Sir Fred Goodwin’s plan to dismember Dutch banking giant ABN Amro is one of his most intriguing takeover moves yet. Can he make the three-way split work?
THE plot for the wooing of what has been described as the “Ugly Betty” of European finance was hatched over a game of golf near Madrid.
Banco Santander’s dealmaker-in-chief and general manager Juan Rodriguez Inciarte was having an amicable game with his friend Sir Fred Goodwin, chief executive of Royal Bank of Scotland.
The pair were playing at “Financial City”, the Spanish bank’s impressive new headquarters complex on the western fringes of Madrid, which sprawls over 160 hectares and accommodates 5,000 staff. Unlike RBS’s similar development at Gogarburn near Edinburgh, the Grupo Santander complex also boasts a purpose-built 18-hole golf course.
As Goodwin tested out his swing, the Paisley-born banker had what can best be described as a “Eureka” moment.
It was looking increasingly likely that RBS’s fierce rival Barclays might be about to pull off a £90 million merger with ABN Amro, the large but inefficient Dutch banking giant. To Goodwin’s chagrin, the Barclays CEO John Varley had skillfully positioned himself as a “white knight” after activist investor The Children’s Investment Fund had started pushing for a break-up of the unwieldy ABN Amro in February.
Varley had achieved this by bending over backwards to placate Dutch national pride, for example insisting the merged Barclays/ABN Amro group would be headquartered in Amsterdam and that it would be regulated by the DNB (the Dutch central bank) — even though its primary listing would remain in London and it would abide by UK corporate governance rules.
If Varley pulled this one off it would see Barclays leapfrog RBS in scale and stature. In addition to being the biggest retail bank in the Netherlands, ABN Amro has a strong presence in Latin America (principally through Brazil’s Banco Real), North America (through the Chicago-based bank LaSalle) and UK and European investment banking (through Hoare Govett in the UK and Alfred Berg in Scandinavia, as well as operations under its own brand). It also has a scattered presence in retail and commercial banking across Asia.
A Barclays acquisition of this global behemoth would transform the former Quaker institution, at the same time making it bid-proof. This was not something Goodwin was keen to see happen.
But in that breakthrough moment on the golf course, Goodwin thought if RBS were to bid in tandem with Santander (and possibly with a third European bank) they might be able to gatecrash the nuptials. In other words, they would be able to make an offer that would turn out to be more attractive to the Dutch bank’s shareholders than Varley’s proposals.
One source at Barclays described it as a rather unconventional form of courtship, saying: “I’ve certainly never tried to woo a girl by offering to tear her limb from limb.” However, in Goodwin’s world things like financial firepower and strategic fit matter much more than the niceties of courtly love.
The plan, which inauspiciously first became public on Friday, 13 April, has its critics. They claim that Goodwin’s hugely ambitious and indeed unprecedented break-up approach is almost bound to fail — first because the triumvirate of banks will struggle to agree on how to divide the spoils, and second because of the complexity of dealing with multiple financial regulators around the world.
In particular, they warn that the apparent hostility of Nout Wellink, president of the Dutch central bank — which may be driven either by patriotism or simly suspicion the three way carve up of ABN Amro will fail or cause financial mayhem in the Netherlands and further afield — is a major obstacle to the consortium’s approach.
Yet Goodwin’s dream, fanciful or otherwise, comes one step nearer to reality tomorrow. Goodwin, Inciarte and Jean-Paul Voltron, chief executive of the Dutch-Belgian bancassurer Fortis, are flying to Amsterdam, along with some of their boardroom colleagues, to present their plans to the ABN Amro board.
They will seek to persuade the Dutch bank’s board and its key advisers that their proposals stack up and that they will do more to enhance shareholder value than Barclays’ cosier embrace .
The gathering will be held in the boardroom atop ABN Amro’s imposing 105-metre high headquarters in Gustav Mahlerlaan, just 15 minutes from Amsterdam’s Schiphol airport.
RBS insists its proposed deal will be straightforward from a shareholder, regulatory and execution perspective. It said in a statement: “The banks welcome the opportunity to present their proposals to ABN Amro so that they can be considered by the board of ABN Amro alongside any proposals from Barclays.”
At the back of the minds of the ABN Amro contingent, likely to include Rijkman Groenink, its beleaguered chief executive, and Arthur Martinez, the American-born chairman of the supervisory board, is that they will need to be careful to put shareholder value ahead of self interest or “economic nationalism”.
Waiting in the wings will be The Children’s Investment Fund, the activist head fund which effectively put ABN Amro into play earlier this year and has threatened legal action if ABN fails to pursue the option that leads to the “best value” for its shareholders.
A consortium approach to taking over ABN Amro serves two main purposes for Goodwin. First, it should enable the Scottish/Spanish/Belgian combination to trump Barclays’s expected €65 billion (£44bn) offer for ABN Amro by a clear margin.
Barclays was still working on its plan this weekend. Having until last week focused on a straightforward acquisition or merger with ABN, Barclays is beilieved to be eager to bring several other banks, thought to include Paris-headquartered BNP Paribas, Basque-based BBVA and Bank of America into a rival consortium, so it has more chance of matching the RBS led group’s financial firepower.
THE idea is that Barclays would agree at this stage with these banks which bits of ABN they wish to take off its hands, and that the dismemberment would occur after the deal completes, which might be easier from a regulatory perspective.
Having committed buyers for parts of the ABN empire should enable Varley to increase his offer by a few euros per share. The downside is that sorting out such arrangements can take many weeks, especially if Barclays is having to do due diligence on behalf of the secondary acquirers.
Goodwin remains confident that his triumvirate of European banks can still trump the Barclays bid, even if the London bank does secure the support of these other banks, partly because of what analysts are describing as the “beautiful synergies” of the consortium’s approach. This is City shorthand for job cuts and other cost-saving measures such as shifting IT on to a single platform.
RBS is already the sixth-biggest bank in the US hrough its ownership of Citizens Financial and Charter One, and is therefore seen as having the potential to create strong “synergy” savings through an acquisition of ABN’s US subsidiary LaSalle, which is headquartered in Chicago.
Neil Tong, investment manager at Dundee-based Alliance Trust, says: “The main logic in this for RBS is in the US overlap. That’s where the synergies are the greatest.”
Santander is well-represented in Latin America — so could achieve synergies through an acquisition of ABN Amro’s Banco Real offshoot in Brazil. And in Benelux, Fortis is already a big player in both retail banking and wealth management, creating synergies with ABN Amro’s core retail banking franchise.
From Goodwin’s perspective, another advantage of joining forces with the other two banks is that it limits the chances he will be criticised for breaking his word.
The former Touche Ross accountant has spent 18 months telling anyone who has cared to listen that he has ditched deal-mongering and now intends to focus on organic growth.
By joining forces with Santander — a trusted ally for nearly 20 years (a relationship which, contrary to some reports, did not sour over the Madrid-based giant’s acquisition of Abbey, though cross sharedholdings ended at that point) — Goodwin thought he could pre-empt investor disquiet. And it appears he gauged this right.
Alex Potter, an analyst at Collins Stewart, said: “Fred is seen as having done enough penance. He did a lot of work post the Charter One acquisition — in terms of the two dividend hikes and the share buybacks —to rid himself of the ‘deal junkie’ tag.”
Even if the planned break-up bid fails, it will probably turn out to be a worthwhile ploy for Goodwin. The mere prospect of a counter-bid has already raised the bar for Barclays and is seen as having dramatically reduced Varley’s chances of sealing the knot.
Last week, Varley told Barclays’ staff that it did not matter whether Barclays gets its hands on ABN or not.
He claimed the bank, which has been seeking a merger with ABN for several years, has “plenty of momentum” without such a deal. In a letter posted on the Barclays website, he wrote: “We are examining the ABN Amro combination from a position of strength, and that means if we choose to walk away, we can.”
If the RBS-led carve-up approach is successful — and last week Charlie McCreevy, Europe’s internal market commissioner, gave its chances a boost when he warned the Dutch banking regulator the DNB against playing the protetionist card — Goodwin and Inciarte will be in a banker’s seventh heaven.
Even though both bankers are fully aware that ABN Amro has been poorly managed for years (its cost to income ratio is around 70 per cent compared to 40.1-per cent for RBS) and is considered “sub-scale” in almost all the markets in which it operates, this gives them scope to boost the efficiency and the scale of whichever bits they eventually get their hands on.
There have been concerns that an acquisition of LaSalle would mean that RBS is increasing its exposure to the US market at a time when the economy there is risks going pear-shaped as a result of the sub-prime mortgage crisis.
But Tong says: “In the long term, the US economy faces some difficult structural hurdles but it remains an open and vibrant economy. You could argue that at least they are not buying at the top of the market cycle.”
Most investors and analysts believe the RBS carve-up to be the best option, with analysts at JP Morgan giving it a 70 per cent chance of success. Collins Stewart’s analyst Alex Potter says: “I’ve been saying since the Barclays talks first came into the open that Barclays is by no means the best possible buyer.”
“The business case for a takeover by RBS, Santander and Fortis is much more compelling, particularly in view of the potential synergies. I would say Barclays can realistically pay €34 per share while the RBS, Santander and Fortis consortium can pay €40 per share.”
Alliance Trust’s Tong is less optimistic. He says: “The structure is difficult and complicated. The potential of this approach succeeding is uncertain. There are a lot of politics involved.”
Tong says the most insurmountable hurdle would be dealing with multiple regulators in each market in which ABN Amro has operations, as well as regulators with a broader remit, such as the European Commission.
Tong says if it works out it will be a “large bolt-on deal” for RBS rather than a transformational deal. “Whether it could be transformational in share price terms is open to question. A lot of that will depend on the price they pay and the synergies they are able to extract.”
This news piece was published in the Sunday Herald on 22 April 2007