Today Barclays (British retail bank and capital markets firm) and ABN Amro (Dutch bancassurance leader and mid-market corporate bank) announced a merger. The combined entity will be the fourth largest global retail & commercial bank (after Citigroup, HSBC and Bank of America) with approximately 2% market share. And the eighth largest global investment manager.
Characteristics of combined business ...
- Revenues €54.4 billion, pre-tax profits €15.5 billion (2006 excluding LaSalle - $21bn disposal to Bank of America)
- UK incorporation (Barclays), Amsterdam headquarters, UK FSA lead regulator
- Primary listing on LSE, secondary listings on Euronext and TSE, ADSs on NYSE
- Staff 217,000 (before 12,000 cut from merger). 11,000 jobs moved to low-cost geographies following merger
- Business geography 70% Europe (UK 36%, Netherlands 17%), 24% Developing markets (Brazil, South Africa, Asia), 6% US
- Business products 53% retail/commercial, 33% investment banking, 14% investment management
- Retail branch network of 7,800 (including 2,000 UK, 1,050 Italy, 650 Netherlands, 600 Iberia)
- Serving 47 million customers (including 27 million credit cards)
- 8th largest global investment manager ($370 billion assets under management)
ABN Amro has been in the media spotlight for poor financial performance. In March 2007, TCI - a $7bn UK hedge fund (The Childrens Investment Fund) and aggressor 1% shareholder in ABN Amro - sent a letter to ABN Amro's top two executives, encouraging them to spin-off non-core assets and avoid new acquisitions.
My thoughts on the merger and its challenges.
1. What is the target market for corporate & investment banking business?
Few businesses can, certainly under the same infrastructure and brand, service largely unrelated market segments. But Barclays Capital targets large corporates and financial institutions while ABN Amro targets mid-market (SME) firms. Surely the IT systems, client service model and product suite for these segments are markedly different?
2. Major cost synergies seem achieveable (management claim €2.8bn)
A
major cause of ABN Amro shareholder concern over recent years has been
above-industry cost:income ('efficiency') ratio. Indeed ABN Amro
cost:income ratio has been 11.5% higher, on average, than Barclays over
the last five years (70.9% versus 59.4%). Were ABN Amro cost:income
ratio to be lowered by 11.5% to Barclays level then this alone would represent €2.6 billion lower operating costs.
For comparison, Royal Bank of Scotland is much more efficient than either Barclays or ABN Amro, with a ratio of 42%.
3. Do the terms of the deal share rewards fairly between shareholders of ABN Amro and Barclays?
Well, for Barclays shareholders then there seem a few causes for concern.
(a) The terms of the merger represent a 33% premium on ABN Amro share price as of 16th March
(b) Barclays management forecast that the deal will not be EPS cash accretive to its shareholders until 2010 (accretive to ABN Amro shareholders in 2008)
(c) Barclays and ABN Amro shareholders receive 52% and 48% respectively of equity in the combined business Yet - relative to ABN Amro - Barclays revenues are 40% higher, pre-tax profits 110% higher, revenue and profit 5 year growth rates more than double and efficiency ratio 11.5% better
How could this be? Perhaps ABN Amro's businesses, relative to those of Barclays, are perceived to be in higher growth businesses or geographies. Or perhaps the forecasted synergies (€3.5bn) have simply been passed to ABN Amro shareholders via the deal valuation. Well, The Childrens Investment fund investors in ABN Amro must surely be happy.
Presentation, webcast and press release given by executives of Barclays and ABN Amro following merger announcement. Many financials from the above commentary were extracted from the investor presentation.
BBC article: Barclays agrees £45bn Dutch deal
Comments