Rbs Abnamro Project Report

RBS Acquisition of ABN AMRO

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Table of Contents

1. Introduction...........................................................................3

2. Economic Environmental......................................................4

3. Business Reasons for Transaction.......................................5

4. Strategy................................................................................6

5. Terms of Transaction............................................................7

6. Initial reaction to deal............................................................8

7. Value Creation......................................................................9

8. Deal History........................................................................10

9. Comparison to other M&A of Acquiring company...............11

10. Comparison to other acquisition by major competitor.........12

11. Impact of acquisition on buyer’s financial performance......13

12. Impact of acquisition on industry structure.........................14

13. Subsequent performance and appraisal.............................15

14. Looking Ahead....................................................................16

15. Drawing some conclusions.................................................17

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[Customer Name][Opportunity Name]

1. IntroductionThe RBS takeover of ABN AMRO is unrivalled in terms of size and complexity and is hugely significant as it is the world’s biggest banking transaction to date and the first cross-border takeover of a European bank. For example, the €13.4bn rights issue that Fortis needed to fund its contribution of the €70bn was the biggest ever in Europe. No European bank had ever succumbed to a cross-border hostile bid and it is interesting that the acquisition was for a perfectly solvent conglomerate. It is commonplace for acquisitions like that of ABN to happen in circumstances where there is a disparity between two organisations or where one organisation is in financial crises. An example of this is the Virgin Group’s proposed acquisition of Northern Rock following the effect of the credit crunch, where share prices tumbled to an all-time low. In the case of ABN, you have a bank with a significant presence in the European banking market and its performance certainly did not suggest that it was in any financial difficulties. Although takeovers are often triggered by the weakness of the target, ABN is a huge organisation with offices in 53 countries and its reputation was never that of a desperate operation.

ABN AMRO bank is a product of a long history of mergers and acquisitions that date to 1765. In 1991, Algemene Bank Nederland (ABN) and AMRO Bank (itself the result of a merger of the Amsterdamsche Bank and the Rotterdamsche Bank in the 1960s) agreed to merge to create the original ABN AMRO. By 2007, ABN AMRO was the second-largest bank in the Netherlands and the eighth-largest in Europe by assets. At that time the magazine The Banker and Fortune Global 500 placed it 15th in the list of world’s biggest banks and it had operations in 63 countries, with over 110,000 employees.

The Royal Bank of Scotland plc (Scottish Gaelic: Banca Rìoghail na h-Alba, Scots: Ryal Baunk o Scotland) is one of the retail banking subsidiaries of the The Royal Bank of Scotland Group plc, and together with NatWest and Ulster Bank, provides banking facilities throughout the UK and Ireland. The Royal Bank of Scotland has around 700 branches, mainly in Scotland though there are branches in many larger towns and cities throughout England and Wales. The Royal Bank of Scotland and its parent, The Royal Bank of


Scotland Group, are completely separate from the fellow Edinburgh based bank, the Bank of Scotland, which pre-dates The Royal Bank of Scotland by 32 years. The Bank of Scotland was effective in raising funds for the Jacobite Rebellion and as a result, The Royal Bank of Scotland was established to provide a bank with strong Hanoverian and Whig ties


2. Economic EnvironmentalBackground to the RBS Consortium acquisition of ABN Amro

In April 2007, the European Commission ordered Dutch regulators to allow the takeover of ABN Amro (ABN). Soon after, ABN received a €66bn takeover bid from Barclays Bank. Two days later a consortium (the RBS Consortium), led by Royal Bank of Scotland (RBS) and including Fortis Bank and Banco Santander, made an even bigger offer of €72bn, €50bn of which would be cash and the remainder of which would be made up of shares in RBS.

In October 2007, the consortium acquired the ABN Amro bank, in what was the world's biggest bank takeover to date. Consequently, the bank was divided into three parts, each owned by one of the members of the consortium. However, RBS and Fortis soon ran into serious trouble: the large debt created to fund the takeover had depleted the banks' reserves just as the financial crisis of 2007–2010 started. As a result, the Dutch government stepped-in and bailed out Fortis in October 2008, before (splitting ABN AMRO's Dutch assets which had primarily been allocated to Fortis) from those owned by RBS, which were effectively assumed by the UK government due to its bail-out of the British bank. The operations owned by Santander, notably those in Italy and Brazil, were merged with Santander, sold or eliminated.


Figure 1: Main economic arguments for approving/rejecting a merger


3. Business Reasons for TransactionIn a typical acquisition of any kind, the acquirer will look for synergies (afashionable word to denote any type of gain that is greater than the gain by each single organisation when two businesses are joined) between itself and its target. A synergy is about creating value. As early as October 2007, ABN’s clients had already expressed an interest in using the increased number of capital markets services available from the combined bank, including private placing and treasury products.

Buying a rival business is often the fastest way to achieve high growth. When RBS took over NatWest in 2000, NatWest had long been seen as vulnerable to a takeover because of its poor track-record, and the fact that NatWest was forced to accept the offer from a smaller rival was a result of poor performance. The argument was that NatWest was badly managed, and the merger would save billions a year through branch closings and more efficient use of the acquirer’s information systems. In a series of events – which started with NatWest making a bid for Legal & General (the insurance firm), a move that was badly received by investors – NatWest stock fell by close to 26 per cent, and as a result the bank became the target of a hostile takeover bid. Successful mergers result in economies of scale and for that reason they can result in huge cost savings. For example, during the RBS Consortium’s due diligence process (a process in which a potential acquirer instructs specialists to analyse the assets of the target organisation and investigate further areas if required), the RBS Consortium forecast a massive cost saving and revenue benefits of €1.8bn if they successfully took over ABN. In addition to cost saving, ABN’s business would allow the RBS Consortium to access a whole new group of clients, particularly in fields where ABN held strong positions, for example in debt and risk management products. The member of the RBS Consortium who took over this aspect would have a list of ready-made contacts and the goodwill that comes from having built business relationships over the years. The new owners would also have a new host of services to offer their existing clients. Barclays had similar ideas: if it had been successful in merging with RBS, its plan was to eliminate costs of €2.8bn.


Each bank spent a significant amount of time analysing the value that could be recovered through assets sales and reduction in the number of staff. Typically, in bidding wars valuation and bidding strategies play a huge part in the battle, a bidder will always fear bidding over the odds but will be aware of the risk of losing as a result of not bidding highly enough.


4. Strategy

Figure 2: Strategic Rationale for Buyers

One interesting aspect of the entire RBS affair is the manner in which it highlights the close inter-linkage between operational risk, strategic risk and liquidity risk. While RBS undeniably failed due to liquidity issues, these primarily arose from a faulty business strategy which damaged the reputational integrity of the bank. The faulty strategy was in many ways due to operational risk issues – unchecked ambition, weak challenge, inadequate oversight and supervision, poor due diligence and a lack of appropriate corporate governance. But at the same time, the very stakeholders of RBS appointed the management team they wanted to drive the firm.

Structured credit markets, of course, deteriorated from spring 2007 onwards. RBS, like many others, was by then holding positions which were bound to suffer some loss. The crucial determinant of how much loss was the extent to which a firm could distribute its existing positions, or was willing to take losses earlier by hedging or closing those positions out. RBS


was among the less effective banks in managing its positions through the period of decline

It is evident that in pursuing its aggressive strategy RBS was exposed to a plethora of high risks. The FSA analysis raised serious questions about the effectiveness of the RBS Board’s role in relation to strategy. ”Given the scale of RBS’s ambitions for growth, in particular during 2006 and into 2007, it is reasonable to expect the Board to have assured itself that the growth strategy was accompanied by a very high degree of attention to the associated risks. In retrospect, this was not clearly and demonstrably the case,” the report stated. This is a sample of the evidence cited in the report:

The ‘Board, Remuneration Committee and Nominations Committee Performance Evaluation 2005’ report said that a quarter of the Board disagreed that the Board’s review and evaluation of strategic issues in relation to the Group’s present and future environment was satisfactory, that directors would like more time to consider and debate strategy, and that a number of them felt that there should be a formal report or discussion of risk appetite when the budget was reviewed. The 2006 report said that directors felt there was insufficient input to and review of risk appetite at Board level, that the Board needed to articulate its risk appetite and that a third of them did not appear to be satisfied with the Board’s role in defining and developing strategy.

Strategy documentation provided to the Group Board for Global Banking and Markets (GBM) did not include detailed analysis of the relevant markets to support the aspirations for growth or of the key risks involved. The risk impact was typically summarized in a bullet point for each initiative, with no information as to how the various risks identified were to be addressed or mitigated. There was no evidence of any significant challenge by the Risk function to the proposals.

Feedback from an adviser who contributed to the RBS executive programme that RBS was unique among major banks in having many ‘hill climbers’ but almost no ‘hill finders’. The bank was seen as exceptionally strong in people who would reliably implement agreed


strategy but relatively much weaker in its capacity for strategic thinking.

The relevant risk functions within RBS were not heavily involved in the process of strategy formulation and they did not carry out a risk assessment until after the strategy had been presented to the RBS Board. When the strategy was presented to the RBS Board in June 2006, the key risks were identified as ‘Market risk from newly evolved products and model complexity’. The FRS found no evidence to suggest that this brief description was expanded on to provide more detail as to the nature of the risk, how and when it would crystallize, and what steps would be taken to minimize it.

Overall, the report stated that within the RBS board and executive team there was pattern of decisions that may reasonably be considered poor, suggesting the probability of underlying deficiencies in: a bank’s management capabilities and style; governance arrangements; checks and balances; mechanisms for oversight and challenge; and in its culture, particularly its attitude to the balance between risk and growth.

The Board’s oversight of strategy

A key role of a board is to set the basic goals for a firm’s strategy and to ensure that they are within the agreed risk appetite. This requires that a board assure itself that a detailed consideration of risks is part of the process of considering future strategy.Until 2007, RBS was perceived as a highly successful bank. For example:

There had been significant growth in earnings per share (EPS) in the ten years between 1997 and 2007 (Graph 2.25).


When the 2007 results were announced in February 2008, they revealed a record Group operating profit of £10.3bn (£7.7bn after tax653).Through its acquisition of NatWest, RBS had become one of the world’s largest banks. That acquisition was considered at the time to be a masterstroke of strategy and execution and a sign of the CEO’s exceptional skill. Moreover, many of the post-acquisition ‘surprises’ in relation to RBS’s initial assessment of prospective synergies had turned out to be favourable. RBS increased its assets by a multiple of 29 between 1998 and 2008 (assets grew by an average of 41% per year), and it moved from outside the top 20 global banks by market capitalisation prior to its acquisition of NatWest to ninth in the world by 2007.

It is difficult in retrospect to evaluate RBS’s strategy or to assess whether, in the absence of the global financial crisis, it would have continued to be successful. There is nothing intrinsically wrong with an ‘opportunistic’


strategy. Nevertheless, the Review Team’s analysis raised questions about the effectiveness of the RBS Board’s role in relation to strategy. Given the scale of RBS’s ambitions for growth, in particular during 2006 and into 2007, it is reasonable to expect the Board to have assured itself that the growth strategy was accompanied by a very high degree of attention to the associated risks. In retrospect, this was not clearly and demonstrably the case.

The RBS Group Internal Audit report delivered to the Chairman inJuly 2008, said:

‘Based on our review and meetings with Board members,discussions of strategy could be expanded to include more analysis ofstrategic options and their associated risks. These discussions would alsobe supported by appraisals of current risk levels versus risk appetite’ and‘This should include the nature and scale of the risk that the Board isprepared to take’.

A memorandum dated 15 July 2008 from RBS’s Head of Group InternalAudit to the RBS Chairman, which was the cover letter to the report, wentfurther, saying: ‘You will see observations in our Group report regardingthe role of the Board in relation to strategy determination and acceptanceof risk. The report does not convey the depth of feeling expressed by Boardmembers regarding their ability to discuss, challenge and influence thedecision-making on these key areas’.


5. Terms of TransactionThe consortium of banks including, The Royal Bank of Scotland Group plc (RBS), Banco Santander, S.A., and Fortis N.V. has completed the acquisition of ABN AMRO Holding N.V.Update on October 10, 2007:

The consortium of banks had declared their offer as unconditional for ABN AMRO ordinary shares and ABN AMRO ADSs, and the offer for ABN AMRO formerly convertible preference shares. A total of 86% of ABN AMRO’s share capital had been tendered in the offer. In accordance with normal practice in the Netherlands, a subsequent offering period was provided for the holders of ABN AMRO ordinary shares who had not yet accepted the offer. Following the expiration of the subsequent offering period, the banks announced that a total of 1,826,332,482 ABN AMRO ordinary shares were tendered to the offer, representing 98.8% of ABN AMRO ordinary shares.

Update on October 5, 2007:Barclays PLC has withdrawn its bid for ABN AMRO Holding. As on October 4, 2007, the closing date of its offer, Barclays failed to fulfill the condition that at least 80% of ABN AMRO’s issued ordinary share capital as at the closing date (excluding any ordinary shares held by ABN AMRO) should be tendered. As a result, Barclays has withdrawn its offer with immediate effect and has requested a payment of EUR200 million break fee to which it is contractually entitled.

Update on October 2, 2007:The Securities Exchange Commission (SEC) had cleared the transaction. Update on September 18, 2007: Dutch Minister of Finance had approved the proposed acquisition of ABN AMRO Holding and its group companies by the consortium of banks.

Update on August 10, 2007:The shareholders of RBS, had approved the proposed acquisition of ABN AMRO Holding by the consortium of banks.

Update on August 6, 2007:


Fortis shareholders voted in favor of the offer.

Update on July 16, 2007:RBS, Fortis, and Santander had confirmed a revised offer of EUR71,100 million for ABN AMRO and the offer values ABN AMRO at unchanged EUR38.40 per share. The consortium had revised its plan from approximately 79% of the consideration in cash to around 93% in cash. The offer will comprise EUR35.6 in cash plus 0.296 new RBS shares for every ABN AMRO share, valuing it 13.7% higher than the agreed deal with Barclays. RBS, Fortis and Santander would pay 38.3%, 33.8% and 27.9% of the consideration respectively.

Update on July 13, 2007:The RBS consortium had revised their offer after the Dutch Supreme Court had ruled that ABN could proceed with the $21,000 million sale of its LaSalle division to Bank of America.Under the terms of the proposed offer, RBS intends to issue new RBS shares to ABN AMRO shareholders and holders of ABN AMRO ADS' and to provide a portion of the cash consideration. Fortis and Santander intend to issue equity to raise cash which will be used, together with cash from other sources, to satisfy their respective portions of the consideration payable to ABN AMRO shareholders and holders of ABN AMRO ADS' under the terms of the proposed offer. All three banks intend to issue Tier 1 capital instruments to raise cash. The new proposal will receive the cash from the sale of the US divisions. On completion of the proposed offer, ABN AMRO will become a subsidiary undertaking of RBS, owned jointly by the Banks through RFS Holdings.The reorganization following completion of the proposed offer will result in Fortis becoming the owner of business unit Netherlands (excluding former Dutch wholesale clients, Interbank and DMC Consumer Finance), business unit Private Clients globally, business unit Asset Management globally. RBS will own business unit North America excluding LaSalle, business unit, global clients and wholesale clients in the Netherlands (including former Dutch wholesale clients) and Latin America (excluding Brazil), business unit Asia (excluding Saudi Hollandi) and business unit Europe (excluding Antonveneta). Santander will own business unit Latin America (excluding wholesale clients outside Brazil), Antonveneta, Interbank and DMC


consumer finance. The banks will share the assets, including head office and central functions, private equity portfolio, stakes in Capitalia and Saudi Hollandi, and Prime Bank.

Update on April 23, 2007:ABN AMRO invited Fortis, RBS, and Santander, to discuss their proposals in relation to a potential transaction with the company.

Update on May 6, 2007:ABN rejected RBS consortium's $24,500 million offer for LaSalle, which was tied to its proposal for entire stake in ABN. Announcement (April 12, 2007):The consortium of banks has confirmed the interest in putting forward a proposal for the acquisition of ABN AMRO.Aviva plc and ING Groep N.V. have sold their entire stakes in ABN AMRO. Aviva owned 7.88% of ABN AMRO and ING was ABN AMRO's largest shareholder. Keefe, Bruyette & Woods, Ltd. acted as financial advisor to ABN AMRO. Slaughter and May acted as legal advisor to Banco Santande. Bonelli Erede Pappalardo acted as legal advisor to acquirers. Shearman & Sterling LLP acted as legal advisor to The Royal Bank of Scotland Group. Fox-Pitt Kelton Cochran Caronia Waller acted as financial advisor to acquirers. Vedder, Price acted as legal advisor to ABN AMRO Holding. Torys LLP acted as legal advisor to The Royal Bank of Scotland Group plc, Banco Santander, S.A., and Fortis N.V.

Split of ABN AMRO BusinessesFortis• BU Netherlands, BU Private Clients, BU Asset ManagementRBS• BU North America, BU Global Clients and wholesale clients in the Netherlands and LatAm (excl. Brazil)Santander• BU Latin America, Antonveneta, Interbank and DMC Consumer FinanceShared Assets• Private equity portfolio, stakes in Capitalia and Saudi Holland, Prime bank, head office and central functions


Figure 3: Breakup of ABN AMRO Businesses

For more details on deal transactions, please refer to “RBS, Fortis, and Banco Santander acquire ABN AMRO Holding.pdf”


6. Initial reaction to dealThe pace of market developments is so quick that, just when the takeover bid was sealed for ABN AMRO itself, new European legislation was adopted that had been inspired by ABN Amro's own adventures in Italy. This legislation seeks to streamline the assessment of shareholders in financial sector entities on prudential grounds. The EC Merger Regulation lays down the rules for a competition assessment above certain thresholds. The EU’s supervisory arrangements, based as they are on national regulation and home State control, no longer seem to fit the emerging landscape of an integrated financial services industry either. Calls for a common European rulebook, for single addressees of reporting obligations and for national supervisors working much more closely together have become louder, also in the wake of the credit crunch which began in the summer of 2007 and its first fatality in Europe, British mortgage lender Northern Rock. . The deal, at the time the biggest banking takeover in history, was concluded not only at an inflated price after a hostile bidding process, but just as the world economy teetered on the edge of the great recession.Yet just how much of a leap of faith was involved in the bid is only now becoming clear thanks to an exhaustive report by the Financial Services Authority (FSA). Having built a reputation for skilfully taking over flabby rivals and surgically cutting costs, RBS's management team dived into the ABN AMRO transaction with its eyes shut tight. Its rival bidder, Barclays, seems to have escaped a similar fate more by luck than skill. Its then chief executive, John Varley, talked of prudence and insisted that mergers and acquisitions would be the “servant of strategy” not the master. But Barclays, too, appears to have been willing to bet the bank on a risky takeover with surprisingly little insight into what it wanted to buy.

The takeover of ABN AMRO weakened RBS and may well have tipped it over the edge into failure, but this was a bank that played fast and loose in other areas too. Take its capital. There is a minimum buffer that a bank is supposed to maintain as a safeguard against some of its loans going bad. Before its failure, RBS had a policy of allowing its core capital ratio to fluctuate in a range that would not allow it to rise above 7%-8%. Anything


above that level and the bank paid dividends or bought back its shares. By contrast, more conservative institutions such as HSBC, another British bank, made a virtue of keeping their capital (calculated more or less on the same basis) above 10%.

Yet even these somewhat racy capital ratios do not capture the full extent of RBS's thin capitalisation. Many of the assets on its balance sheet were categorised in a way that required that bank to hold no capital against them. The FSA reconstructed the bank's balance sheet using new rules (known as Basel 3) that give banks far less wriggle room to massage numbers and found that RBS's actual capital was only about 2% of assets.How RBS calculated its numbers is a lesson against giving banks too much discretion in calculating key ratios that are relied upon by investors and providers of credit. Basel 1, the original set of international capital standards, forced banks to apply strict risk weightings and required them to hold more capital against risky assets (commercial real estate loans, for instance) than against relatively safe ones (such as residential mortgages). Basel 2, however, gave banks a lot more wriggle room to determine their own risk weights. RBS took advantage of this, for instance by setting the “confidence interval” (essentially a measure of how much capital should be held against unlikely occurrences) at 96%. Most others in the industry applied a 99.9% standard.In the bank's trading book the shortage of capital should have been plain to see. According to the FSA:

Only £2.3bn of core tier 1 capital was held to cover potential trading losses which might result from assets carried at around £470bn on the firm's balance sheet. In fact, in 2008, losses of £12.2bn arose in the credit trading area alone (a subset of total trading book assets). A regime which inadequately evaluated trading book risks was, therefore, fundamental to RBS's failure. This inadequacy was particularly significant for RBS, given that the purchase of ABN AMRO significantly increased RBS's trading book assets. RBS was allowed by the existing regulations massively to increase its trading risk exposure counterbalanced only by a small increase in capital buffers available to absorb loss.


Big banks are complex institutions. With the benefit of hindsight their failures are always easy to understand. But the FSA's examination of RBS's failure provides ample evidence that this was a bank heading towards the rocks—in plain sight, at least for those who cared to look.


7. Value Creation


8. Deal HistoryMarch 2007. Market forces including the credit crunch and the subsequent support offered by the Bank of England, which pushed down Barclays’ share price, meaning it was unable to match the €70bn proposed by the RBS Consortium. The RBS Consortium’s offer was cash rich and looked more generous to the ABN shareholders than the equity-heavy offer from Barclays, which was lessened by the fall in its share price. The shareholders struggled to choose between the larger offers from the RBS Consortium, which would split ABN, and the lower offer from Barclays, which was decreasing daily due to the fall in share price but which would ultimately keep the entire ABN organisation together. In Britain or the US it will be no surprise that the higher offer was preferred. Barclays was seeking to create a new global bank which would become one of the world’s biggest financial institutions. The RBS Consortium responded by launching a charm offensive to persuade the authorities that its plan to break up ABN was not such a terrible option.

ABN bosses preferred the Barclays offer because this would have kept theinstitution intact and the headquarters would have remained in the Netherlands.

One aspect worthy of note is the cultural difference between the Dutchshareholders and British or US shareholders. The complexity and potential for conflict in the RBS Consortium’s proposal was immense. The plan was to split the bank into three parts, and each of the RBS Consortium members would take control of the parts of the banks they were best placed to deal with. In practice, this would mean that RBS would take over ABN’s wholesale operation and its Asian business; Santander would take control of the retail banking franchises in Italy and Brazil; and Fortis would take over the Dutch retail operation, and the asset management and private banking arms.

On 8 October 2007, the RBS Consortium announced that it had secured the bid for ABN after eight months of negotiation. The reason why the Barclays offer fell through was ultimately because it did not meet its deadline for


securing majority shareholder support. The RBS Consortium, however, stormed away and its bid was accepted by 86 per cent of ABN shareholders, higher than the 80 per cent threshold required securing the deal.


9. Comparison to other M&A of Acquiring company

RBS Acquisition of NatWest

Buying a rival business is often the fastest way to achieve high growth. When RBS took over NatWest in 2000, NatWest had long been seen as vulnerable to a takeover because of its poor track-record, and the fact that NatWest was forced to accept the offer from a smaller rival was a result of poor performance. The argument was that NatWest was badly managed, and the merger would save billions a year through branch closings and more efficient use of the acquirer’s information systems. In a series of events – which started with NatWest making a bid for Legal & General (the insurance firm), a move that was badly received by investors – NatWest stock fell by close to 26 per cent, and as a result the bank became the target of a hostile takeover bid.

In the case of ABN, you have a bank with a significant presence in the European banking market and its performance certainly did not suggest that it was in any financial difficulties. Although takeovers are often triggered by the weakness of the target, ABN is a huge organisation with offices in 53 countries and its reputation was never that of a desperate operation.


10. Comparison to other acquisition by major competitor

HSBC – Household 2003HSBC bought Household, a US sub-prime mortgage lender, for $15bn. By the end of 2007, HSBC had racked up write-downs of $17.2bn from the unit. By last March, it was writing off $51m a day in loans to poor Americans as more and more defaulted on mortgages, credit cards, personal loans and car finance. Knight Vinke, an activist investor, is now pressing HSBC to sell the troubled Household business.

BarclaysBarclays has made numerous corporate acquisitions, including of London, Provincial and South Western Bank in 1918, British Linen Bank in 1919, Mercantile Credit in 1975, the Woolwich in 2000 and the North American operations of Lehman Brothers in 2008.

Lloyds TSBLloyds emerged to become one of the "Big Four" clearing banks in the United Kingdom by a series of mergers, including Cunliffe, Brooks in 1900, the Wilts. and Dorset Bank in 1914 and, by far the largest, the Capital and Counties Bank in 1918. By 1923, Lloyds Bank had made some 50 takeovers, one of which was the last private firm to issue its own banknotes—Fox, Fowler and Company of Wellington, Somerset. Today, the Bank of England has a monopoly of banknote issue in England and Wales. In 2011, the company founded SGH Martineau LLP.In 1968, a failed attempt at merger with Barclays and Martins Bank was deemed to be against the public interest by the Monopolies and Mergers Commission. Barclays finally acquired Martins the following year. In 1972, Lloyds Bank was a founder member of the Joint Credit Card Company (with National Westminster Bank, Midland Bank and Williams & Glyn's Bank) which launched the Access credit card (now MasterCard) and in the same year it introduced Cashpoint, the first online cash machine to use plastic cards with a magnetic stripe. In popular use, the Cashpoint trademark has become a generic term for an ATM in the United Kingdom.


Under the leadership of Sir Brian Pitman between 1984 and 1997, the bank's business focus was narrowed and it reacted to disastrous lending to South American states by trimming its overseas businesses and seeking growth through mergers with other UK banks. During this period, Pitman tried unsuccessfully to acquire The Royal Bank of Scotland in 1984, Standard Chartered in 1986, and Midland Bank in 1992. Lloyds Bank International merged into Lloyds Bank in 1986, since there was no longer an advantage in operating separately. In 1988, Lloyds merged five of its businesses with the Abbey Life Insurance Company to create Lloyds Abbey Life.In 1995 Lloyds Bank P.L.C. and TSB Group P.L.C., a rival bank, have agreed to merge, creating Britain's largest retail bank, with assets of $:150 billion, or $238 billion. Over all, Lloyds-TSB would be the fourth-largest bank on the stock exchange in terms of assets.Under the agreement, Lloyds shareholders got 70.6 percent of the new company. Each Lloyds share will be exchanged for 2.704 Lloyds-TSB common shares. Each TSB share got exchanged for one Lloyds-TSB share plus a special dividend of 68.3 pence a share.


11. Impact of acquisition on buyer’s financial performance

Figure 4: Share Price Performance

Figure 5: Initial Broker Reaction


Figure 6: ABN AMRO share price performance and Offer Value

All stock market companies have to grow to satisfy their shareholders, who want bigger profits and a higher share price. In order to make a takeover successful, the acquirer needs to think of ways in which it can extract profits from its new business. When Barclays set out its plan for ABN, it contemplated getting rid of around 12,800 jobs from a workforce well in excess of 200,000 and moving over 10,000 jobs offshore.

In fact, both rival banks had planned to trim jobs in order to generate costsavings. The RBS Consortium issued a statement saying that it would keep half of the bank’s current management and half of its supervisory board members, and take full responsibility for ABN until the deal was complete. But it would appear that the RBS Consortium only made this offer to appease Dutch authorities, which were concerned about a lack of stability in ABN during the course of the acquisition.

Individual organisations will not always complement each other entirely and an acquirer may need to assess which parts of a target it will keep. It may be that the acquisition is structured around the takeover of the target’s main business but the acquirer is not interested in the target’s other assets and wishes to sell these off. The disastrous takeover of


Donaldson, Lufkin & Jeanette by Credit Suisse First Boston in the 1990s is an example of an acquisition where the institutions were not complementary. There were massive disagreements within the management and little communication between the merged organisations.The bankers fought ruthlessly to determine who would survive on a division-bydivision and group-by-group basis.

Other problems include difficulty in dealing with personnel and informationtechnology, and the possibility of a decrease in share price, which may tumble if there is market apprehension due to the thought that the acquirer has overpaid for the target or that the businesses will be too difficult to integrate. The RBS Consortium would do well to follow the approach it took when integrating NatWest, which it acquired following a hostile takeover. Although the share price dropped initially, the merger was a success as a result of RBS’s operations, which improved cash flows and performance (although some of this success was due to the low interest rates during the years that followed the merger and the rising property market in the UK). If investors are not confident about the prospects for the newly merged company, the resulting fall in share price could be disastrous.


12. Impact of acquisition on industry structure

The ABN merger with RBS was two years in the making. The chief executive of RBS first met Rijkman Groenink of ABN Amro in February 2005, and it was thought that they continued to correspond over the course of two years in relation to a possible merger of the banks.

The Economist explains that merger activity by consortia rather than single banks is the way forward. In this way, banks can share the costs and the risks associated with any merger. It also means that they will not be forced to sell off parts of the target’s business that do not fit in with their own model, as these can be hived off and distributed to the RBS Consortium member that is best placed to take control of those assets.

Following the ABN takeover (and at the time of writing this article) there have been whisperings that Unicredit are holding talks with Société Générale in France regarding a possible takeover. Technology is becoming more and more relevant, and banks are able to extract a massive amount of value through the use of technology. Ultimately, this means they can work across borders more easily. The merits of a merger if all the considerations are weighed up correctly can extract massive cost savings. Moreover, many banks are keen to diversify away from saturated home markets and explore new jurisdictions, and the role of technology makes this even easier.

The credit crunch has proved that in a shaky economy it is important to have a diverse business, and a by-product of a merger is diversification; however, the outlook must be long term.

There have also been reports that private equity firms may start trying to get in on the act. They have previously avoided banks because they are highly leveraged and this goes against the principles of private equity firms, which make their money by buying companies cheaply and borrowing against the newly acquired company’s assets.Finally, the regulatory environment is turning towards cross-borders deals. This transition is aided partly by the single currency and partly by changes


in legislation. For example, the new European banking legislation, which (at the time of writing this article) will come into force in about eight months, will require that bids be assessed in a non-discriminatory way’ and ‘do not distinguish between friendly and hostile takeovers. This means that if Unicredit did merge with Société Générale, the Trichet doctrine (which allows the French regulators to oppose hostile takeovers) could not be enforced. On this basis, it is inevitable, now that a precedent has been set, that we will see more cross-border mergers in the very near future.


13. Subsequent performance and appraisal

The “sub-prime loan crisis” and the economic setback had a negative impact on the banking industry and inevitably affected the RBS, which is operating worldwide 19 and was heavily exposed to sub-prime loans and sovereign debt. RBS shocked the financial markets by reporting £24bn loss for 2008 and saw its share falling to 10p. The UK government had to intervene to help the bank to stay in business. In February 2009 the Bank announced its detailed strategic plan aiming to allow the bank to recover from the crisis, become more efficient and profitable on along-term basis. Since 2008 the RBS remains loss making with an average loss of around £2bn for the period 2009-2011( annual report 2011), and return to profitability was not expected in the near future due to the slower recovery and the stringent regulatory changes.The undermined confidence and reputation problems of the banking sector and the RBS had devastating effects to their share price and consequently to shareholder’s value. In order encounter society’s concerns attempts are made to raise their Social Responsibility profile by enhancing transparency, corporate governance, and funding contributions to public and SME. The RBS reform its board of Directors, established a “Sustainability Committee”(2009), lending 40p for every £1 to SME in UK and making on average 4000 business loans every week (Annual Report 2011). The support given to startup businesses and SME is expected to stimulate economic growth once again.

(Telegraph dated 27 Feb 2014) Royal Bank of Scotland has lost all the money invested in it by the taxpayer six years ago when the lender came close to collapse. The bank has confirmed its total losses since its bailout have now drawn level with the £46bn pumped into it in 2008 in return for an 81pc stake. RBS made a loss last year of £8.2bn, its sixth consecutive annual loss, taking its cumulative losses to £46bn. The scale of the losses means that all the capital provided by the taxpayer has now been used up dealing with the toxic legacy assets on the bank's balance sheet. Losses at the bank came after it took a £3.8bn bill for customer mis-selling


compensation and a £4.8bn impairment charge against the continued run down of its bad loans. Excluding these costs, RBS reported an operating loss for the year of £2.5bn, with profits from its retail and commercial business falling 4pc year-on-year to £4.1bn, while its markets division reported a 58pc fall compared to 2012 making a profit of £638m. Despite, the loss RBS said it had put aside £576m to pay staff bonuses for 2013. Ross McEwan, chief executive of RBS, is to set out his plans to turnaround the lender that has yet to report a profit six years on from its state-funded £46bn bailout in 2008.

A bonus pool of around £500m is expected to be earmarked for employees to retain talent in 2014, although Ross McEwan and his nine-strong top management team will not be taking any of it. Last year the pot totalled £800m, but Ross McEwan can expect tough questions about £500m, given the scale of the bank's losses Last year the pot totalled £800m.


14. Looking AheadRBS is determined to succeed in time to come under the guidance of new chief executive Ross McEwan. RBS have put a common set of values at the heart of how we do business. RBS values are not new, but capture what they believe they do when they are at their best:

Serving customers We exist to serve customers. We earn their trust by focusing on their needs and delivering excellent service.Working togetherWe care for each other and work best as one team. We bring the best of ourselves to work and support one another to realise our potential.Doing the right thingWe do the right thing. We take risk seriously and manage it prudently. We prize fairness and diversity and exercise judgement with thought and integrity.Thinking long termWe know we succeed only when our customers and communities succeed. We do business in an open, direct and sustainable way.

Read more at http://www.rbs.com/about/our-business-and-strategy/our-values.html#bxw0ymeb8G2qePPU.99

RBS CEO Ross McEwan today accepted the recommendations set out in an independent review of the bank’s small and medium size business lending and committed to act on the findings.

RBS aims to be the number one bank for SME customer serviceRBS targets SME lending growthSir Andrew Large recommendations acceptedRBS CEO Ross McEwan today accepted the recommendations set out in an independent review of the bank’s SME lending and committed to act on the findings.


RBS also announced that it will take a series of immediate actions to ensure that it can enhance its support for SMEs and the economic recovery. This includes writing to thousands more businesses setting out how much more the bank is willing to lend them, cutting the length of time that loan applications can take, and aiming to be the leading bank for SME customer service in a new, independent survey run by the Federation of Small Businesses and the British Chambers of Commerce.

RBS appointed Sir Andrew Large, together with the management consultant firm Oliver Wyman, to undertake a thorough and independent review of the lending standards and practices used by RBS and NatWest, for small and medium sized business lending in the UK.

The objective of the review was to enable RBS to enhance its support for SMEs and the economic recovery, while maintaining safe and sound lending practices. A summary of the report’s findings and recommendations has been published today.

The report states that RBS has succeeded in delivering a number of critical changes to its SME business since the onset of the financial crisis, re-balancing and stabilising the balance sheet and building the foundations for sustainable growth. But RBS has not supported the SME sector in a way that meets its own targets or the expectations of its customers. It says that while RBS has started to address a number of the issues raised, further progress is needed.

Ross McEwan said: “The picture Sir Andrew Large paints is not an entirely comfortable one, but it’s one we have to confront. A successful, vibrant, and well-regarded SME bank is central to the overall value and reputation of this company.

“We must ensure our policies, processes and systems help our people do the best job they can for customers and shareholders in this area. Our aim is to become the number one bank for SME customer service in the UK and to grow our lending along the way.


“The Large review shows that there is significantly more we can do to expand our lending to small and medium-sized businesses. More recently, some of our competitors have managed to increase their lending in this area while we continue to contract. We will address all the issues this report raises.”

Ross McEwan has launched a fundamental review of the bank to improve its performance and effectiveness, and will announce a new plan for the way the bank serves its customers around the time of its full year results in February 2014. RBS will fully address the issues raised by the Sir Andrew Large report at this time.

The Sir Andrew Large report highlights a number of improvements which have already been made; however, RBS recognises there is more that needs to be done. RBS will take a series of immediate actions to ensure that we can grow gross lending to SMEs, enhance our service for our SME customers and support the economic recovery.

The bank will write to thousands more SMEs setting out clearly how much it is willing to lend to their business. It has already offered £4 billion of lending opportunities this way, and following the positive response to these letters RBS are now extending the programme;A dedicated website will be developed to show clearly what information RBS use to make a lending decision and set out simple, clear steps in its lending process;

The bank will begin work to enable bankers to make all but the most complex lending decisions in just five days of receipt of all necessary information – this process can currently take weeks and months in some instances;

RBS will ensure two thirds of its lending decisions are made locally and by sector specialists;RBS will continue to invest in building the capability of its people with at least 90% of Relationship Managers and Credit Managers professionally qualified;


RBS will start a programme to make all customers whose loan applications are declined aware of the appeals process, and will continue to work with the Independent Appeals Chair to improve the support it provides to customers going though this process; and,The bank will commit to pointing businesses to alternative sources of finance where it cannot support a loan application.RBS aims to become the number one bank for SME customer service in the UK, including as measured in a new survey of SMEs satisfaction with their banks, to be carried out by the Federation of Small Business (FSB) and the British Chambers of Commerce (BCC).

RBS will also look to set specific targets for customer experience for staff; it will work to reduce by half the customer complaints it receives from SMEs; and, it will ensure that none of its services will be conditional on customers buying another product or service with the bank.

RBS will publicly report on progress against these commitments annually.

Read more at http://www.rbs.com/news/2013/11/press-release-rbs-to-act-on-sme-lending-review-findings.html#ci6wECuR30T8bcx0.99


15. Drawing some conclusionsThe FSA report states that RBS undertook woefully inadequate due diligence prior to its acquisition of ABN Amro, which amounted to “two lever arch folders and one CD ROM” of information provided by ABN AMRO. The fact that the deal was funded primarily with debt, the majority of which was short-term rather than equity, sufficed to erode RBS’s capital adequacy and increased its reliance on short-term wholesale funding.

The FSA found that following the successful integration of NatWest, RBS underestimated the challenges of managing the risks arising from the acquisition of ABN AMRO. The RBS’ board was also found to be not “sufficiently sensitive to the wholly exceptional and unique importance of customer and counterparty confidence in a bank. As a result, in the Review Team’s view, the Board’s decision-making was defective at the time.”

The FSA takes its share of the blame in this respect, saying that “in response to the largest ever cross-jurisdictional acquisition in history, the FSA took only limited account of the substantial uncertainties and risks, which were compounded by the restricted due diligence that the firm could perform”, adding that “The analysis that RBS was able to perform on the balance sheet was, however, severely limited by the restrictions on access to relevant risk information. For example, it was not possible properly to assess as part of due diligence whether there were any significant deficiencies in ABN AMRO’s key risk management practices, the quality of the assets in its structured credit portfolios or the valuation of those positions”.

The FSA admits to its own failings in supervising the bank during the acquisition process: “the FSA was not sufficiently engaged from April 2007… [to test] the potential capital and liquidity implications of the acquisition. Nor did it challenge sufficiently the adequacy of RBS’s due diligence”.

The FSA states that this hands-off approach reflected the fact that the regulator had neither a responsibility to approve the acquisition, nor a defined approach towards major takeovers. Moreover, the FSA report


states, this approach “reflected the FSA’s supervisory philosophy at the time, which encouraged supervisors to place reliance on assurances from firms’ senior management and boards about strategy, business model and key business decisions”.

Poor management decisions “crucial to RBS’ failure”The report states that “with hindsight it is clear that poor decisions by RBS’s management and Board during 2006 and 2007 were crucial to RBS’s failure”. Although the FSA Review Board admits that it is easy to identify poor management decisions at RBS with the benefit of hindsight, a pattern of bad decision making suggests there were “underlying deficiencies in: a bank’s management capabilities and style; governance arrangements; checks and balances; mechanisms for oversight and challenge; and in its culture, particularly its attitude to the balance between risk and growth”.Specifically, the reports states, there were decisions taken by the RBS Board and senior management which placed RBS in a more vulnerable position than other banks when the financial crisis developed between 2007 and 2008. They included:• keeping RBS lightly capitalised in order to maintain an ‘efficient’ balance sheet;• adopting a business model that was highly dependent on wholesale funding and therefore choosing to run with a high level of liquidity risk;• expanding commercial real estate lending with inadequate monitoring and mitigation of concentration risk;• rapidly increasing lending in a number of other sectors which subsequently gave rise to substantial losses, eroding RBS’s capital resources;• expanding the structured credit business in 2006 and early 2007 when signs of underlying deterioration in the market were already starting to emerge;• proceeding with the ABN AMRO acquisition without a sufficient understanding of the risks involved;• funding that acquisition primarily by debt, which in turn made RBS’s capital position worse than it might otherwise have been; and adopting the role of lead partner in the ABN AMRO acquisition, thereby initially acquiring all the assets and risks on behalf of the consortium.


The report states that other banks in the UK made similar mistakes in hindsight but it points to specific decisions that it says were a consequence of poor management.

Banks may have a tendency to make poor decisions if there are deficiencies in: “their management capabilities and approach; the governance arrangements, which should provide checks and balances and ensure effective oversight and challenge; or the culture, in particular the attitude to the balance between risk-taking and growth”.

The FSA Review Team admits that judging areas such as boardroom dynamics, management style and shared values, are subjective and thus difficult to assess precisely; while “assessing a firm’s culture effectively is difficult even when done contemporaneously, let alone when attempting to assess the past”. Despite these difficulties, the report has concluded that “it is highly probable that aspects of RBS’s management, governance and culture played a role in the story of RBS’s failure”. But the report is very careful to stress that “the fact that some decisions are described as poor or mistaken, either in retrospect or at the time, carries no implication that RBS or any individual was guilty of any regulatory breach”.

The FSA could not find any legal fault with the bank’s governance processes, saying that the board met regularly to discuss key issues including the ABN AMRO acquisition, while the chairman in April 2006, Sir Tom McKillop was even praised for taking steps to improve the transparency and operation of the Chairman’s Committee. Although the bank did not have a formal Board Risk Committee, risk issues were the responsibility of the Group Audit Committee (GAC), which was considered to be standard practice at the time.

Although on paper the evidence suggests there were no governance failings, the report says the fact that the “RBS Board and the Chairman’s Committee were ultimately responsible for a sequence of decisions and judgements that resulted in RBS being one of the banks that failed during the financial crisis. On that basis and in retrospect, the Review Team concluded that there were substantive failures of Board effectiveness at RBS, even if there were no formal failures in the governance process.”


The Review Team found the picture that emerged from interviews with Board members and employees “was clearly more complex than the one-dimensional ‘dominant CEO’ sometimes suggested in the media”. That said, criticism was levelled internally on RBS’s Group Executive Management Committee (GEMC) more broadly in a memo dated July 15, 2008 from RBS’s Head of Group Internal Audit to the RBS Chairman. It says:

“‘Most of the members of GEMC we met with criticised the way the Committee operates. Our report describes a lack of meaningful discussion of strategy and risk. However GEMC members also described dysfunctional working in relation to:–– GEMC are not operating as a team.–– Conversations are typically bilateral.–– Performance targets consume too much of the agenda.–– Discussions often seem bullying in nature.–– The atmosphere is often negative and is at a low point currently.’”4

All of these points raise questions about the culture and management style at RBS. Although the FSA is quick to point out that this memo was written in the midst of the financial crisis and the criticism is not aimed at the CEO alone. In the same document, RBS’s head of group internal audit also wrote, in relation to the separation of management responsibilities: “‘There have been a number of observations made during this review that the Group CEO tends to operate too often in the CFO role and that [the CFO] should be more independent in his decision making’”.It is this comment that caused the FSA Review Team to raise questions about the CEO’s capability and management style and its impact on the business. Nevertheless the FSA found insufficient evidence to press any charges against Goodwin.There is increasing recognition that human behavior, actions and decisions are perhaps the most crucial components of operational exposures which any firm (or the entire market) may face over time. The RBS fiasco clearly demonstrates this and illustrates why operational risk management has to become a core focal point of the Board of Directors, the Audit Committee, the Risk Committee, the entire executive management – and all relevant regulatory authorities with jurisdiction


over the firm. Taking this a step further, given the evolving financial services playing field and the possibility of significant splits between “core traditional banking” (savings, deposits and payments) and “risky financial engineering and investments”, the need to establish a coherent enterprise-wide, integrated risk approach is becoming even more important, with operational risk performing the leading role in interlinking the other primary risk types. RBS though is determined to learn from mistakes and following the recommendations of Sir Andrew Large will be working for long term re-structuring and rebuilding of banks wealth.

Documents

Rbs Abnamro Project Report