It seemed to be in the bag. Nine days ago, after weeks of discussions with the
Dutch bank ABN Amro, Barclays’ chief executive John Varley was confident he
would spend last weekend ironing out a few wrinkles that remained before
announcing the world’s biggest ever bank deal – a merger worth £94 billion.
Then, late that night, in his 31st floor office at the bank’s Canary Wharf
headquarters, the phone rang. What Varley heard left him stunned and
furious. Without consulting him, ABN had agreed to sell LaSalle, its
Chicago-based subsidiary, to Bank of America.
It was a bombshell that threatened to blow apart the carefully crafted merger
plan. Varley and his executive team at Barclays immediately threatened to
walk away from the deal – and not for the first time. On several occasions
during their hard negotiations with ABN’s management, led by the urbane
chief executive Rijkman Groenink, conflicts over top jobs and regulatory
issues – who would get what out of the deal – had threatened to scupper it.
Varley’s anger did not last long. He and his team realised that the LaSalle
sale could spike the guns of the rival suitors for the Dutch bank, a
consortium of Royal Bank of Scotland (RBS), Santander of Spain and Fortis,
the Dutch-Belgian bank.
The consortium, led by RBS’s combative chief executive Sir Fred Goodwin, had
made no secret of its intention of breaking up ABN into three parts, with
RBS getting LaSalle. If LaSalle was sold off in advance, ABN would no longer
carry such appeal.
So, over the weekend, ABN wrapped up the sale of LaSalle to Bank of America
for $21 billion (£10.5 billion) and Barclays prepared to unveil its
recommended all-share bid for ABN. But Goodwin should never be
underestimated – he has a reputation as one of the toughest dealmakers in
banking. On Monday, he flew to Amsterdam in the RBS corporate Dassault
Falcon 900 jet for a prearranged meeting with ABN to explain his
consortium’s plans.
The meeting was cancelled at the last minute when Barclays and ABN unveiled
their agreed merger terms. Barclays was making a recommended all-share bid
valuing ABN at €36.25 a share or €66 billion (£45 billion), creating a group
worth £94 billion. Furious, Goodwin diverted to Fortis’s Amsterdam offices
to consult Jean-Paul Votron, its chief executive, and Santander chairman
Emilio Botin. He then flew back to Edinburgh to plot the consortium’s
response. At his shoulder was Matthew Greenburgh of Merrill Lynch, a veteran
of Goodwin’s epic victory in the takeover battle for NatWest seven years ago.
The next move came quickly. On Wednesday, the RBS consortium proposed a €72
billion break-up bid for ABN, trouncing Barclays’ offer. Goodwin appeared to
be right back in the running – he was prepared to offer an enticing 70% in
cash with only 30% in RBS shares. In the cutthroat world of mergers and
acquisitions, cash is usually king. But the contest was never going to be
that simple.
In a characteristic act of brinkmanship, Goodwin summoned the ABN chief
executive to Edinburgh for a meeting to explain the consortium’s bid.
Groenink insisted that discussions take place in Amsterdam.
Under intense pressure from its shareholders, ABN seemed to have no choice but
to open its books to Goodwin. But it insisted that the RBS group first agree
not to mount a future hostile bid. This led to protests from angry
shareholders led by the Children’s Investment fund (TCI), the hedge fund
that originally called for ABN’s break-up, accusing the board of seeking to
frustrate the consortium’s offer in favour of Barclays’ proposal.
“It seems remarkable to me that [the ABN board] want to recommend a paper deal
at a lower price against a largely cash deal at €39. How that is not an
abuse of fiduciary duty is a mystery to me,” said Alex Potter, an analyst at
Collins Stewart.
In a rowdy ABN annual meeting in the Hague on Thursday, Peter Paul de Vries,
the director of the powerful Dutch shareholder association VEB, stormed the
stage and had to be led away by security guards.
Goodwin made it plain he was prepared to go hostile. On Friday ABN blinked and
threw open its books. Even after that tactical victory, however, Goodwin
still faces huge obstacles. His offer is conditional on ABN not selling
LaSalle; but unpicking the deal with Bank of America looks tricky. It can
only be done if another bank makes a higher offer before May 6 and Bank of
America decides not to match it.
Ken Lewis, Bank of America’s chief executive, is in belligerent mood and
believes his contract is bulletproof. He has long coveted LaSalle, and he
will not give up without an almighty fight. Ominously for RBS, Bank of
America has pointed out that in the United States it is illegal to try to
persuade someone to break a legal contract.
RBS may have found a loophole. It could make an offer for LaSalle, which would
be conditional on it also winning control of ABN. That could allow it to
stump up such a huge premium that it could outbid Bank of America, but it
would not have to pay up until it had completed the ABN deal. RBS is
understood to have gained legal advice that such a move would not breach the
Bank of America contract.
RBS’s other hope resides in ABN’s rebel shareholders. This weekend, VEB is
seeking an injunction from the Dutch enterprise court to block the LaSalle
sale, arguing that it prevents a higher offer for the whole of ABN. If VEB
succeeds, Bank of America would be certain to sue ABN for breach of
contract. TCI is also threatening legal action against individual ABN
directors. EVEN if LaSalle could be prised away from Bank of America’s
clutches, the RBS consortium still needs to come up with €50 billion in
cash. That is likely to lead to huge rights issues for Santander and Fortis.
Analysts at Keefe Bruyette and Woods (KBW) estimate that Santander would
have to pay €23 billion for its slice of ABN – the Latin American business
and Italian bank Antonveneta.
Fortis could pay €27 billion for buying ABN’s Dutch operations, private
banking and wealth management, with almost the entire amount being funded
through a rights issue. These are unprecedented sums – the largest
fundraising by a European company was €15 billion in a rescue rights issue
for France Telecom in 2003.
Goodwin appears fearless: “Most people will think we are good for it. We have
the cash,” he said.
But RBS also needs to convince ABN that such a break-up will work. ABN has
been opposed, with Groenink claiming last week that it had looked at a
break-up but rejected it as unworkable. Regulators could also upset RBS’s
plans. And even if RBS can get round the legal issues – a huge if – the ABN
board may still decide that the risks are too high.
Antony Broadbent, an analyst at Sanford Bernstein, said: “I think Goodwin’s
force of will and determination to get LaSalle will carry him an awful long
way in this bid. But given the complexity, there is considerable scope for
irreconcilable differences to emerge within the consortium.”
And what of Barclays? In the war of words last week, Varley remained
confident, arguing that the two offers were in “stark contrast”. Barclays’
offer, said Varley, would “build through merger one of the best banks in the
world” while the RBS consortium bid would mean “the deconstruction into
heaven knows how many parts of one of the biggest banks in Europe”.
Barclays still has options. It has said that it can squeeze €3.5 billion in
costs savings and revenue gains by 2010 – though some believe that Varley
has been cautious.
And it could do some clever reorganising of its capital, perhaps finding £3
billion of cash to sweeten its offer. In a straight fight on price, RBS has
the upper hand. But the courts on both sides of the Atlantic and the
pugnacious Lewis at Bank of America could play key roles. There will be many
more rounds in this heavyweight contest.
£140M BONANZA FOR THE ADVISERS
WHEN news broke six weeks ago that Barclays and ABN Amro were in exclusive
talks, Merrill Lynch, one of the world’s most powerful investment banks,
appeared to have been left out in the cold.
However, as rival banks rushed to win advisory mandates with either Barclays
or ABN, Merrill was quietly biding its time.
Within weeks, Merrill had secured potentially the most lucrative mandate of
all, becoming sole adviser to the consortium of Royal Bank of Scotland
(RBS), Santander and Fortis. Merrill’s team is led by Matthew Greenburgh,
vice-president of global investment banking, and Andrea Orcel, head of
European investment banking.
Greenburgh has had a close relationship with RBS chief executive Sir Fred
Goodwin. He advised RBS on its acquisition of NatWest in 2000 and is said to
have been responsible for the notion of conditional acceptances, which
allowed RBS to gain the support of a group of shareholders at a crucial
stage in the NatWest bidding war. Greenburgh also advised on the flotation
of Standard Life last year and the defence of the London Stock Exchange.
RBS’s decision to bid is a vindication for Merrill. But the strategy also has
big risks. If the Barclays and ABN deal goes ahead, Merrill would lose out
on huge fees to its rivals. But if RBS succeeds, Merrill could pocket tens
of millions of pounds. The bank would also be well-placed to pick up further
work advising on the likely restructuring of ABN by the RBS consortium.
The bidding war for ABN is expected to generate £140m in fees for advisers on
the deal. This would make it one of the most lucrative transactions ever.
