ABN: 2+2=3?

Rosario Silva and José María Ortiz. Professors. IE Business School

7 September 2007

When Barclays and ABN Amro announced their merger agreement, whereby Barclays undertook to pay out €67,000 million, it was expected that the result would be the fifth-largest bank in the world in terms of stock market value. The merger seems, however, to have lost its way.

Although this type of operation is complex and not easily simplified, it would appear that the source of ABN’s problems lies in criticism about its directors made by one of its main shareholders, unhappy with how the operation is developing. Following said criticism, expectation that the company would be taken over, increased the ABN’s share value by 46%.

Moreover, a consortium comprising Banco de Santander, Fortis and Royal Bank of Scotland (RBS) has also shown interest in ABN, offering 13% more than Barclays. The consortium has adoped a different approach. Its intention is to split ABN´s business into segments and for each partner to keep the segments that provide the greatest synergy (Santander would strengthen its position in Brazil, Fortis in Holland, RBS in the USA).

For its part, ABN has decided to sell its American subsidiary (LaSalle) to the Bank of America for $21,000 million. This operation has scuppered the consortium’s plans, since LaSalle is one of the businesses that held most interest for RBS to strengthen its position in the USA. However, the ABN´s shareholders reacted fast to the behaviour of its directors and an Amsterdam court has already frozen the sale of LaSalle to the Bank of America (BoA) since it considers that the operation should first of all be approved by shareholders. Now, the Bank of America is to claim indemnification from ABN and we may see the arrival of a new rival consortium. There will be no shortage of candidates and HSBC has already shown its interest in ABN´s business in Brazil.

Despite the complexity of the operation, several things would appear to be clear at the moment. Firstly, the winners so far are the shareholders who are seeing the value of their shares increase. Second, executives and shareholders do not agree on what is best for ABN Amro. In the ABN shareholders meeting, 70% voted in favour of finding the best offer for the bank (merger, sale of all or part of its businesses), a proposal for which the board had recommended a “no” vote. One conclusion could be that the board does not seem to agree with the interests of its shareholders.

Besides the legal battles, the situation may give rise to an interesting debate on the principles of good corporate governance and the harmonisation of interests of all stakeholders. Let us not forget that the codes of conduct of listed companies have been based on shareholders defining the strategy and directors implementing it, a principle that seeks to counter the so-called "agency" problem whereby directors are more interested in short-term operations in detriment to the company´s long-term project. Furthermore, as far as we know, shareholders and directors do not seem to consider what is going to happen with the employees of the current ABN or its brand as a priority. We shall have to understand that the company´s value includes (or justifies) everything.

It can be argued that, at any given time, the best thing to do with a project that does not generate sufficient synergies is to break it up and that ABN´s directors are simply trying to enable the merger with Barclays because they certainly don’t seem to have a problem sharing with BoA. A good number of analysts believe that the final conclusion would be that the time has come when the sum of the separate parts is worth more than the bank as a whole. In other words, each of ABN´s businesses works well on its own, but there are not sufficient synergies between the individual parts to generate greater value for the whole bank. In other words, two plus two does not always make five; indeed, it does not always make four.

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