Was ABN Amro a deal too far for Fred the Shred?
Matthew Lynn says Royal Bank of Scotland chief Sir Fred Goodwin’s reputation is on the line as he struggles to make a success of a very expensive acquisition The title of the worst deal in British corporate history is hotly contested. Glaxo and SmithKline were worth £107 billion on the day they announced their merger: eight years later, they’re worth £57 billion, and they’re not quite the ‘kings of science’ their chief executive Jean-Pierre Garnier said they would be. Getting on for a decade after it paid £75 billion for Mannesmann of Germany in Europe’s largest hostile bid, Vodafone still hasn’t recovered. Capping both of those, Lord Simpson’s foray into the American telecoms industry after he took over at GEC and renamed it Marconi is always going to take some beating for the speed and thoroughness with which he destroyed one of Britain’s largest companies.
Sir Fred Goodwin’s acquisition of the Dutch bank ABN Amro last year on behalf on Royal Bank of Scotland may never quite claw its way into such a pantheon. Still, it is already looking like one deal too many, and one that may take many years to justify to shareholders.
Rewind a year, and Goodwin — or Fred the Shred, as he is known for the surgical precision with which he fillets out underperforming staff — was the master of the British financial services industry. In his decade at the helm of the RBS, he had turned a relatively minor Edinburgh-based bank into a global powerhouse. His acquisition of NatWest in 2000 for £21 billion was a masterstroke. Fending off his closest rival, Bank of Scotland, he took control of one of the big four of the British high street. The result was the fifth largest financial services group in the world by market value.
And yet now Goodwin’s script appears to have gone horribly wrong. For years, bankers have talked about consolidating Europe’s patchwork of national banks. Last year, Goodwin decided to do something about it, teaming up with Banco Santander of Spain and Fortis of Belgium to take control of the Dutch bank ABN Amro. It was a bitter six-month battle, resisted by ABN’s board and almost thwarted by a rival bid from Barclays. But not many people come out of a scuffle with Goodwin without feel ing a bit bruised, and eventually RBS won the fight.
It cost €71 billion. But the real price might be a lot higher — Goodwin’s carefully cultivated reputation as the sharpest pencil in British banking. ‘To some extent [the RBS-led consortium] have been overtaken by events,’ said Robert Talbut, chief investment officer at Royal London Asset Management. ‘Against that, they can be criticised for the fact that they carried on with it regardless of the fact that conditions have changed.’ True enough. In the months since, the global credit crunch has hit, markets have wobbled, banks have been busily writing off every subprime loan on their books, and their share prices have fallen off a cliff. Is ABN still worth it? Well, to put it at its mildest, €71 billion would buy you an awful lot more bank today than it would have done a year ago. Goodwin is looking more and more like the man who decided to buy big just before the market crashed.
If anyone can get this right, however, it is probably Fred the Shred. Born in Paisley and trained as an accountant, Goodwin made his name working on the liquidation of the fraud-ridden BCCI and went on to run the Clydesdale Bank before joining RBS as deputy to Sir George Matthewson in 1998. Goodwin masterminded the NatWest takeover and became chief executive of the new group on the day it was completed. Just 41, he was the youngest boss of any British bank. He had promised to lick NatWest into shape, and he didn’t waste time: 18,000 jobs were swiftly winnowed out. He had promised £1.4 billion of cost cuts or extra revenue, and in the end he delivered £2 billion. The result was a lean, mean profit machine, and it was rewarded with a rapidly rising share price.
There were two things, according to legend, that Fred knew how to do. He could get the timing of a deal right, and he could make an acquisition pay. Both are now looking questionable: ABN may turn out to have been a deal too far. True, the potential pain is shared: Banco Santander will be taking ABN’s Brazilian and Italian units, while Fortis takes the Dutch consumer banking business. RBS will end up owning its investment banking and Asian operations. At the time of its last results announcement, RBS said it was ahead of schedule in delivering the promised cost cuts at ABN.
But the RBS-led consortium paid mostly cash. It was the biggest-ever takeover in financial services, narrowly beating the $69 billion combination of Citicorp and Travelers Group in 1998. And, whichever way you look at it, banks are a lot cheaper than they were a year ago. For example, if you’d waited until now, €71 billion would buy you the whole of BNP Paribas, plus €15 billion in change; or Deutsche Bank with €30 billion to spare; or Merrill Lynch and Morgan Stanley, with enough left over to pay for Lazards plus a slap-up lunch to celebrate. If it was an investment bank you were after, all of those would seem to be a lot more exciting than ABN’s operations, which is what RBS ended up acquiring.
The share price certainly reflects what the market thinks. A slice of burnt toast would look more appetising. From 725p last February, the shares have fallen all the way back to just a little over 360p. They currently yield 8.8 per cent, a price-level that suggests the market thinks there are big write-offs still in the pipeline. Even Lloyds TSB, after a decade as the dog of the British banking sector, doesn’t yield that much.
Another problem is that RBS looks short of capital. Credit Suisse analyst Jonathan Pierce (one of the first to spot potential trouble at Northern Rock and label it a ‘sell’ last year) argued in a note to investors this month that RBS needs to boost capital ratios that ‘we believe leave it deeply exposed to any further deterioration in financial markets’. So what might that be? Well, it could sell some assets, such as the 5 per cent stake it bought in Bank of China in 2006. Or some bits of ABN Amro. Or it could bring in a strategic investor — perhaps one of the Asian or Middle Eastern sovereign wealth funds that have provided timely injections of capital for subprime-damaged American banks. Alternatively, it could cut the dividend, or tap its shareholders for money.
The obstacle, in each case, would be Sir Fred’s pride. He has made his name as a man who buys assets, not sells them. The market has learnt to be suspicious of banks that come asking for money: the point of Sir Fred was that he paid out to shareholders, rather than asking them to cough up. For fear of losing that reputation now, ‘there is considerable risk that the group does very little, leaving investors with the potential for a more serious correction somewhere down the line,’ argues Pierce.
Quite so. Could things have been done differently? Hindsight is always easy, of course. But plenty of people were saying last summer that the bid for ABN looked expensive. The credit crunch had already broken by the time it was completed. There might have been a wave of lawsuits if RBS had pulled out — but they might well have been cheaper to settle, or to fight through the courts, than to go ahead with the deal.
Talk to RBS, and it argues that buying ABN was a once-in-a-generation opportunity; talk to Barclays people and they say they still regret losing. Markets go up and down, but European banks virtually never come on to the market. If Goodwin didn’t buy ABN in 2007, he might never have had another chance. RBS’s share price dropped sharply after the NatWest takeover, yet that deal worked out brilliantly. In two or three years time, will the same be said of ABN?
Well, maybe. The fact remains that after a decade of unbroken success, Sir Fred has dug himself into a hole. He’s certainly smart enough to stop digging. Whether he’s smart enough to climb out — and to swallow his pride as he does so — remains to be seen.
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