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Barclays merge ABN Amro

The combined Barclays-ABN would be a Goliath with a market value of almost £90 billion, operations in 74 countries, more than 40 million customers and 230,000 staff.

The combined Barclays-ABN would be a Goliath with a market value of almost £90 billion, operations in 74 countries, more than 40 million customers and 230,000 staff. Bankers say Barclays has been smart, cleverly positioning itself as a white knight to save ABN Amro from the wrath of rebel shareholders. ABN has looked increasingly vulnerable since it became embroiled in a battle with an activist investor, The Children’s Investment fund, in late February. In a vitriolic letter, TCI lambasted ABN’s management, attacked the bank’s „terrible” shareholder returns and called for it to be sold or broken up.

In response, ABN hired four heavyweight investment banks — UBS, Lehman Brothers, Morgan Stanley and Rothschild — to shore up its defenses. TCI is demanding five punchy motions be put to ABN’s annual shareholder meeting on April 26. Even before the TCI attack, ABN was under pressure from shareholders. Last month, seeking to appease investors, it announced plans to spend €1 billion buying back shares. Rijkman Groenink, its chief executive, has declared 2007 „a year of delivery”.

So does the deal stack up?
Last week most analysts agreed it makes strategic sense. By gobbling up ABN, Barclays gets access to fast-growing markets such as Brazil and to attractive assets in Asia with more than 2.8 million customers and a strong credit-card business. ABN also has one of the world’s leading asset-management groups and a sizeable corporate and investment-banking business. „These opportunities do not come up more than once in a decade. If you are a chief executive it is hard to let this pass you by,” said Antony Broadbent, an analyst at Sanford Bernstein.

International expansion has been central to Barclays since John Varley landed the top job in 2004. In his first strategy board meeting as chief executive he made it a priority. Two years ago he set a strategy to compete with the world’s top five banks. He also set a target of making 50% of profits from outside the UK by 2008, up from 40% in 2005. In the event, it beat that target last year. Last year he hired Frits Seegers, a former Citigroup banker, in the newly created role of chief executive of global retail and commercial banking on a potential package of £11.7 million over three years. Part of Seegers’s role is to use his experience to drive Barclays’ retail business into new markets, including Russia.

Varley is understood to have set the bank a new target of generating 70% of its profits from overseas. According to an insider, merging with ABN would accelerate that by three years. Broker Cazenove estimates Barclays-ABN would rely on its British businesses for a mere 32% of profit. The big question is what price Barclays can pay. This will depend on the amount of costs Barclays can squeeze out and the extra revenues it can gain by selling investment-banking and fund-management products to ABN customers.

The return Barclays calculates it can get on its investment will also be crucial in gaining shareholder support. The fact that any offer will be largely in Barclays shares makes it vital that Varley retains shareholder confidence. Fund managers are sitting on the fence. „We would be very concerned if Barclays does anything to destroy shareholder value. The deal makes sense, but until we see the price we really can’t make a proper judgment,” said one leading shareholder.

Most analysts calculate that Barclays can probably offer about €33 a share on projected cost reductions of €1.55 billion; but Stuart Graham at Merrill Lynch is more bullish, forecasting a €3 billion projected cost reduction and a €35-a-share offer price. There is little geographic overlap between the two banks, however, which limits the scope to slash costs. This also leaves Barclays at a disadvantage to rivals such as HSBC, which could pay €48 a share, according to Merrill Lynch. Santander, BBVA, Royal Bank of Scotland and BNP Paribas are all seen as being better placed to make a higher offer.

„It is not clear to us that Barclays can offer the highest price for ABN among other potential suitors. That said we recognize that factors such as cultural fit will have to be considered by ABN,” said Graham. At €33 a share, the offer would be a decent 20% premium to the ABN Amro share price on March 16, the last trading day before the talks were announced. Since then Barclays has suffered in the relative value of its shares. ABN’s shares have jumped by 20% to €32.5 while Barclays’ stock is up just 11%, making it more expensive for the British bank to fund a share-based deal.

There are other options open to Barclays.
One could be to sweeten the deal by selling off parts of ABN and returning large amounts of cash to shareholders. LaSalle, the American bank, is a favorite target; analysts at Sanford Bernstein estimate it could be worth €11.3 billion. Possible buyers of LaSalle could include RBS and Bank of America. Barclays could also sell off ABN’s stake in Capitalia, the Italian bank. Even if Barclays can pull off the deal — and most analysts in the market believe there is only a 55% chance — it faces further challenges. „ABN Amro has been an unloved franchise and it is not easy to turn around.

Any bank looking at this knows there are difficulties,” says one senior banker. Tellingly, ABN’s cost to income ratio, a key measure of efficiency, is 69.6% against a much more lean 59% at Barclays. In one sense success could come down to management. In the past two years, Varley has shaken up his top team. Besides Seegers, he has brought in Deanna Oppenheimer, a highflying American banker, to pep up the ailing retail bank, and Antony Jenkins, another American, to run Barclay-card. All come highly rated, but taking on a huge integration project on the scale of ABN is fraught with difficulty. Bob Diamond, Barclays’ president and architect of the phenomenally successful investment bank Barclays Capital, will play a key role.

He is expected to have responsibility for fixing ABN’s loss-making wholesale banking business. But some analysts fear this could result in Diamond taking his eye off the ball and Barclays Capital suffering. „While Diamond has been good at driving BarCap forward, we would worry about the distraction of having to integrate, fix and, in all probability, shut large amounts of the ABN Amro investment bank,” said Broadbent. The most intriguing question is whether a rival bidder emerges. Most possible predators are expected to wait on the sidelines until Varley declares his hand. One potential bidder could be Citigroup, the American financial-services giant, where a faction is said to be putting pressure on chief executive Chuck Prince to make a bid. Last week RBS refused to rule itself out as a potential suitor for ABN. If either Citigroup or RBS moves, others may be tempted to follow, creating a bidding war. (,