Background: ABN AMRO had come to a crossroads in the beginning of 2005. The bank had still not come close to its own target of having a return on equity that would put it among the top 5 of its peer group, a target that the CEO, Rijkman Groenink had set upon his appointment in 2000. From 2000 until 2005, ABN AMRO’s stock price stagnated. Financial results in 2006 added to concerns about the bank’s future. Operating expenses increased at a greater rate than operating revenue, and the efficiency ratio deteriorated further to 69. 9%. Non-performing loans increased considerably year on year by 192%.
Net profits were only boosted by sustained asset sales. There had been some calls, over the prior couple of years, for ABN AMRO to break up, to merge, or to be acquired. On February 21, 2007, the call came from the The Children’s Investment Fund Management hedge fund which asked the Chairman of the Supervisory Board to actively investigate a merger, acquisition or breakup of ABN AMRO, stating that the current stock price didn’t reflect the true value of the underlying assets. TCI asked the chairman to put their request on the agenda of the annual shareholders’ meeting of April 2007.
Events accelerated when on March 20 the British bank Barclays and ABN AMRO both confirmed they were in exclusive talks about a possible merger. A consortium of banks, including RBS, Belgium’s Fortis, and Spain’s Banco Santander also proposed an acquisition and finally won the deal. The RBS-ABN Amro deal is also unusual in that it led to the fall of not just one buyer but two: the Belgian-Dutch bank Fortis was nationalised by the Dutch government last year to avert a liquidity crisis. On 22 April 2008 RBS announced the largest rights issue in British corporate history, which aimed to raise ? 2billion in new capital to offset a writedown of ? 5. 9billion resulting from the bad investments and to shore up its reserves following the purchase of ABN AMRO. On 13 October 2008, British Prime Minister Gordon Brown announced a UK government bailout of the financial system. The Treasury would infuse ? 37 billion ($64 billion, €47 billion) of new capital into Royal Bank of Scotland Group Plc, Lloyds TSB and HBOS Plc, to avert financial sector collapse. This resulted in a total government ownership in RBS of 58%. As a consequence of this rescue the chief executive of the group Fred Goodwin offered his resignation, which was duly accepted.
In January 2009 it was announced that RBS had made a loss of ? 28bn of which ? 20bn was due to ABN AMRO. At the same time the government converted their preference shares to ordinary shares resulting in a 70% ownership of RBS. The 452-page report by the FSA into what went wrong at RBS found that the bank conducted inadequate due diligence into ABN, on the basis of just two lever arch files and a CD. “The board was fully aware that it could undertake only extremely limited due diligence in respect of the ABN Amro acquisition.
However, it appears to have treated the fact that such constraints on due diligence are normal in any contested bid as, at least to some degree, entitling it to disregard this impediment. ” Once they started to look around ABN’s trading books after the acquisition, they realised that a lot of their businesses, particularly what you would call model businesses where valuations were based on assumptions, were based on forecasts that were super aggressive,” said one senior former RBS trader. The woes at RBS were in stark contrast to its consortium partner Santander, which had acquired businesses that proved relatively simple to separate.
Quite how well Santander had done out of the deal, became only too apparent on November 8 when it announced it was selling Antonveneta to Banca Monte dei Paschi di Siena for €9bn, €2bn more than the price it had bought it for less than a month earlier. On 9 February 2010, the businesses of ABN AMRO acquired by the Dutch state were legally demerged from the RBS acquired businesses. This created two separate banks within ABN AMRO Holdings, The Royal Bank of Scotland and the new entity named ABN AMRO Bank, each licensed separately by the Dutch Central Bank Transaction:
RBS (UK:RBS), Santander (US:STD), and Fortis offered 30. 40 euros in cash and 0. 844 RBS share for each ABN Amro share, valuing the Dutch bank at 38. 40 euros a share. The deal was valued at €67 billion. Barclays offer for ABN AMRO was €67. 5bn, “Our philosophy is to offer as much cash as possible,” said Fred Goodwin, chief executive of RBS, at a press conference. He said the banks were able to offer more cash after performing limited due diligence on ABN Amro. Throwing in more cash heightened the pressure on ABN to back the consortium’s offer.
Shareholders accepted a 71bn euro ($98. 5bn; ? 49bn) offer to clinch Europe’s biggest ever banking takeover and Barcalays withdrew its bidding. Breaking down the costs Under the plan, RBS would pay 27. 2 billion euros to get ABN’s North American, Asian, Latin American (except Brazil), investment and corporate banking arms. Fortis would pay 24 billion euros to get ABN’s Dutch, private-client and asset-management businesses, and Santander would fork over 19. 9 billion euros for ABN’s Brazilian and Italian presence.
The three banks would share other assets, such as ABN’s head office and its private-equity portfolio. They’d sell the stake in Capitalia , the Italian bank that’s recently agreed to be bought by UniCredit . The break-up of ABN will involve 4,500 branches across 53 countries and unravelling businesses ranging from cash management operations in Asia to retail banking in Brazil. RBS is expected to take its wholesale and investment banking business and its Asian operations while Santander will get ABN’s Italian and Brazilian units, and Fortis its Dutch business and wealth and asset management operations.
Royal Bank of Scotland acquired the business most affected by the market turbulence of the sub-prime crisis. Objective: The banks saw a 4. 23 billion euros in cost savings by the end of 2010, and said their profit will be boosted by an additional 1. 22 billion euros of revenue. They said the deal is expected to increase Fortis’s earnings per share by 4% by the end of 2010, lift RBS’ EPS by 7% and improve Santander’s EPS bsy 5%.
