LONDON: With even behemoths like Citigroup finding themselves under verbal attack from hedge fund managers, it becomes clear there are no untouchable banks when it comes to potential bids any more.
Tom Brown of Second Curve Capital, a $500 million, U.S.-based firm, recently suggested that the world's largest bank would improve its performance if it were split into four businesses. So far, the market appears to have shrugged off the suggestion.
Still, hedge fund interest, allied to a host of other factors affecting banking, could result in an acceleration in mergers and acquisitions in this field.
Last year was already a record. 2006 saw a 45 percent increase in global banking mergers and acquisitions over 2005 activity, to $702 billion, according to Mergermarket, a research firm.
"We are looking for a record year in banking M&A, and the trend is set to continue in the next years," said Nick Page, a partner in the Transaction Services group at the international accounting and consulting firm PricewaterhouseCoopers.
The heated battle for the Dutch bank ABN AMRO between Barclays Bank of Britain and a consortium including Royal Bank of Scotland, Banco Santander of Spain and a Belgian bank, Fortis, shines a spotlight on some of the reasons behind the rise in bids.
Banks like Barclays have been benefiting from a benign environment in the last few years that has seen them make record profits. They need to invest those funds, Page noted.
Additionally, with ample liquidity around, they will not find it difficult to line up funds from the capital markets.
Meanwhile, the consortium model may open up the field to more bidders and make more banks into targets, analysts say.
Whether or not the pan-European trio succeeds in its Dutch foray is almost irrelevant, except insofar as it would provide a general blueprint for the legal, tax and regulatory practicalities of complex joint bids. What matters is that, by joining together, the banks are each looking to take away very specific parts of the target bank, allowing them to make more cost savings and more synergies than if they had to look at buying the whole thing on their own.
For banks like Royal Bank of Scotland, whose chief executive, Fred Goodwin, was told by investors to curb his appetite for acquisitions a couple of years ago, the specificity of this bid makes it look more like one that would create value - and thus one that shareholders won't balk at. Royal Bank of Scotland would, according to the consortium's plans, be taking over ABN AMRO's U.S. bank, LaSalle, and merging it with Charter One, its existing U.S. business. It would also take over three other business units.
"Bolt-on acquisitions are increasingly seen as an attractive route to accelerate growth and are increasingly being tolerated by the markets," noted David Williams, head of European banks research at Morgan Stanley, at a recent roundtable hosted by The Banker.
Another issue is size. "How do banks hope to compete with the likes of Citi, Bank of America or HSBC? It is not going to be through organic growth but rather through acquisition," said Jonathan Fine, head of European Financial Institutions Group syndication at Goldman Sachs, speaking at the roundtable.
Additionally, there is private equity's increased involvement in the sector. Awash with funds - the industry raised over $400 billion last year and is forecast to raise $500 billion this year, according to Private Equity Intelligence - it is moving into financial services in both developed and emerging markets. Earlier this year, the private equity firm JC Flowers announced it would lead a consortium taking a majority stake in Sallie Mae, the U.S. lender to college students, while last year Ripplewood Holdings, a U.S. private equity firm, led a consortium buying a stake in Commercial International Bank of Egypt.
Williams noted that once a bank is put into play by a bid from private equity, it "will help to flush out interest from the established banking groups much more quickly than if they are left to their own devices."
Moreover, in a number of emerging markets, retail and corporate customers are demanding sophisticated financial products. Some of the local banks can supply these, but many need the input of developed country banks.
Regulators in markets like Turkey are proving themselves willing to allow foreign banks to take stakes or take over local banks.
There are, however, doubts about the performance of some of the largest banks in the world, namely Citigroup and HSBC, that are reflected in their share prices.
About the IHT (Related) About the IHT | Privacy & Cookies (Related) Privacy & Cookies | Contact the IHT (Related) Contact the IHT
Copyright © 2007 the International Herald Tribune All rights reserved
No comments:
Post a Comment