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Fred’s gamble

October 3rd, 2007

Image courtesy of New York Times

Sir Fred Goodwin, the chief executive of Royal Bank of Scotland, has been accused of being “unhinged” in a blog published on FT Alphaville on October 1st, headlined The sobering message of RBS’s sky-high ABN bid.

Their correspondent Lina Saigol has calculated that Sir Fred and his “dos amigos” — Emilio Botin of Banco Santander and Jean-Paul Votron of Fortis (pictured with Fred above) — are about to pay a whacking 70 per cent premium for the Dutch bank ABN Amro.

She draws parallels with other bids where “ego, conceit and a deep-seated need for power” drove chief executives to bid dangerously high premiums at the peak of bull markets. She argues this applied to both Vodafone’s 1999 bid for Airtouch and AOL’s 2000 takeover of Time Warner. The chief executives concerned were Sir Chris Gent at Vodafone and Steve Case at AOL.

Saigol wrote:

“The Dutch banking group’s share price on January 1 — before its share register was populated by speculative hedge funds — was €24.35. Since then, however, the DJ Stoxx Banks Index has fallen approximately 10 per cent. This suggests that ABN Amro’s share price would be about €21.95.

The RBS offer for ABN Amro is roughly €38 a share — equivalent to a premium of more than 70 per cent.

Vodafone’s bid for AirTouch was pitched at 70 per cent in 1999, while one year later, AOL bought Time Warner also at a 70 per cent premium, according to data from Thomson Financial.

There are no comparable banking deals where such a premium has been paid.

Even more worrying is that Sir Fred et al are willing to pay 70 per cent for a new and untested model: the complex break-up of a bank across several countries

RBS argues that it is an unrepeatable deal and that the cost synergies alone justify the premium.

But the numbers are dizzying and RBS is risking its track record as being a successful acquirer of other banks. ABN, dragged down by the credit squeeze, is no longer worth what it was six months ago and making the numbers work is not going to be easy.

In the same way AOL’s deal came to symbolise the irrational exuberance of the dotcom era, the ABN transaction could well epitomise all that has gone wrong during this debt-fuelled boom.

Saigol is certainly right about one thing: the break-up of ABN Amro is an extremely risky venture, a complex exercise the likes of which have never been attempted before. If Sir Fred surprises the doubters and manages to “integrate” the Amsterdam-based group as successfully and eke out the promised synergies as he did NatWest, he’s going to be lauded as a corporate hero without compare (although he’ll be hated by Dutch trade unions and liberal thinkers alike). If he fails, it’s going to be catastrophic not just for RBS but also for Scotland’s reputation as a financial services centre on the global stage.

If Saigol’s right, Fred’s neck will be on the block and the many shareholders who’ve tried in vain to persuade him to overcome his addiction to deal-making in recent years will at least have the satisfaction of feeling vindicated (albeit substantially worse off).

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