Investors in Barclays have been unnerved by its management’s decision to enter merger talks with ABN Amro. True, at first glance it seems reasonable to make a play for the Dutch bank: the valuation of its broad international franchise in prime growth and developed markets has been beaten down by prolonged share price underperformance while it struggled and failed to build a credible top-tier investment bank. The Dutch bank has been tipped into play recently by shareholder activist TCI but has been a clear consolidation target for years. It is cheap and available.
Doubts remain whether this is the deal for Barclays, though. The British bank’s chief executive, John Varley, has famously said that mergers and acquisitions should be the servant of strategy not the master: in other words, banks should decide strategy first and then nail on appropriate deals, not look for the deal first just because it is cheap and doable and then contrive a strategy to justify it. Is ABN Amro suddenly such a good strategic fit, or is this an opportunistic trade? Barclays’ investors assume the latter. From day one, they have raised serious doubts about Varley’s credibility.
This might be unfair. The Dutch bank offers scale in markets in Asia, Latin America, the Gulf and north America, as well as in Italy and Benelux. If Barclays’ strategy is simply to get bigger outside the UK, the deal can – and no doubt will – be trumpeted as a strategic masterstroke. Securing it, of course, involves abundant execution risk. The Dutch bank is much more a diffused collection of franchises than its more centralized British suitor.
The management of Barclays is generally well regarded and it is supremely confident following the successful absorption of Absa in South Africa and before that Zaragozano in Spain. However, it has no great track record with such mega deals to set against leading European rivals – most obviously, RBS and Santander and even BBVA and HSBC.
All four of these banks have greater experience in large-scale truly transformational deals and more overlaps with ABN Amro, either in the US or Latin America or both. They could therefore take out greater cost-savings synergies and so, in theory, make a more compelling case to shareholders of both target and acquirer and so offer a higher price. Then there are the American banking deal machines.
Time will tell whether Barclays, by jumping first on an obvious target, has increased its chances of carrying off the prey or simply unleashed the rest of the pack. By quickly conceding that the merged entity would have its headquarters in Amsterdam, with the Dutch central bank as its lead regulator, and that ABN Amro should nominate the chairman, Barclays might have scattered some distracting obstacles in the path of other predators. In truth, it has had to make these concessions precisely because its lack of overlaps and synergies constrains the value of the bid it will ultimately offer. It therefore needs to burnish a softer, more politically nuanced appeal.
The drivers of the deal are Varley, still early in his tenure and keen to make a mark, and the more recently arrived chairman Marcus Agius, the consummate ex-Lazard deal-maker. But the key player, as ever at Barclays, might yet be Bob Diamond.
His success in building Barclays Capital into a hugely successful debt-focused investment bank, and latterly also guiding BGI, has been at the core of the Barclays story in recent years and has attracted investors to the stock. All that his group has achieved has been without the distraction of any large deal, although Diamond would no doubt love to acquire a leading corporate advisory and M&A franchise. What overlaps there are between ABN Amro and Barclays centre on the wholesale global client businesses. If the deal goes ahead, Diamond and his senior lieutenants will be up to their necks in managing the integration. The quid pro quo is gaining access for their businesses to large numbers of new corporate clients around the world.
Is it the best use of their time? The transaction might offer the best chance for Barclays to achieve global scale. But some investors in Barclays feel that the short-term hit to the bank if it misses this deal might be well worth taking.
