A boom in M&A for the world’s financial institutions was widely expected a year ago, when the biggest European cross-border acquisition in financial services was announced. The tale of how Barclays lost the hand of ABN Amro, and how Fortis, Santander and RBS won it, needs no retelling here, but that merger was forecast to change the banking landscape. Growth-enhancing mergers, which would create product and geographical scale, would surely follow. Instead of that rosy picture we have a world of acquisition triggered by desperation, with the terms dictated by one party’s weakness. That Bear Stearns would end up in the arms of JPMorgan in such circumstances is remarkable, and perfectly illustrates the new harsh environment.
It is clear that the strong can dictate their terms but there are so few that meet the criterion. Even with a revised and increased offer, JPMorgan was still able to pick up a leading US broker cheaply. But which other institutions are set to take over the desperate position of the weak? Very few companies are well situated today. The strong have lots of capital and liquidity. They are also in the right businesses – that means limited investment banking and consumer finance and lots of retail banking. And one highly important intangible asset is required – credibility.
Several institutions are known to be scaling down or refocusing their banking operations. Allianz, for instance, announced that it was splitting Dresdner Bank from the investment banking operation, Dresdner Kleinwort Wasserstein. In the US, CIT group is clearly challenged – as are other larger money-centre banks. And all over the US and Europe banks are believed to be vulnerable to takeover or, if not, under pressure to shed assets and focus on their core businesses.
But given the extent of the crisis, there will be many bank chief executives happy to wait until the dust settles, despite several weak players being up for grabs. The market will likely punish those it perceives to be acting unwisely. No one wants to risk biting off more than they can chew.
Potential sellers might well have to find ways of assuring purchasers that there will be no nasty additional surprises. When the sale is conducted under the auspices of a central bank, be assured that none will repeat the mistake the Bank of England made by refusing Lloyds TSB medium-term funding for Northern Rock – witness the Federal Reserve’s $30 billion line to JPMorgan for Bear Stearns. And Allianz, which is keen to get rid of DrKW, could find itself having to pay someone in order to focus on its insurance business. Think about it – if Bear was eventually worth $1.2 billion, what is a far smaller European investment bank worth?
There are few sources of new capital now to buy on weakness. Recent favourites such as sovereign wealth funds have been burnt, though there are rumours that the Chinese may buy Dresdner Bank.
It’s not a great landscape for central banks. Let’s hope that another crisis on the lines of Bear or Northern Rock doesn’t occur, because it’s unclear which banks are capable or willing to pick up the pieces.