22 January, 2010

Unfortunate Victors: The Doomed Battle for ABN AMRO

Photo: Royal Bank of Scotland, Fortis and Banco Santander acquired ABN AMRO Holding for Eur 70.0-billion (USD $101.0-billion) in November 2007, marking it the largest banking acquisition in history up to that point. Ironically, barely one year following their massive acquisition, the Royal Bank of Scotland and Fortis went de facto bankrupt during the credit crisis and were nationalized by Britain (RBS) and Belgium and Luxembourg (Fortis). Meanwhile, the Dutch state bought ABN AMRO's Dutch operations from the bankrupt Fortis, returning the bank to Dutch control.

Children's Money, Adult's Battle

To the Dutch business world, 2007 was a dramatic year that saw the sale of ABN AMRO Holding NV. For several years, ABN AMRO’s management had been questioned for their mediocre management and poor profitability. Then in February 2007, British-based investment fund TCI (The Children’s Investment), holder of about 2% of ABN AMRO’s shares, openly criticized the bank’s management strategy and demanded the bank be sold or split up.

While publicly defending its long-term strategy during March, ABN AMRO held secret talks with British bank Barclays plc about a potential merger. On 2007-03-20, ABN AMRO and Barclays announced that they were in exclusive discussion about a potential combination. Speculation that a bidding war from other European and American banks would erupt lifted ABN AMRO's share prices from under Eur 30 to Eur 35 within days.

While the exclusive discussion between ABN AMRO and Barclays was still in progress, a banking consortium formed by the Royal Bank of Scotland Group (RBS), Belgium’s Fortis and Spain's Banco Santander on 2007-04-13 sent a letter to ABN AMRO’s board expressing their wish to acquire the Dutch bank. The banking consortium’s plans involved carving up ABN AMRO’s extensive global operations. RBS would take over ABN AMRO’s U.S. subsidiary LaSalle Bank, as well as ABN AMRO’s retail, commercial and investment banking businesses outside of Brazil, Italy and the Netherlands. RBS already had a sizable U.S. subsidiary named Citizens Financial. By acquiring Chicago-based LaSalle Bank, RBS could achieve greater synergy and efficiency in the U.S.

Meanwhile, Fortis planned to take over ABN AMRO’s home market in the Netherlands, as well as its global private banking and asset management divisions. Lastly, Banco Santander, which already operated extensively in Latin America, would take over ABN AMRO’s Brazilian operations Banco ABN AMRO Real, and expand into the high-growth Italian market by acquiring ABN AMRO’s Banca Antonveneta. With much more overlap in their existing markets, the tri-bank consortium could achieve much more cost savings and afford a higher price for ABN AMRO than Barclays.

The Dutch Central Bank, De Nederlandsche Bank (DNB), favouring a merger of equals between Barclays and ABN AMRO over the consortium’s break-up proposal, warned on 2007-04-18 of the risks and complications in “the preparation… the execution and implementation” of the [consortium’s] proposal. His comments, however, were immediately criticized by the European Commission that nationalist protectionism must not be used to discourage cross-border consolidation within the EU.

Barclays-ABN AMRO's Poison Pill

After a month of exclusive talks, Barclays and ABN AMRO jointly-announced on 2007-04-23 that they had agreed to an all-stock deal that valued ABN AMRO at Eur 67.0-billion (GBP 45.4-billion, USD $91.0-billion), making it the biggest banking merger ever. At the same time, ABN AMRO also announced that it had agreed to sell its U.S. operations LaSalle Bank (officially known as ABN AMRO North America Holding Co.) to Bank of America for USD $21.0-billion (Eur 15.46-billion) in cash. ABN AMRO’s surprise announcement to pre-emptively sell LaSalle Bank was clearly a “poison-pill” move to fend off the breakup proposal from RBS, Fortis and Santander. Without LaSalle Bank, the division most sought after by RBS, it was believed that consortium might disband itself.

Under the Barclays-ABN AMRO merger proposal, the new bank would retain the name Barclays plc, and have its head office in Amsterdam. Existing Barclays shareholders would end up owning 52% of the new bank, while the remaining 48% would be owned by the former ABN AMRO shareholders. About 12,800 jobs would be cut from the combined operations. Consolidation cost savings would amount to Eur 3.5-billion annually.

Furious Consortium Counter-offers

Understandably, RBS, Fortis and Santander were furious about ABN AMRO’s agreement to sell LaSalle Bank to Bank of America for USD $21.0-billion. British investment fund TCI and Dutch investor rights group VEB both demanded that the terms of the LaSalle Bank sale be made public, and a shareholders’ meeting be called to vote on the sale.

Barely two days following the Barclays offer, RBS, Fortis and Santander made an unsolicited, informal offer of Eur 72.2-billion (USD $98.5-billion) for ABN AMRO, triggering a dramatic takeover battle. The consortium’s offer consisted of 70% in cash and 30% in stock. However, the offer was conditional on ABN AMRO rescinding its agreement to sell LaSalle Bank. Analysts generally favoured the consortium’s offer, as it was higher than the one proposed by Barclays, and had a high cash component as opposed to Barclays’ all-stock offer, whose value had fallen to Eur 65.0-billion (USD $88.2-billion) due to a drop in Barclays’ share prices. When ABN AMRO’s management refused to let its shareholders vote on the sale of LaSalle Bank, shareholder rights group VEB launched a lawsuit against the Dutch bank.

Throughout April and May 2007, the market wildly speculated that HSBC, BNP Paribas, BBVA and JPMorgan Chase could also bid for ABN AMRO. There were also rumours that Société Générale and UniCredit were in merger talks with each other.

ABN AMRO’s uncertain future prompted some clients to pull their savings from the bank and others to express concerns. ABN AMRO’s employees and labour unions accused the shareholders of selling out one of Netherlands’ most important businesses, and urged the shareholders to put the future of Dutch jobs and the Dutch economy ahead of greed.

Meanwhile, Bank of America, eager to acquire LaSalle Bank from ABN AMRO, signalled that it would sue ABN AMRO should the LaSalle Bank sale agreement be rescinded, potentially triggering a lengthy and nasty legal battle across the Atlantic.

While all the parties waited for the Enterprise Chamber of the Amsterdam Court of Appeal’s ruling on the VEB lawsuit, ABN AMRO openly questioned how the consortium could come up with more than Eur 50.0-billion in cash to pay for the offer.

The Trans-Atlantic Lawsuits

On 2007-05-03, the Enterprise Chamber of the Amsterdam Court of Appeal ruled that ABN AMRO’s sale of LaSalle Bank to Bank of America was illegal, and that ABN AMRO must obtain shareholders’ approval before the sale could proceed. Within 24 hours of the Dutch court’s ruling, Bank of America filed a lawsuit in the U.S. District Court in Manhattan demanding ABN AMRO to go ahead with the sale.

At the same time, Dutch finance minister Wouter Wos also waded into the takeover drama by urging the RBS-Fortis-Santander consortium to clarify on their financing and breakup implementation plans.

Not backing down from the legal setback, Barclays and ABN AMRO filed an appeal on 2007-05-15 to the Dutch Supreme Court over the ruling that froze the sale of LaSalle Bank to Bank of America. Then two weeks later, RBS, Fortis and Santander officially presented their hostile Eur 71.1-billion offer for ABN AMRO.

The takeover battle went through a month of relative calm until 2007-06-25, when the most senior advisor to the Dutch Supreme Court, Attorney General Levinius Timmerman concluded that ABN AMRO’s sale of LaSalle Bank to Bank of America was legal, and should not be blocked. The Attorney General’s legal opinions, while not binding, have historically been highly regarded by the Supreme Court.

Barclays-ABN AMRO: 1 Consortium: 0

On 2007-07-13, as expected, the Dutch Supreme Court cleared ABN’s sale of LaSalle Bank to Bank of America. Analysts began to wonder if the setback would cause RBS to pull out of the consortium. By now, however, a further drop in Barclays’ share prices meant that its offer has fallen in value to Eur 63.7-billion (USD $87.6-billion).

Despite the failure to secure LaSalle Bank, the RBS-Fortis-Santander consortium not only pressed on with the offer, but on 2007-07-16 raised the cash component of their offer from 70% to 93.5%, with the rest payable in Royal Bank of Scotland shares. This meant that the consortium now needed to come up with Eur 65.7-billion (USD $90.4-billion) in cash to buy ABN AMRO.

Barclays Gets Hot Money from Asia

Barclays, refusing to back down from the battle, also worked behind the scene to look for ways to raise its offer. Exactly one week after the consortium raised their cash portion of the offer, Barclays raised GBP 2.44-billion (Eur 3.6-billion, USD $4.97-billion) in cash by issuing a 3.1% stake to China Development Bank and a 2.0% stake to Singapore’s sovereign fund Temasek Holdings. Barclays would use the proceeds to buy back its own shares to support its share price. Should the bid for ABN AMRO succeed, China Development Bank had committed to invest another GBP 3.64-billion worth of Barclays shares, whereas Temasek had committed to invest another GBP 499-million worth of Barclays shares.

Armed with this freshly-injected GBP 2.44-billion cash, Barclays raised its offer for ABN AMRO to Eur 67.5-billion (USD $93.1-billion) and added a cash component to it: the new offer was 37% in cash and 63% in Barclays’ shares. Barclays’ new offer was still 5% below that from the tri-bank consortium, but the bank was betting that its share buyback programme would prompt investors to bid up its share prices. It was also hoping that ABN AMRO’s shareholders might favour the friendly merger deal over the uncertainties surrounding the consortium’s offer.
However, Barclays’ new offer failed to ignite investor enthusiasm and the value of its offer continued to linger around Eur 66.0-billion rather than catch up to the consortium’s Eur 72.0-billion.

Consortium Seeks Eur 65.7-Billion, in Cash

In late July, there were doubts over whether Fortis, the smallest member in the consortium, could raise the Eur 24.0-billion from investors to finance its share of the ABN AMRO purchase. For much of late July and August, ABN AMRO shares traded between Barclays’ offer price and the consortium’s offer price, suggesting uncertainties over the outcome of the battle. However, Fortis, RBS (Eur 22-billion) and Santander (Eur 19.8-billion) all successfully raised the cash required to pay for ABN AMRO.

Barclays, meanwhile, was understood to be taking a wait-and-see stance, as it was convinced that the Dutch central bank and the EU anti-trust authorities would place tough conditions on Fortis’ plan to take over ABN AMRO’s Dutch operations.

Tremors from the U.S.

The takeover battle for ABN AMRO took another unexpected twist in August, when the credit crisis suddenly caused banks around the world to tighten lending activities. The formerly red-hot U.S. housing market, which had been in a slump since late 2006, began to cause massive loan losses in the global banking sector throughout the summer of 2007. Corporate bond prices slumped and trading of higher-risk mortgage loans, often packaged and re-sold to investors as collateralized debt obligations (CDOs), came to an abrupt halt when mortgage default rates soared. As many companies around the world had invested their short-term cash in these CDOs, the seize-up of CDO market caused a sudden shortage of cash. The resulting liquidity crisis led stock markets around the world to tumble. At one point, there were fears that both Barclays and the consortium would withdraw its offer for ABN AMRO due to their high exposure to the alternative investment market.

During the first wave of the credit market crunch in late-August, the value of Barclays’ mostly-stock offer fell sharply to Eur 58.4-billion (USD $79.3-billion, GBP 40.0-billion), essentially wiping out all the gain made by the cash injection from China Development Bank and Temasek. Despite a significant fall in RBS’ and Fortis’ share prices also, the value of the RBS-Fortis-Santander offer remained relatively steady at around Eur 70.6-billion (USD $96.5-billion) due to its high cash element. Nevertheless, several of RBS’ institutional shareholders in September 2007 were believed to have urged the bank to activate the “material adverse event” clause to reduce or even cancel the offer for ABN AMRO.

Cash is King. Barclays Loses the Battle But Wins Eur 200-million

Meanwhile, Barclays’ hope that Fortis would face anti-trust challenges in the Netherlands was dashed on 2007-10-03, when the European Commission cleared RBS-Fortis-Santander’s acquisition of ABN AMRO. One day after that, only 0.28% of the outstanding ABN shares were tendered to Barclays and the British bank conceded defeat. In accordance with the friendly merger agreement, ABN AMRO paid Barclays a Eur 200-million breakup fee. Meanwhile, the RBS-Fortis-Santander consortium received more than 86% of ABN AMRO’s shares and made its offer unconditional. The consortium's higher and almost all-cash offer clearly won over the hearts of ABN AMRO’s shareholders at uncertain times. At closing, the consortium’s offer was worth about Eur 70.0-billion (USD $101.0-billion).

Two of the Three Victors Became Big Losers

Even though RBS, Fortis and Banco Santander appeared to be the victors, against all odds, in the takeover battle for ABN AMRO, it soon became apparent that their acquisition could not have been executed at a worse time.

Throughout 2008 and 2009, the global real estate bubble burst and the CDO market collapsed. Recklessly careless lending by banks and carefree borrowing from consumers since 2000 together contributed to a massive housing and credit bubble in the United States, Great Britain, Spain, Ireland, Iceland and Eastern Europe. A huge amount of these consumer loans was re-packaged into “innovative” investment products that were off-balance-sheet, meaning that the loans were not subject to regulatory capital requirements.

When the bubble burst in 2007 and 2008, the impact was so severe that many of the world’s largest financial institutions including Citigroup, Bank of America, Wachovia, Merrill Lynch, Morgan Stanley, HBOS, Royal Bank of Scotland, Fortis and UBS certainly would have gone bankrupt were it not a concerted effort by governments around the world to inject much-needed capital into the banks, and to unconditionally guarantee their loan losses and customer deposits.
Shockingly, less than one year following their triumphant purchase of ABN AMRO, both the Royal Bank of Scotland and Fortis were de facto bankrupt in September 2008. At this point the Dutch state decided to buy ABN AMRO's Dutch operations from the bankrupt Fortis, which ironically, returned ABN AMRO to Dutch control. The Royal Bank of Scotland only survived because the British government nationalized the bank by injecting billions of pounds of new capital, as well as insuring hundreds of billions of sour loans against losses. Similarly, Fortis was nationalized by the Belgian and Luxembourg states. Fortis' Belgian operations were then taken over by BNP Paribas. Both RBS’ and Fortis’ shareholders lost almost 100% of their investment.

The Shrewd Santander

Banco Santander, on the other hand, came out of the ABN AMRO drama as a true and respected winner. In fact, just when the whole ABN AMRO deal was being closed, Santander surprised the market by selling Banca Antonveneta, ABN AMRO's Italian division that it had just acquired days earlier, to Banca Monte dei Paschi di Siena for Eur 9.0-billion (USD $13.21-billion) in cash. This meant that Santander only paid about Eur 9.8-billion for Banco ABN AMRO Real of Brazil, which was considered to be a bargain.

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