Tuesday, March 20, 2007

Barclays- A Model for Meek Canadian Banks

The Globe and Mail, Eric Reguly, 20 March 2007

There's a lesson in Barclays Bank PLC for Canada. When former Bank of Montreal CEO Matt Barrett landed at Barclays in 1999, it was in a strategic cul de sac. Barclays was big at home, virtually nowhere overseas. The choice: Squeeze the British market for everything it's worth and watch the profits roll in or hit the road and become a growth story.

Mr. Barrett chose the international route. By 2004, when he switched from CEO to chairman (he retired at the end of last year), earnings from non-British operations had doubled to about 25 per cent. If yesterday's reports are right, Barclays is on the verge of international superstardom through the purchase of ABN Amro Bank NV, the leading Dutch bank. Together, Barclays and ABN would have a market value of more than $190-billion, based on yesterday's share prices and exchange rates. That would place it fifth in the global rankings, behind Citigroup, Bank of America, HSBC and JPMorgan and well ahead of Royal Bank of Scotland, the current British heavyweight.

Royal Bank, the largest Canadian bank, ranks 28th by the same measures, with a value of $73-billion. There was a time in the 1990s when Barclays and RBC weren't too far apart in size. Barclays showed that even middling banks (by global standards) can graduate from the domestic sandbox if they put their minds to it.

If it happens, a Barclays takeover of ABN would be the biggest financial services merger. The outcome is far from certain. Neither bank would comment yesterday, though Barclays promised to deliver a "clarifying" statement by this morning. Even if Barclays launches a formal bid for ABN, the British bank may not win. Prizes like ABN -- with its strong European base, extensive Asian operations and foothold in the United States -- don't come up all the time, and a bidding war may ensue. Various reports had BNP Paribas, Société Générale, Santander Central Hispano, Bank of America and ING among the potential bidders.

There is also talk of a breakup scenario, with individual assets landing on the auction block. Bank of Montreal would love the breakup scenario. ABN owns LaSalle Bank in Chicago, where BMO owns Harris Bank, a business it wants to expand by taking out a rival. LaSalle is the second-largest bank in the Chicago market; Harris is third.

Barclays's desire to transform from domestic biggie to global wannabe is no secret. The bank, started in the 1820s, began its overseas foray in 1925, when it bought three banks in Africa, the Middle East and Caribbean. Then it spent decades bulking up in Britain.

The big domestic move came in 2000, under Mr. Barrett, when it bought mortgage lender Woolich for £5.3-billion. After that, the Irish-Canadian CEO diverted his attentions elsewhere. In 2003, Barclays bought Spain's Banco Zaragozano for €1.1-billion. Later, it bought a majority stake in Absa Group, one of South Africa's largest financial services companies.

In 2005, Barclays president Bob Diamond said he wanted Barclays to be one of the top five banks in the world. By this year, the bank had reached its goal of generating more than half of its profits overseas. ABN's acquisition would dramatically raise the proportion, making it, with Citigroup and HSBC, one of the few global banks.

ABN is vulnerable. Until a few months ago, when takeover rumours lifted the shares, it had been a stock market laggard. The bank took a blow a couple of years ago, when its senior investment banking team defected en masse to Citigroup. (The investment banking business continues to shrink.)

It took another blow last year with the tortured acquisition of Italian bank Antonveneta. Inevitably, the lousy performance attracted the attention of grumpy hedge funds. Tocasfund and the Children's Investment Fund, both of London, wrote open letters to the board demanding changes, ranging from halting any acquisition plans to the outright sale of the company. It looks like the hedgies' wishes will be fulfilled. In the meantime, ABN is cutting 11,000 jobs to bring costs into line.

For Barclays, the good news is that ABN's purchase would take it into new, high-growth markets, notably the Far East, but also Brazil and Russia. The bank has 4,500 branches in 53 countries. The bad news? There is little overlap, reducing the potential for the margin-pumping cost cutting that investors adore.

It's impossible to imagine that the Canadian banks will enter any bidding war for ABN. The target is simply too big for the relatively small Canadian banks, though the purchase of individual assets like LaSalle is certainly possible. Canada's banks are highly regarded. They are among the global industry's top performers measured by shareholder return. They are well managed and efficient; they have no serious foreign competition because the foreigners can't find any room in the Canadian market to make a buck.

What they don't have are top spots in the global rankings. As the big get bigger, the Canadians look more likely to spend an eternity grinding away in the global middle market. Barclays pursued a different strategy and may soon have the No. 5 spot as its reward..
The Wall Street Journal, Jason Singer, Carrick Mollenkamp, Edward Taylor, 20 March 2007

In what would be the largest-ever banking deal in Europe, the Netherlands' ABN Amro Holding NV is nearing a deal to be acquired by Barclays PLC of the United Kingdom for more than $80 billion, according to people close to the matter.

The two banks had discussed a deal as long as a year ago, but talks foundered. The chief executives resumed talks at a meeting in Geneva about six weeks ago, said people close to the matter, even as ABN Amro publicly asserted that it wanted to remain independent.

Talks could still fall apart as the two sides hammer out further details, these people warned. Such a large and complex deal -- a cross-border merger involving businesses that span the globe and several regulatory authorities -- could fall apart at many junctures due to small differences.

If successful, the transaction would create a global banking giant with world-wide consumer operations, including in the U.S., and businesses ranging from exchange-traded funds and fixed-income to investment banking and credit cards. Such a European giant could better compete with global banks in the U.S. and Asia.

Big global banks have had a mixed record, often proving less nimble than smaller, more focused competitors. But a deal likely would prompt big rivals -- from Citigroup Inc. and Bank of America Corp. in the U.S. to Spain's Banco Santander Central Hispano SA and the U.K.'s HSBC Holdings PLC -- to reassess their own global strategies. Only a handful of banks are large enough to swallow ABN Amro. A sale would remove from the scene a large target that, despite some current problems, offers a buyer rare access both to mature markets and the emerging markets that are at the top of every buyer's list.

A deal also would cap several years of rapid consolidation in Europe's banking system, following earlier waves in the U.S. Consolidation began with Santander's $14.9 billion acquisition of the U.K.'s Abbey National PLC in 2004, which was followed by the $19 billion acquisition by Italian bank UniCredito Italiano SpA of Germany's HVB. That deal stitched together a good part of fast-growing Eastern Europe and set off smaller deals in areas including Turkey and Ukraine, among others. A spate of deals in Italy has reduced opportunities for mergers there.

Though further consolidation is likely, the rash of deals has left fewer opportunities remaining, especially for banks within the slower-growing areas of Europe.

The Barclays-ABN talks come as banks around the world struggle with increasing bad loans from the souring U.S. market for mortgages to people with shaky credit. Many overseas banks have U.S. businesses, such as Barclays's larger rival HSBC. ABN Amro sold its U.S. mortgage business to Citigroup in January.

Under the terms being discussed, Barclays would offer a mix of cash and stock for ABN Amro, valuing the Dutch bank's shares in the range of low €30s, slightly above their current trading price. With investors betting on a takeover bid materializing, shares of ABN Amro yesterday hit a 10-year high in trading on the Amsterdam Stock Exchange, rising 9.7% to close at €29.94, or $39.86. In 4 p.m. New York Stock Exchange composite trading, the bank's American depositary shares rose 14%, or $5.12, to $41.36.

Shares of Barclays, which has a market capitalization of about $85 billion, rose slightly on the London Stock Exchange in the morning, suggesting investors would be open to the deal. But they ended down 0.8% at 677 pence, or $1.31. In 4 p.m. New York Stock Exchange trading, Barclays's ADR shares were down .28%, or 15 cents a share, to $53.35.

The combined bank would be run by Barclays CEO John Varley and headquartered in Amsterdam, people familiar with the matter said. Board seats and other senior management positions would be split between the ranks of the two lenders, according to a broad agreement negotiated largely between Mr. Varley and ABN Amro chief Rijkman Groenink alone.

The combined bank would have sweeping operations around the world, putting ABN Amro's LaSalle bank in Chicago and operations in 53 countries -- including a big consumer presence in the Netherlands, Italy and Latin America -- alongside Barclays's big U.K. retail and investment bank and San Francisco asset management arm. Barclays's Mr. Varley sees expansion into the so-called BRIC countries -- Brazil, Russia, India and China -- as a top priority and something that ABN Amro offers because of its holdings in Brazil.

But he also would face challenges in integrating the far-flung operations, a task with which ABN Amro's Mr. Groenink has struggled. Investors will want to see Mr. Varley find cost savings, too, something several analysts yesterday said will be difficult.

The two banks have a big overlap in fixed-income investment banking that likely would require large cuts. But the banks have little geographical overlap, said analyst Antony Broadbent of research firm Sanford C. Bernstein. Typically, branch-banking operations offer big opportunities for cost cuts because of redundant branches and the chance to consolidate back-office systems. But compared to ABN Amro, Barclays's main retail centers are in the U.K., Spain, South Africa and Portugal.

Moreover, Barclays Capital, a capital-markets business that has been a huge revenue generator for the bank, could face a challenge in integrating ABN Amro's capital-markets business, which includes typical investment-bank operations such as trading stocks and advising on mergers that Barclays has avoided in the past, Mr. Broadbent said.

Final terms could be reached within 14 days, said the person close to the matter.

ABN Amro's Mr. Groenink has been under pressure from activist hedge-fund investors for the past month to split up the bank's units or join with a rival. The Children's Investment Fund Management LLP, the London activist hedge fund known as TCI, holds a 1% stake in ABN Amro and has been pushing for a breakup.

On Tuesday, TCI said that a merger between ABN Amro and Barclays may result in the creation of shareholder value. TCI has been demanding a breakup or sale of the bank to boost returns for shareholders after years of underperformance. A fund spokesman said that until there is a formal proposal it is unable to comment on the merits of a prospective deal but the hedge fund is "encouraged" by the development that the banks are in talks about a tie-up. "We hope that the exclusivity granted to Barclays PLC will not prevent the board of ABN Amro from employing a process that considers bids by other credible institutions in order to produce the best result for shareholders," a spokesman said.

It has argued that Barclays is a credible option but that ABN Amro has not shown itself willing to conduct a proper search for partners in order to maximize shareholder value, a person familiar with the matter said. TCI will push management to widen its search, this person said.

Mr. Groenink had signaled that he would try to persuade shareholders to support his vision of an independent bank when they meet in late April for ABN Amro's annual meeting. But he also said publicly in July that he would be willing to talk if a bidder showed up with an attractive combination and a high price. He has built the bank through acquisitions in his seven years at the helm, but the bank has underperformed compared to its peers and never emerged as the banking giant that Mr. Groenink aimed to run.

The chairman of ABN Amro's supervisory board, former Sears, Roebuck & Co. CEO Arthur C. Martinez, will play a key role in sealing any deal. Mr. Martinez joined the board in 2002 and became chairman last April. ABN Amro, which has a sizeable U.S. operation, figured an executive with U.S. experience would be beneficial.

ABN Amro said in a statement Monday that it "is in exclusive preliminary discussions with Barclays PLC concerning a potential combination of the two organizations." The bank added that "these discussions are the result of careful consideration to create a highly complementary partnership," and cautioned that "the talks are at an early and exploratory stage and there can be no certainty that they will lead to a transaction."

For its part, Barclays confirmed being "in exclusive preliminary discussions" with ABN Amro.