Will Verde be Co-op's ABN Amro?
In April 2007 John Varley, then CEO of Barclays, in an attempt to vault Barclays into the Premier League of investment banking made a bid for ABN Amro. Not to be outdone Sir Fred Goodwin put together a consortium consisting of RBS, Santander and Fortis to put in a counter bid.
Through the spring and summer of 2007 a battle took place to win ABN Amro. It could be said that it stopped being entirely about the business sense of acquiring the bank and more about winning the deal, beating the other CEO. This was a deal that appeared to be personal. The price continued to rise.
Finally in early October John Varley and Barclays conceded defeat and withdrew their offer. Barclays was rewarded with being paid 200m Euros as a break fee by ABN Amro. Even at the time of Barclays’ withdrawal analysts were saying that RBS was paying too much. One said that RBS was going to be struck by ‘the winner’s curse’.
The rest, as they say is history. The capital required, the slow down and eventual crash of the global markets and the complexity of the integration all contributed to the situation RBS finds itself in now.
Looking at the Co-op’s pursuit of the 632 Verde branches that Lloyds Banking Group has to sell, there appear to be some parallels with the ABN Amro pursuit. Could it be that the Co-op will also be struck down with ‘the winner’s curse’?
The pursuit of Verde has not been as long as for ABN Amro but it appears to have been as personal. In July 2012 Peter Marks, the CEO of Co-op, boasted that he has taken the shirt off the back of the Lloyds Banking Group CEO, Antonio Horta-Osario, as they agreed to a £750m price tag. Given that the expectation had been that Verde would sell for between £1.5-2bn, he may have had a point, though he may have been better keeping his opinion to himself.
However Co-op is also paying a big price in other ways to raise the capital it needs to acquire Verde. With the announcement of the sale of its Life & Pensions and Savings business to Royal London and its instruction of Deutsche Bank to find a buyer for its General Insurance business, the Co-op’s existing financial services business is being taken apart in order to raise the capital for Verde. Aviva is rumoured to be interested in acquiring the General Insurance business.These deals are not dependent on the Verde deal going through, so should the deal fail the Co-op will be in a much poorer state.
Similarly RBS had to raise a lot of money in order to pay the price it had agreed for ABN Amro. In RBS’s case it went to the market and executed a huge rights issue for which in a class action it is now being sued). This left RBS with a highly weakened balance sheet, which made it unable to absorb the massive change in the market. How would RBSG have fared if they hadn’t pursued and won ABN-Amro? They certainly would still have had problems with their exposure to Ireland through Ulster Bank and the investment banking business would still have been hit, but with a stronger balance sheet and without the exposure to the PIIGS (Portugal, Italy, Ireland, Greece, Spain) that ABn Amro brought the size of the bailout required from the UK Government would have been significantly lower. Fred Groodwin would almost certainly be Sir Fred Goodwin and his pension would be intact.
Should the acquisition still go ahead, which is looking less likely, this will not be a simple integration by any stretch of the imagination. The integration of Britannia Building Society has proved to be a major challenge for the Co-op, Verde will far more complex. Again looking back at RBS, Sir Fred Goodwin went into the ABN Amro integration full of confidence that the bank knew how to do integrations, but Natwest was fundamentally a larger version of RBS so it was a homogenous integration, ABN Amro was an integration of something quite different from RBS and the costs of integration ballooned.
One of the worst scenarios for the Co-op is that they sell off the assets they need in order to complete the Verde transaction and then fail to close the purchase. This would leave the Co-op in a weakened position in terms of Financial Services and overall in a poorer strategic position.
Whilst Peter Marks may have got what appears to be a rock bottom price for Verde the Co-op will be tied to Lloyds Banking Group for many years to come since they have agreed to pay for and use the Lloyds Banking Group systems for the Verde branches. It will take hundreds of millions of pounds and years to move off these systems and onto a modern architected banking system so Co-op and Lloyds Banking Group will be partners for many years to come. The Co-op may need to be reminded of the expression that revenge is a meal best eaten cold.
In the meantime Santander has withdrawn from the acquisition of the 316 branches that RBS is being forced to sell. Santander is a bank that appears to always make smart deals – Abbey National, Bradford & Bingley, Alliance & Leicester and Antonveneta to name a few. Antonveneta was owned by ABN Amro and was one part of Santander’s element of the consortium bid led by RBS. In true Santander style it sold Antonveneta on to Banca Monte dei Paschi di Siena before Santander had even taken possession making a $3.5bn profit in the process. For Peter Marks it would be sensible to contemplate why Santander withdrew from the RBS branch purchase and reflect on how that might apply to the Verde deal.
As the crunch point approaches when Co-op must decide one way or another to complete or walk away from the deal and Peter Marks looks forward to his retirement, it would be good to have one last reflection on the deal and to decide whether he would rather be John Varley, who walked away from a bad deal with his reputation intact, or Fred Goodwin who was struck down by the winner’s curse.
Update April 24th 2013.
So Peter Marks made the almost certainly right decision to walk away from the Verde deal. For the Co-op to have been burdened with the debt and enormous risks of the Verde deal would not have been a good leaving present.
However it does bring into question the future of financial services within the Co-op. Having sold the life and savings business to Royal London and with the general insurance business on the blocks a question has to be whether the Co-op should pull out of financial services altogether. The integration of Britannia into Co-op Financial Services has been a major challenge and it has not resulted in a real challenger to the Big 5 banks. The Co-op is at a crossroads and needs to decide whether financial services is really a business it can be successful in.