizational structure will look like upon acquisition, those who will be affected, how to deal with integration issues, and customer retention formula must be prepared beforehand and agreed by all the parties.

The takeover of ABN AMRO bank by the RBS-led consortium will remain a subject of discussion for a long time to come. The deal was entered into annals of history as the largest financial takeover in the history of Europe (Keuleneer & Cossin 2008). But in the same measure, the ABN AMRO takeover deal has continued to dominate media outlets and newspaper headlines for all the wrong reasons. Financial heavyweights such as RBS and Fortis are now reeling under the pressure of engaging in a takeover bid in troubled waters. This case study has dutifully served the purpose of cautioning organizations against engaging in mergers and acquisitions in times of financial instability. It is suicidal for organizations to make financial deals in troubled waters.


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