Barclays-ABN Deal Signals a Shakeup

The proposed $91 billion merger is sure to change the landscape for global financial services

It's still possible that the agreement struck by London-based Barclays bank (BCS) to acquire Dutch bank ABN-Amro (ABN) on Apr. 23 won't go through. But no matter what happens, the proposed giant merger will shake up the global financial-services industry. At $91 billion, the price is the highest ever for a bank acquisition.

It's also the first time that a major European bank has agreed to give up the dream of being what Rijkman Groenink, chairman of ABN-Amro's management board, calls "the senior partner" in one of the combinations that everyone concedes is inevitable.

Until now, European cross-border mergers have mostly taken the form of large banks from one country buying relative small fry or wounded institutions such as Britain's Abbey National, which was sold to Santander (STD) of Spain in 2004. But Groenick's realism (he is stepping aside from management, but remaining on the board) may lead other top bankers to fall on their swords as well. "My guess is that this will trigger more consolidation across Europe and with global banks," said Robert Diamond, Barclays president, in an interview with

Lots of Activity

Recently, reports have surfaced of Italy's UniCredit talking to France's Société Générale. France's BNP Paribas, Spain's BBVA (BBV), and Britain's Royal Bank of Scotland are all potential acquirers.

Diamond also speculates that a bigger European presence might make sense for several U.S. banks—among them Citigroup (C), Wachovia (WB), and Bank of America (BAC). Bank of America said late on Apr. 22 that it will buy ABN-Amro's U.S. subsidiary LaSalle Bank for $21 billion. Speaking about Bank of America, which has been an oft-rumored suitor of European banks, including Barclays, Diamond said, "It is a very interesting question what their next move is; this [LaSalle] deal gets them closer and closer to the regulatory limits [in the U.S.]."

A Better Offer?

Groenink has been preaching the need for European bank consolidation for years and talking to his fellow bank chiefs about potential combinations. When no one wanted ABN-Amro as senior partner, the bank decided last year that it had better add a "junior partner option" to its strategy, he said in a conversation. Barclays and ABN Amro have been talking on and off for a couple of years, but their agreement was accelerated by pressure from an activist hedge fund called The Children's Investment Fund Management (TCI), which has been pushing ABM to take measures to improve its stock price (see, 3/19/07, "Hedge Funds Hit European Blue Chip").

Some other bankers look at ABN-Amro more as a group of interesting but undermanaged businesses than as a potential partner. A group headed by the hardnosed Royal Bank of Scotland is still trying to figure out if it can top the Barclays offer by carving up ABN's assets up among themselves. RBS is being supported by its long-time collaborator Santander, as well as Belgian-Dutch giant Fortis.

In fact, to bolster the likelihood that the Barclays deal would carry the day, ABN's Groenink—who sought to avoid a breakup or sell-off—had to agree to a major concession—the divestiture of LaSalle. Rijkman got a few sweeteners, such as having the official headquarters of the bank in Amsterdam.

But even in this friendly deal, Barclays top executives, Chief Executive Officer John Varley and Barclays President Diamond, are clearly in the driver's seat. Management control was a sine qua non, a Barclays source says.

Cryptic Statement

Indeed, the banks announced on Apr. 23 that their leading regulator would be London's Financial Services Authority, not the Dutch banking regulator (see, Cleaning Up London's Financial Markets, "Cleaning Up London's Financial Markets").

The LaSalle move does seem to have thrown off Barclays' rivals. On Apr. 23, the three banks in the consortium issued a cryptic statement saying that their proposals included the retention of LaSalle, asking for more information about the sale and saying that they did not consider it "appropriate" to go ahead with a planned 2:30 p.m. meeting with ABN-Amro to present their proposals. But ABN's nemesis, the hedge fund TCI, quickly came to the consortium's support with a statement saying, "We are concerned the pre-agreed sale of LaSalle Bank unfairly hinders the RBS consortium."

Some analysts think that the wholesale cost cutting these banks could bring to bear might allow them to make a substantially higher offer than Barclays' all-share deal. Barclays, for instance, is promising $3.8 billion in cost synergies. Staff reductions would be about 10% of the combined 230,000 employees, in line with routine annual attrition and staff turnover, Varley stressed.

Banking analysts Keefe, Bruyette, & Woods think that an RBS-led consortium might be able to squeeze out as much as $5 billion. RBS CEO Fred Goodwin isn't known as "Fred the Shred" for nothing, the reasoning goes. But there is a breakup fee of $270 million if the Barclay's-ABN deal isn't consummated.

It is conventional wisdom around the City of London that if Barclays comes out the loser on ABN-Amro it, too, will be in play. But Varley and Diamond are risking such exposure to gain pole position in what they think will now be a race to scale-up businesses such as wealth management, investment banking, and asset management—all already fast-growing businesses at Barclays. ABN-Amro gives Barclays access to new clients in the European middle markets and in such places as India, China, Italy, and Brazil, where ABN-Amro has built a strong base.

Skeptical About a Breakup

Under Diamond, Barclays has been growing these businesses at a very fast rate. For instance, Barclays Capital, the investment bank where Diamond has made his name, grew at a 55% clip last year, to $4.4 billion in pretax profits. Barclays Global Investors, the asset management business, and Barclays Wealth, the private bank, grew at 32% and 28%, respectively. Diamond says the high growth will continue. Overall, Barclays' pre-tax profit was up by 35% last year, to $14.3 billion. ABN-Amro's 2006 profits were up 8%, to $6.45 billion.

Varley and Diamond also figure that the support of the ABN-Amro board is worth something. Indeed, Groenink said that ABN-Amro will only consider a "serious, compelling" new offer. And he expressed skepticism that a breakup was the way to gain value for shareholders, noting that the board had deliberated carefully before recommending the Barclays offer.

On the first day of trading after the announcement, investors showed skepticism about the deal, knocking down Barclays shares 2.67% on the London Stock Exchange. ABN-Amro's shares fell about 0.4% in Amsterdam. Who the ultimate buyer will be is a very tough call at this point. What's certain is that the financial services landscape is heading for a change.

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