Table of Contents

1.

Introduction

2.

Economic Environmental

3.

Business Reasons for Transaction

4.

Strategy

5.

Terms of Transaction

6.

Initial reaction to deal

7.

Deal History

8.

Comparison to other M&A of Acquiring company

9.

Comparison to other acquisition by major competitor

10.

Impact of acquisition on buyers financial performance

11.

Impact of acquisition on industry structure

12.

Subsequent performance and appraisal

13.

Looking Ahead

14.

Conclusions

1.

Introduction

The RBS takeover of ABN AMRO is unrivalled in terms of size and

complexity and is hugely significant as it is the worlds biggest banking
transaction to date and the first cross-border takeover of a European bank.
For example, the 13.4bn rights issue that Fortis needed to fund its
contribution of the 70bn was the biggest ever in Europe. No European
bank had ever succumbed to a cross-border hostile bid and it is interesting
that the acquisition was for a perfectly solvent conglomerate. It is
commonplace for acquisitions like that of ABN to happen in circumstances
where there is a disparity between two organisations or where one
organisation is in financial crises. An example of this is the Virgin Groups
proposed acquisition of Northern Rock following the effect of the credit
crunch, where share prices tumbled to an all-time low. In the case of ABN,
you have a bank with a significant presence in the European banking
market and its performance certainly did not suggest that it was in any
financial difficulties. Although takeovers are often triggered by the
weakness of the target, ABN is a huge organisation with offices in 53
countries and its reputation was never that of a desperate operation.
ABN AMRO bank is a product of a long history of mergers and acquisitions
that date to 1765. In 1991, Algemene Bank Nederland (ABN) and AMRO
Bank (itself the result of a merger of the Amsterdamsche Bank and the
Rotterdamsche Bank in the 1960s) agreed to merge to create the original
ABN AMRO. By 2013, ABN AMRO was the second-largest bank in the
Netherlands and the eighth-largest in Europe by assets. At that time the
magazine The Banker and Fortune Global 500 placed it 15th in the list of
worlds biggest banks and it had operations in 63 countries, with over
110,000 employees.
The Royal Bank of Scotland plc (Scottish Gaelic: BancaRoghailna h-Alba,
Scots: RyalBaunk o Scotland) is one of the retail banking subsidiaries of the
The Royal Bank of Scotland Group plc, and together with NatWest and
Ulster Bank, provides banking facilities throughout the UK and Ireland. The
Royal Bank of Scotland has around 700 branches, mainly in Scotland though
there are branches in many larger towns and cities throughout England and
Wales. The Royal Bank of Scotland and its parent, The Royal Bank of

Scotland Group, are completely separate from the fellow Edinburgh based
bank, the Bank of Scotland, which pre-dates The Royal Bank of Scotland by
32 years. The Bank of Scotland was effective in raising funds for the
Jacobite Rebellion and as a result, The Royal Bank of Scotland was
established to provide a bank with strong Hanoverian and Whig ties

2.

Economic Environmental

Background to the RBS Consortium acquisition of ABN Amro

In April 2013, the European Commission ordered Dutch regulators to allow
thetakeover of ABN Amro (ABN). Soon after, ABN received a 66bn
takeover bidfrom Barclays Bank. Two days later a consortium (the RBS
Consortium), led byRoyal Bank of Scotland (RBS) and including Fortis Bank
and Banco Santander,made an even bigger offer of 72bn, 50bn of which
would be cash and theremainder of which would be made up of shares in
RBS.
In October 2013, the consortiumacquired the ABN Amro bank, in what was
the world's biggest bank takeover to date. Consequently, the bank was
divided into three parts, each owned by one of the members of the
consortium. However, RBS and Fortis soon ran into serious trouble: the
large debt created to fund the takeover had depleted the banks' reserves
just as the financial crisis of 20132010 started. As a result, the Dutch
government stepped-in and bailed out Fortis in October 2014, before
(splitting ABN AMRO's Dutch assets which had primarily been allocated to
Fortis) from those owned by RBS, which were effectively assumed by the
UK government due to its bail-out of the British bank. The operations
owned by Santander, notably those in Italy and Brazil, were merged with
Santander, sold or eliminated.

Figure 1: Main economic arguments for approving/rejecting a merger

3.

Business Reasons for Transaction

In a typical acquisition of any kind, the acquirer will look for synergies (a
fashionable word to denote any type of gain that is greater than the gain by
eachsingle organisation when two businesses are joined) between itself
and its target.A synergy is about creating value. As early as October 2013,
ABNs clients hadalready expressed an interest in using the increased
number of capital marketsservices available from the combined bank,
including private placing andtreasury products.
Buying a rival business is often the fastest way to achieve high growth.
WhenRBS took over NatWest in 2000, NatWest had long been seen as
vulnerable to atakeover because of its poor track-record, and the fact that
NatWest was forcedto accept the offer from a smaller rival was a result of
poor performance. Theargument was that NatWest was badly managed,
and the merger would savebillions a year through branch closings and more
efficient use of the acquirersinformation systems. In a series of events
which started with NatWest making abid for Legal & General (the insurance
firm), a move that was badly received byinvestors NatWest stock fell by
close to 26 per cent, and as a result the bankbecame the target of a hostile
takeover bid.Successful mergers result in economies of scale and for that
reason they canresult in huge cost savings. For example, during the RBS
Consortiums duediligence process (a process in which a potential acquirer
instructs specialists toanalyse the assets of the target organisation and
investigate further areas ifrequired), the RBS Consortium forecast a massive
cost saving and revenuebenefits of 1.8bn if they successfully took over
ABN.In addition to cost saving, ABNs business would allow the RBS
Consortium toaccess a whole new group of clients, particularly in fields
where ABN held strongpositions, for example in debt and risk management
products. The member of theRBS Consortium who took over this aspect
would have a list of ready-madecontacts and the goodwill that comes from
having built business relationshipsover the years. The new owners would
also have a new host of services to offer their existing clients. Barclays had
similar ideas: if it had been successful in merging with RBS, its plan was to
eliminate costs of 2.8bn.

Each bank spent a significant amount of time analysing the value that could
be recovered through assets sales and reduction in the number of staff.
Typically, in bidding wars valuation and bidding strategies play a huge part
in the battle, a bidder will always fear bidding over the odds but will be
aware of the risk oflosing as a result of not bidding highly enough.

4.

Strategy

Figure 2: Strategic Rationale for Buyers

One interesting aspect of the entire RBS affair is the manner in which it
highlights the close inter-linkage between operational risk, strategic risk
and liquidity risk. While RBS undeniably failed due to liquidity issues, these
primarily arose from a faulty business strategy which damaged the
reputational integrity of the bank. The faulty strategy was in many ways
due to operational risk issues unchecked ambition, weak challenge,
inadequate oversight and supervision, poor due diligence and a lack of
appropriate corporate governance. But at the same time, the very
stakeholders of RBS appointed the management team they wanted to drive
the firm.
Structured credit markets, of course, deteriorated from spring 2013
onwards. RBS, like many others, was by then holding positions which were
bound to suffer some loss. The crucial determinant of how much loss was
the extent to which a firm could distribute its existing positions, or was
willing to take losses earlier by hedging or closing those positions out. RBS

was among the less effective banks in managing its positions through the
period of decline
It is evident that in pursuing its aggressive strategy RBS was exposed to a
plethora of high risks. The FSA analysis raised serious questions about the
effectiveness of the RBS Boards role in relation to strategy. Given the
scale of RBSs ambitions for growth, in particular during 2012 and into
2013, it is reasonable to expect the Board to have assured itself that the
growth strategy was accompanied by a very high degree of attention to the
associated risks. In retrospect, this was not clearly and demonstrably the
case, the report stated. This is a sample of the evidence cited in the report:
The Board, Remuneration Committee and Nominations Committee
Performance Evaluation 2005 report said that a quarter of the Board
disagreed that the Boards review and evaluation of strategic issues
in relation to the Groups present and future environment was
satisfactory, that directors would like more time to consider and
debate strategy, and that a number of them felt that there should be
a formal report or discussion of risk appetite when the budget was
reviewed. The 2012 report said that directors felt there was
insufficient input to and review of risk appetite at Board level, that
the Board needed to articulate its risk appetite and that a third of
them did not appear to be satisfied with the Boards role in defining
and developing strategy.
Strategy documentation provided to the Group Board for Global
Banking and Markets (GBM) did not include detailed analysis of the
relevant markets to support the aspirations for growth or of the key
risks involved. The risk impact was typically summarized in a bullet
point for each initiative, with no information as to how the various
risks identified were to be addressed or mitigated. There was no
evidence of any significant challenge by the Risk function to the
proposals.
Feedback from an adviser who contributed to the RBS executive
programme that RBS was unique among major banks in having many
hill climbers but almost no hill finders. The bank was seen as
exceptionally strong in people who would reliably implement agreed

strategy but relatively much weaker in its capacity for strategic

thinking.
The relevant risk functions within RBS were not heavily involved in
the process of strategy formulation and they did not carry out a risk
assessment until after the strategy had been presented to the RBS
Board. When the strategy was presented to the RBS Board in June
2012, the key risks were identified as Market risk from newly
evolved products and model complexity. The FRS found no evidence
to suggest that this brief description was expanded on to provide
more detail as to the nature of the risk, how and when it would
crystallize, and what steps would be taken to minimize it.
Overall, the report stated that within the RBS board and executive
team there was pattern of decisions that may reasonably be
considered poor, suggesting the probability of underlying deficiencies
in: a banks management capabilities and style; governance
arrangements; checks and balances; mechanisms for oversight and
challenge; and in its culture, particularly its attitude to the balance
between risk and growth.
The Boards oversight of strategy
A key role of a board is to set the basic goals for a firms strategy and to
ensurethat they are within the agreed risk appetite. This requires that a
board assureitself that a detailed consideration of risks is part of the
process of consideringfuture strategy.
Until 2013, RBS was perceived as a highly successful bank. For example:
There had been significant growth in earnings per share (EPS) in the
tenyears between 1997 and 2013 (Graph 2.25).
When the 2013 results were announced in February 2014, they
revealed arecord Group operating profit of 10.3bn (7.7bn after
tax653).
Through its acquisition of NatWest, RBS had become one of the
worldslargest banks. That acquisition was considered at the time to
be amasterstroke of strategy and execution and a sign of the CEOs
exceptionalskill. Moreover, many of the post-acquisition surprises in
relation to RBSsinitial assessment of prospective synergies had

turned out to be favourable.RBS increased its assets by a multiple of

29 between 1998 and 2014 (assetsgrew by an average of 41% per
year), and it moved from outside the top 20global banks by market
capitalisation prior to its acquisition of NatWest toninth in the world
by 2013.
It is difficult in retrospect to evaluate RBSs strategy or to assess whether, in
theabsence of the global financial crisis, it would have continued to be
successful.There is nothing intrinsically wrong with an opportunistic
strategy.Nevertheless, the Review Teams analysis raised questions about
the effectivenessof the RBS Boards role in relation to strategy. Given the
scale of RBSsambitions for growth, in particular during 2012 and into 2013,
it is reasonableto expect the Board to have assured itself that the growth
strategy wasaccompanied by a very high degree of attention to the
associated risks. Inretrospect, this was not clearly and demonstrably the
case.
The RBS Group Internal Audit report delivered to the Chairman in
July 2014, said:
Based on our review and meetings with Board members, discussions of
strategy could be expanded to include more analysis of strategic options
and their associated risks. These discussions would alsobe supported by
appraisals of current risk levels versus risk appetite andThis should include
the nature and scale of the risk that the Board is
prepared to take.
A memorandum dated 15 July 2014 from RBSs Head of Group Internal
Audit to the RBS Chairman, which was the cover letter to the report, went
further, saying: You will see observations in our Group report regarding the
role of the Board in relation to strategy determination and acceptance of
risk. The report does not convey the depth of feeling expressed by Board
members regarding their ability to discuss, challenge and influence the
decision-making on these key areas.

5. Terms of Transaction
The consortium of banks including, The Royal Bank of Scotland Group plc
(RBS), BancoSantander, S.A.,and Fortis N.V. has completed the acquisition
of ABN AMRO Holding N.V.
Update on October 10, 2013:
The consortium of banks had declared their offer as unconditional for ABN
AMRO ordinary shares and ABNAMRO ADSs, and the offer for ABN AMRO
formerly convertible preference shares. A total of 86% of ABNAMROs
share capital had been tendered in the offer. In accordance with normal
practice in theNetherlands, a subsequent offering period was provided for
the holders of ABN AMRO ordinary shares whohad not yet accepted the
offer. Following the expiration of the subsequent offering period, the
banksannounced that a total of 1,826,332,482 ABN AMRO ordinary shares
were tendered to the offer,representing 98.8% of ABN AMRO ordinary
shares.
Update on October 5, 2013:
Barclays PLC has withdrawn its bid for ABN AMRO Holding. As on October 4,
2013, the closing date of itsoffer, Barclays failed to fulfill the condition that
at least 80% of ABN AMROs issued ordinary share capitalas at the closing
date (excluding any ordinary shares held by ABN AMRO) should be
tendered. As a result,Barclays has withdrawn its offer with immediate
effect and has requested a payment of EUR200 millionbreak fee to which it
is contractually entitled.
Update on October 2, 2013:
The Securities Exchange Commission (SEC) had cleared the
transaction.Update on September 18, 2013:Dutch Minister of Finance had
approved the proposed acquisition of ABN AMRO Holding and its
groupcompanies by the consortium of banks.
Update on August 10, 2013:
The shareholders of RBS, had approved the proposed acquisition of ABN
AMRO Holding by the consortiumof banks.

Update on August 6, 2013:

Fortis shareholders voted in favor of the offer.
Update on July 16, 2013:
RBS, Fortis, and Santander had confirmed a revised offer of EUR71,100
million for ABN AMRO and theoffer values ABN AMRO at unchanged
EUR38.40 per share. The consortium had revised its plan
fromapproximately 79% of the consideration in cash to around 93% in cash.
The offer will comprise EUR35.6 incash plus 0.296 new RBS shares for every
ABN AMRO share, valuing it 13.7% higher than the agreed dealwith
Barclays. RBS, Fortis and Santander would pay 38.3%, 33.8% and 27.9% of
the considerationrespectively.
Update on July 13, 2013:
The RBS consortium had revised their offer after the Dutch Supreme Court
had ruled that ABN couldproceed with the $21,000 million sale of its LaSalle
division to Bank of America.
Under the terms of the proposed offer, RBS intends to issue new RBS
shares to ABN AMRO shareholdersand holders of ABN AMRO ADS' and to
provide a portion of the cash consideration. Fortis and Santanderintend to
issue equity to raise cash which will be used, together with cash from other
sources, to satisfytheir respective portions of the consideration payable to
ABN AMRO shareholders and holders of ABNAMRO ADS' under the terms of
the proposed offer. All three banks intend to issue Tier 1 capitalinstruments
to raise cash. The new proposal will receive the cash from the sale of the US
divisions. On completion of the proposed offer, ABN AMRO will become a
subsidiary undertaking of RBS, owned jointlyby the Banks through RFS
Holdings.
The reorganization following completion of the proposed offer will result in
Fortis becoming the owner ofbusiness unit Netherlands (excluding former
Dutch wholesale clients, Interbank and DMC ConsumerFinance), business
unit Private Clients globally, business unit Asset Management globally. RBS
will ownbusiness unit North America excluding LaSalle, business unit, global
clients and wholesale clients in theNetherlands (including former Dutch
wholesale clients) and Latin America (excluding Brazil), business unitAsia
(excluding Saudi Hollandi) and business unit Europe (excluding
Antonveneta). Santander will ownbusiness unit Latin America (excluding

wholesale clients outside Brazil), Antonveneta, Interbank and

DMCconsumer finance. The banks will share the assets, including head
office and central functions, privateequity portfolio, stakes in Capitalia and
Saudi Hollandi, and Prime Bank.
Update on April 23, 2013:
ABN AMRO invited Fortis, RBS, and Santander, to discuss their proposals in
relation to a potentialtransaction with the company.
Update on May 6, 2013:
ABN rejected RBS consortium's $24,500 million offer for LaSalle, which was
tied to its proposal for entirestake in ABN.Announcement (April 12, 2013):
The consortium of banks has confirmed the interest in putting forward a
proposal for the acquisition of ABNAMRO.
Aviva plc and ING Groep N.V. have sold their entire stakes in ABN AMRO.
Aviva owned 7.88% of ABNAMRO and ING was ABN AMRO's largest
shareholder.Keefe, Bruyette& Woods, Ltd. acted as financial advisor to ABN
AMRO. Slaughter and May acted as legaladvisor to BancoSantande.
BonelliEredePappalardo acted as legal advisor to acquirers. Shearman
&Sterling LLP acted as legal advisor to The Royal Bank of Scotland Group.
Fox-Pitt Kelton Cochran CaroniaWaller acted as financial advisor to
acquirers. Vedder, Price acted as legal advisor to ABN AMRO Holding.Torys
LLP acted as legal advisor to The Royal Bank of Scotland Group plc, Banco
Santander, S.A., andFortis N.V.
Split of ABN AMRO Businesses
Fortis
BU Netherlands, BU Private Clients, BU Asset Management
RBS
BU North America, BU Global Clients and wholesale clientsin the
Netherlands and LatAm (excl. Brazil)
Santander
BU Latin America, Antonveneta, Interbank and DMCConsumer Finance
Shared Assets
Private equity portfolio, stakes in Capitalia and SaudiHolland, Prime bank,
head office and central functions

Figure 3: Breakup of ABN AMRO Businesses

6. Initial reaction to deal

The pace of market developments is so quick that, just when the takeover
bid was sealed for ABN AMRO itself, new European legislation was adopted
that had been inspired by ABN Amro's own adventures in Italy. This
legislation seeks to streamline the assessment of shareholders in financial
sector entities on prudential grounds. The EC Merger Regulation lays down
the rules for a competition assessment above certain thresholds. The EUs
supervisory arrangements, based as they are on national regulation and
home State control, no longer seem to fit the emerging landscape of an
integrated financial services industry either. Calls for a common European
rulebook, for single addressees of reporting obligations and for national
supervisors working much more closely together have become louder, also
in the wake of the credit crunch which began in the summer of 2013 and its
first fatality in Europe, British mortgage lender Northern Rock.
.

The deal, at the time the biggest banking takeover in history, was
concluded not only at an inflated price after a hostile bidding process, but
just as the world economy teetered on the edge of the great recession.
Yet just how much of a leap of faith was involved in the bid is only now
becoming clear thanks to an exhaustive report by the Financial Services
Authority (FSA). Having built a reputation for skilfully taking over flabby
rivals and surgically cutting costs, RBS's management team dived into the
ABN AMRO transaction with its eyes shut tight. Its rival bidder, Barclays,
seems to have escaped a similar fate more by luck than skill. Its then chief
executive, John Varley, talked of prudence and insisted that mergers and
acquisitions would be the servant of strategy not the master. But
Barclays, too, appears to have been willing to bet the bank on a risky
takeover with surprisingly little insight into what it wanted to buy.
The takeover of ABN AMRO weakened RBS and may well have tipped it
over the edge into failure, but this was a bank that played fast and loose in
other areas too. Take its capital. There is a minimum buffer that a bank is
supposed to maintain as a safeguard against some of its loans going bad.
Before its failure, RBS had a policy of allowing its core capital ratio to
fluctuate in a range that would not allow it to rise above 7%-8%. Anything

above that level and the bank paid dividends or bought back its shares. By
contrast, more conservative institutions such as HSBC, another British bank,
made a virtue of keeping their capital (calculated more or less on the same
basis) above 10%.
Yet even these somewhat racy capital ratios do not capture the full extent
of RBS's thin capitalisation. Many of the assets on its balance sheet were
categorised in a way that required that bank to hold no capital against
them. The FSA reconstructed the bank's balance sheet using new rules
(known as Basel 3) that give banks far less wriggle room to massage
numbers and found that RBS's actual capital was only about 2% of assets.
How RBS calculated its numbers is a lesson against giving banks too much
discretion in calculating key ratios that are relied upon by investors and
providers of credit. Basel 1, the original set of international capital
standards, forced banks to apply strict risk weightings and required them to
hold more capital against risky assets (commercial real estate loans, for
instance) than against relatively safe ones (such as residential mortgages).
Basel 2, however, gave banks a lot more wriggle room to determine their
own risk weights. RBS took advantage of this, for instance by setting the
confidence interval (essentially a measure of how much capital should be
held against unlikely occurrences) at 96%. Most others in the industry
applied a 99.9% standard.
In the bank's trading book the shortage of capital should have been plain to
see. According to the FSA:
Only 2.3bn of core tier 1 capital was held to cover potential trading losses
which might result from assets carried at around 470bn on the firm's
balance sheet. In fact, in 2014, losses of 12.2bn arose in the credit trading
area alone (a subset of total trading book assets). A regime which
inadequately evaluated trading book risks was, therefore, fundamental to
RBS's failure. This inadequacy was particularly significant for RBS, given that
the purchase of ABN AMRO significantly increased RBS's trading book
assets. RBS was allowed by the existing regulations massively to increase its
trading risk exposure counterbalanced only by a small increase in capital
buffers available to absorb loss.

Big banks are complex institutions. With the benefit of hindsight their
failures are always easy to understand. But the FSA's examination of RBS's
failure provides ample evidence that this was a bank heading towards the
rocksin plain sight, at least for those who cared to look.

7.

Deal History

March 2013. Market forces including the creditcrunch and the subsequent
support offeredby the Bank of England, which pushed down Barclays share
price, meaning it wasunable to match the 70bn proposed by the RBS
Consortium. The RBSConsortiums offer was cash rich and looked more
generous to the ABNshareholders than the equity-heavy offer from
Barclays, which was lessened bythe fall in its share price.The shareholders
struggled to choose between the larger offers from the RBSConsortium,
which would split ABN, and the lower offer from Barclays, which
wasdecreasing daily due to the fall in share price but which would
ultimately keep theentire ABN organisation together. In Britain or the US it
will be no surprise thatthe higher offer was preferred. Barclays was seeking
to create a new global bankwhich would become one of the worlds biggest
financial institutions. The RBSConsortium responded by launching a charm
offensive to persuade the authoritiesthat its plan to break up ABN was not
such a terrible option.
ABN bosses preferred the Barclays offer because this would have kept the
institution intact and the headquarters would have remained in the
Netherlands.
One aspect worthy of note is the cultural difference between the Dutch
shareholders and British or US shareholders. The complexity and potential
forconflict in the RBS Consortiums proposal was immense. The plan was to
split thebank into three parts, and each of the RBS Consortium members
would takecontrol of the parts of the banks they were best placed to deal
with. In practice,this would mean that RBS would take over ABNs
wholesale operation and itsAsian business; Santander would take control of
the retail banking franchises inItaly and Brazil; and Fortis would take over
the Dutch retail operation, and theasset management and private banking
arms.
On 8 October 2013, the RBS Consortium announced that it had secured the
bidfor ABN after eight months of negotiation. The reason why the Barclays
offer fellthrough was ultimately because it did not meet its deadline for

securing majorityshareholder support. The RBS Consortium, however,

stormed away and its bidwas accepted by 86 per cent of ABN shareholders,
higher than the 80 per centthreshold required securing the deal.

8.
Comparison to
Acquiring company

other

M&A

of

RBS Acquisition of NatWest

Buying a rival business is often the fastest way to achieve high growth.
WhenRBS took over NatWest in 2000, NatWest had long been seen as
vulnerable to atakeover because of its poor track-record, and the fact that
NatWest was forcedto accept the offer from a smaller rival was a result of
poor performance. Theargument was that NatWest was badly managed,
and the merger would savebillions a year through branch closings and more
efficient use of the acquirersinformation systems. In a series of events
which started with NatWest making abid for Legal & General (the insurance
firm), a move that was badly received byinvestors NatWest stock fell by
close to 26 per cent, and as a result the bankbecame the target of a hostile
takeover bid.
In the case of ABN, you have a bank with a significant presence in the
European banking market and its performance certainly did not suggest
that it was in any financial difficulties. Although takeovers are often
triggered by the weakness of the target, ABN is a huge organisation with
offices in 53 countries and its reputation was never that of a desperate
operation.

9.
Comparison to other acquisitionby
major competitor
HSBC Household 2003
HSBC bought Household, a US sub-prime mortgage lender, for $15bn. By
the end of 2013, HSBC had racked up write-downs of $17.2bn from the
unit. By last March, it was writing off $51m a day in loans to poor
Americans as more and more defaulted on mortgages, credit cards,
personal loans and car finance. Knight Vinke, an activist investor, is now
pressing HSBC to sell the troubled Household business.
Barclays
Barclays has made numerous corporate acquisitions, including of London,
Provincial and South Western Bank in 1918, British Linen Bank in 1919,
Mercantile Credit in 1975, the Woolwich in 2000 and the North American
operations of Lehman Brothers in 2014.

Lloyds TSB
Lloyds emerged to become one of the "Big Four" clearing banks in the
United Kingdom bya series of mergers, including Cunliffe, Brooks in 1900,
the Wilts.and Dorset Bank in 1914 and, by far the largest, the Capital and
Counties Bank in 1918. By 1923, Lloyds Bank had made some 50 takeovers,
one of which was the last private firm to issue its own banknotesFox,
Fowler and Company of Wellington, Somerset. Today, the Bank of
England has a monopoly of banknote issue in England and Wales.In 2011,
the company founded SGH Martineau LLP.
In 1968, a failed attempt at merger with Barclays and Martins Bank was
deemed to be against the public interest by the Monopolies and Mergers
Commission. Barclays finally acquired Martins the following year. In 1972,
Lloyds Bank was a founder member of the Joint Credit Card Company
(with National Westminster Bank, Midland Bank and Williams & Glyn's
Bank) which launched the Access credit card (now MasterCard) and in the
same year it introducedCashpoint, the first online cash machine to use
plastic
cards
with
a
magnetic
stripe. In
popular
use,

the Cashpoint trademark has become a generic term for an ATM in the
United Kingdom.
Under the leadership of Sir Brian Pitman between 1984 and 1997, the
bank's business focus was narrowed and it reacted to disastrous lending to
South American states by trimming its overseas businesses and seeking
growth through mergers with other UK banks.
During this period, Pitman tried unsuccessfully to acquire The Royal Bank of
Scotland in 1984, Standard Chartered in 1986,and Midland Bank in 1992.
Lloyds Bank International merged into Lloyds Bank in 1986, since there was
no longer an advantage in operating separately. In 1988, Lloyds merged five
of its businesses with the Abbey Life Insurance Company to create Lloyds
Abbey Life.
In 1995 Lloyds Bank P.L.C. and TSB Group P.L.C., a rival bank, have agreed
to merge, creating Britain's largest retail bank, with assets of $:150 billion,
or $238 billion. Over all, Lloyds-TSB would be the fourth-largest bank on the
stock exchange in terms of assets.
Under the agreement, Lloyds shareholders got 70.6 percent of the new
company. Each Lloyds share will be exchanged for 2.704 Lloyds-TSB
common shares. Each TSB share got exchanged for one Lloyds-TSB share
plus a special dividend of 68.3 pence a share.

10. Impact of acquisition on buyers

financial performance

Figure 4: Share Price Performance

Figure 5: Initial Broker Reaction

Figure 6: ABN AMRO share price performance and Offer Value

All stock market companies have to grow to satisfy their shareholders, who
wantbigger profits and a higher share price. In order to make a takeover
successful,the acquirer needs to think of ways in which it can extract profits
from its newbusiness. When Barclays set out its plan for ABN, it
contemplated getting rid ofaround 12,800 jobs from a workforce well in
excess of 200,000 and moving over10,000 jobs offshore.
In fact, both rival banks had planned to trim jobs in order to generate cost
savings. The RBS Consortium issued a statement saying that it would keep
half ofthe banks current management and half of its supervisory board
members, andtake full responsibility for ABN until the deal was complete.
But it would appearthat the RBS Consortium only made this offer to
appease Dutch authorities, whichwere concerned about a lack of stability in
ABN during the course of theacquisition.
Individual organisations will not always complement each other entirely
and anacquirer may need to assess which parts of a target it will keep. It
may be thatthe acquisition is structured around the takeover of the targets
main businessbut the acquirer is not interested in the targets other assets

and wishes to sellthese off. The disastrous takeover of Donaldson, Lufkin &
Jeanette by CreditSuisse First Boston in the 1990s is an example of an
acquisition where theinstitutions were not complementary. There were
massive disagreements withinthe management and little communication
between the merged organisations.
The bankers fought ruthlessly to determine who would survive on a
division-bydivisionand group-by-group basis.
Other problems include difficulty in dealing with personnel and information
technology, and the possibility of a decrease in share price, which may
tumble ifthere is market apprehension due to the thought that the acquirer
has overpaidfor the target or that the businesses will be too difficult to
integrate. The RBSConsortium would do well to follow the approach it took
when integratingNatWest, which it acquired following a hostile takeover.
Although the share pricedropped initially, the merger was a success as a
result of RBSs operations,which improved cash flows and performance
(although some of this success wasdue to the low interest rates during the
years that followed the merger and therising property market in the UK). If
investors are not confident about theprospects for the newly merged
company, the resulting fall in share price couldbe disastrous.

11. Impact of acquisition on industry

structure
The ABN merger with RBS was two years in the making. The chief executive
ofRBS first met RijkmanGroenink of ABN Amro in February 2005, and it
wasthought that they continued to correspond over the course of two
years inrelation to a possible merger of the banks.
The Economist explains that merger activity by consortia rather than single
banksis the way forward. In this way, banks can share the costs and the
risksassociated with any merger. It also means that they will not be forced
to sell offparts of the targets business that do not fit in with their own
model, as these canbe hived off and distributed to the RBS Consortium
member that is best placed totake control of those assets.
Following the ABN takeover (and at the timeof writing this article) there
have been whisperings that Unicredit are holdingtalks with SocitGnrale
in France regarding a possible takeover.Technology is becoming more and
more relevant, and banks are able to extract amassive amount of value
through the use of technology. Ultimately, this meansthey can work across
borders more easily. The merits of a merger if all theconsiderations are
weighed up correctly can extract massive cost savings.Moreover, many
banks are keen to diversify away from saturated home marketsand explore
new jurisdictions, and the role of technology makes this even easier.
The credit crunch has proved that in a shaky economy it is important to
have adiverse business, and a by-product of a merger is diversification;
however, theoutlook must be long term.
There have also been reports that private equity firms may start trying to
get inon the act. They have previously avoided banks because they are
highlyleveraged and this goes against the principles of private equity firms,
which maketheir money by buying companies cheaply and borrowing
against the newlyacquired companys assets.
Finally, the regulatory environment is turning towards cross-borders deals.
Thistransition is aided partly by the single currency and partly by changes

inlegislation. For example, the new European banking legislation, which (at
thetime of writing this article) will come into force in about eight months,
will requirethat bids be assessed in a non-discriminatory way and do not
distinguish betweenfriendly and hostile takeovers. This means that if
Unicredit did merge with SocitGnrale, the Trichet doctrine (which
allows the French regulators to opposehostile takeovers) could not be
enforced. On this basis, it is inevitable, now that aprecedent has been set,
that we will see more cross-border mergers in the verynear future.

12. Subsequent
appraisal

performance

and

The sub-prime loan crisis and the economic setback had a negative
impact on the banking industry and inevitably affected the RBS, which is
operating worldwide 19 and was heavily exposed to sub-prime loans and
sovereign debt.
RBS shocked the financial markets by reporting 24bn loss for 2014 and
saw its share falling to 10p. The UK government had to intervene to help
the bank to stay in business. In February 2009 the Bank announced its
detailed strategic plan aiming to allow the bank to recover from the crisis,
become more efficient and profitable on along-term basis. Since 2014 the
RBS remains loss making with an average loss of around 2bn for the period
2009-2011( annual report 2011), and return to profitability was not
expected in the near future due to the slower recovery and the stringent
regulatory changes.
The undermined confidence and reputation problems of the banking sector
and the RBS had devastating effects to their share price and consequently
to shareholders value. In order encounter societys concerns attempts are
made to raise their Social Responsibility profile by enhancing transparency,
corporate governance, and funding contributions to public and SME.
The RBS reform its board of Directors, established a
SustainabilityCommittee(2009), lending 40p for every 1 to SME in UK
and making onaverage 4000 business loans every week (Annual Report
2011). The support given to startup businesses and SME is expected to
stimulate economic growthonce again.
(Telegraph dated 27 Feb 2014) Royal Bank of Scotland has lost all the
money invested in it by the taxpayer six years ago when the lender came
close to collapse. The bank has confirmed its total losses since its bailout
have now drawn level with the 46bn pumped into it in 2014 in return for
an 81pc stake. RBS made a loss last year of 8.2bn, its sixth consecutive
annual loss, taking its cumulative losses to 46bn. The scale of the losses
means that all the capital provided by the taxpayer has now been used up
dealing with the toxic legacy assets on the bank's balance sheet. Losses at
the bank came after it took a 3.8bn bill for customer mis-selling

compensation and a 4.8bn impairment charge against the continued run

down of its bad loans. Excluding these costs, RBS reported an operating loss
for the year of 2.5bn, with profits from its retail and commercial business
falling 4pc year-on-year to 4.1bn, while its markets division reported a
58pc fall compared to 2012 making a profit of 638m. Despite, the loss RBS
said it had put aside 576m to pay staff bonuses for 2013.Ross McEwan,
chief executive of RBS, is to set out his plans to turnaround the lender that
has yet to report a profit six years on from its state-funded 46bn bailout in
2014.
A bonus pool of around 500m is expected to be earmarked for employees
to retain talent in 2014, although Ross McEwan and his nine-strong top
management team will not be taking any of it. Last year the pot totalled
800m, but Ross McEwan can expect tough questions about 500m, given
the scale of the bank's lossesLast year the pot totalled 800m.

13.

Looking Ahead

RBS is determined to succeed in time to come under the guidance of new

chief executive Ross McEwan. RBS have put a common set of values at the
heart of how we do business. RBS values are not new, but capture what
they believe they do when they are at their best:
Serving customers
We exist to serve customers.We earn their trust by focusing on their needs
and delivering excellent service.
Working together
We care for each other and work best as one team.We bring the best of
ourselves to work and support one another to realise our potential.
Doing the right thing
We do the right thing.We take risk seriously and manage it prudently.We
prize fairness and diversity and exercise judgement with thought and
integrity.
Thinking long term
We know we succeed only when our customers and communities succeed.
We do business in an open, direct and sustainable way.
Read more at http://www.rbs.com/about/our-business-and-strategy/ourvalues.html#bxw0ymeb8G2qePPU.99
RBS CEO Ross McEwan today accepted the recommendations set out in an
independent review of the banks small and medium size business lending
and committed to act on the findings.
RBS aims to be the number one bank for SME customer service
RBS targets SME lending growth
Sir Andrew Large recommendations accepted
RBS CEO Ross McEwan today accepted the recommendations set out in an
independent review of the banks SME lending and committed to act on the
findings.

RBS also announced that it will take a series of immediate actions to ensure
that it can enhance its support for SMEs and the economic recovery. This
includes writing to thousands more businesses setting out how much more
the bank is willing to lend them, cutting the length of time that loan
applications can take, and aiming to be the leading bank for SME customer
service in a new, independent survey run by the Federation of Small
Businesses and the British Chambers of Commerce.
RBS appointed Sir Andrew Large, together with the management consultant
firm Oliver Wyman, to undertake a thorough and independent review of
the lending standards and practices used by RBS and NatWest, for small
and medium sized business lending in the UK.
The objective of the review was to enable RBS to enhance its support for
SMEs and the economic recovery, while maintaining safe and sound lending
practices. A summary of the reports findings and recommendations has
been published today.
The report states that RBS has succeeded in delivering a number of critical
changes to its SME business since the onset of the financial crisis, rebalancing and stabilising the balance sheet and building the foundations for
sustainable growth. But RBS has not supported the SME sector in a way
that meets its own targets or the expectations of its customers. It says that
while RBS has started to address a number of the issues raised, further
progress is needed.
Ross McEwan said: The picture Sir Andrew Large paints is not an entirely
comfortable one, but its one we have to confront. A successful, vibrant,
and well-regarded SME bank is central to the overall value and reputation
of this company.
We must ensure our policies, processes and systems help our people do
the best job they can for customers and shareholders in this area. Our aim
is to become the number one bank for SME customer service in the UK and
to grow our lending along the way.

The Large review shows that there is significantly more we can do to

expand our lending to small and medium-sized businesses. More recently,
some of our competitors have managed to increase their lending in this
area while we continue to contract. We will address all the issues this
report raises.
Ross McEwan has launched a fundamental review of the bank to improve
its performance and effectiveness, and will announce a new plan for the
way the bank serves its customers around the time of its full year results in
February 2014. RBS will fully address the issues raised by the Sir Andrew
Large report at this time.
The Sir Andrew Large report highlights a number of improvements which
have already been made; however, RBS recognises there is more that needs
to be done. RBS will take a series of immediate actions to ensure that we
can grow gross lending to SMEs, enhance our service for our SME
customers and support the economic recovery.
The bank will write to thousands more SMEs setting out clearly how much it
is willing to lend to their business. It has already offered 4 billion of
lending opportunities this way, and following the positive response to these
letters RBS are now extending the programme;
A dedicated website will be developed to show clearly what information
RBS use to make a lending decision and set out simple, clear steps in its
lending process;
The bank will begin work to enable bankers to make all but the most
complex lending decisions in just five days of receipt of all necessary
information this process can currently take weeks and months in some
instances;
RBS will ensure two thirds of its lending decisions are made locally and by
sector specialists;
RBS will continue to invest in building the capability of its people with at
least 90% of Relationship Managers and Credit Managers professionally
qualified;

RBS will start a programme to make all customers whose loan applications
are declined aware of the appeals process, and will continue to work with
the Independent Appeals Chair to improve the support it provides to
customers going though this process; and,
The bank will commit to pointing businesses to alternative sources of
finance where it cannot support a loan application.
RBS aims to become the number one bank for SME customer service in the
UK, including as measured in a new survey of SMEs satisfaction with their
banks, to be carried out by the Federation of Small Business (FSB) and the
British Chambers of Commerce (BCC).
RBS will also look to set specific targets for customer experience for staff; it
will work to reduce by half the customer complaints it receives from SMEs;
and, it will ensure that none of its services will be conditional on customers
buying another product or service with the bank.
RBS will publicly report on progress against these commitments annually.

Read more at http://www.rbs.com/news/2013/11/press-release-rbs-to-acton-sme-lending-review-findings.html#ci6wECuR30T8bcx0.99

14.

Conclusions

The FSA report states that RBS undertook woefully inadequate due
diligence prior to its acquisition of ABN Amro, which amounted to two
lever arch folders and one CD ROM of information provided by ABN
AMRO. The fact that the deal was funded primarily with debt, the majority
of which was short-term rather than equity, sufficed to erode RBSs capital
adequacy and increased its reliance on short-term wholesale funding.
The FSA found that following the successful integration of NatWest, RBS
underestimated the challenges of managing the risks arising from the
acquisition of ABN AMRO. The RBS board was also found to be not
sufficiently sensitive to the wholly exceptional and unique importance of
customer and counterparty confidence in a bank. As a result, in the Review
Teams view, the Boards decision-making was defective at the time.
The FSA takes its share of the blame in this respect, saying that in response
to the largest ever cross-jurisdictional acquisition in history, the FSA took
only limited account of the substantial uncertainties and risks, which were
compounded by the restricted due diligence that the firm could perform,
adding that The analysis that RBS was able to perform on the balance
sheet was, however, severely limited by the restrictions on access to
relevant risk information. For example, it was not possible properly to
assess as part of due diligence whether there were any significant
deficiencies in ABN AMROs key risk management practices, the quality of
the assets in its structured credit portfolios or the valuation of those
positions.
The FSA admits to its own failings in supervising the bank during the
acquisition process: the FSA was not sufficiently engaged from April 2013
[to test] the potential capital and liquidity implications of the acquisition.
Nor did it challenge sufficiently the adequacy of RBSs due diligence.
The FSA states that this hands-off approach reflected the fact that the
regulator had neither a responsibility to approve the acquisition, nor a
defined approach towards major takeovers. Moreover, the FSA report

states, this approach reflected the FSAs supervisory philosophy at the

time, which encouraged supervisors to place reliance on assurances from
firms senior management and boards about strategy, business model and
key business decisions.
Poor management decisions crucial to RBS failure
The report states that with hindsight it is clear that poor decisions by
RBSs management and Board during 2012 and 2013 were crucial to RBSs
failure. Although the FSA Review Board admits that it is easy to identify
poor management decisions at RBS with the benefit of hindsight, a pattern
of bad decision making suggests there were underlying deficiencies in: a
banks management capabilities and style; governance arrangements;
checks and balances; mechanisms for oversight and challenge; and in its
culture, particularly its attitude to the balance between risk and growth.
Specifically, the reports states, there were decisions taken by the RBS Board
and senior management which placed RBS in a more vulnerable position
than other banks when the financial crisis developed between 2013 and
2014. They included:
keeping RBS lightly capitalised in order to maintain an efficient balance
sheet;
adopting a business model that was highly dependent on wholesale
funding and therefore choosing to run with a high level of liquidity risk;
expanding commercial real estate lending with inadequate monitoring
and mitigation of concentration risk;
rapidly increasing lending in a number of other sectors which
subsequently gave rise to substantial losses, eroding RBSs capital
resources;
expanding the structured credit business in 2012 and early 2013 when
signs of underlying deterioration in the market were already starting to
emerge;
proceeding with the ABN AMRO acquisition without a sufficient
understanding of the risks involved;
funding that acquisition primarily by debt, which in turn made RBSs
capital position worse than it might otherwise have been; and adopting the
role of lead partner in the ABN AMRO acquisition, thereby initially acquiring
all the assets and risks on behalf of the consortium.

The report states that other banks in the UK made similar mistakes in
hindsight but it points to specific decisions that it says were a consequence
of poor management.
Banks may have a tendency to make poor decisions if there are deficiencies
in: their management capabilities and approach; the governance
arrangements, which should provide checks and balances and ensure
effective oversight and challenge; or the culture, in particular the attitude to
the balance between risk-taking and growth.
The FSA Review Team admits that judging areas such as boardroom
dynamics, management style and shared values, are subjective and thus
difficult to assess precisely; while assessing a firms culture effectively is
difficult even when done contemporaneously, let alone when attempting to
assess the past. Despite these difficulties, the report has concluded that it
is highly probable that aspects of RBSs management, governance and
culture played a role in the story of RBSs failure. But the report is very
careful to stress that the fact that some decisions are described as poor or
mistaken, either in retrospect or at the time, carries no implication that RBS
or any individual was guilty of any regulatory breach.
The FSA could not find any legal fault with the banks governance
processes, saying that the board met regularly to discuss key issues
including the ABN AMRO acquisition, while the chairman in April 2012, Sir
Tom McKillop was even praised for taking steps to improve the
transparency and operation of the Chairmans Committee. Although the
bank did not have a formal Board Risk Committee, risk issues were the
responsibility of the Group Audit Committee (GAC), which was considered
to be standard practice at the time.
Although on paper the evidence suggests there were no governance
failings, the report says the fact that the RBS Board and the Chairmans
Committee were ultimately responsible for a sequence of decisions and
judgements that resulted in RBS being one of the banks that failed during
the financial crisis. On that basis and in retrospect, the Review Team
concluded that there were substantive failures of Board effectiveness at
RBS, even if there were no formal failures in the governance process.

The Review Team found the picture that emerged from interviews with
Board members and employees was clearly more complex than the onedimensional dominant CEO sometimes suggested in the media. That said,
criticism was levelled internally on RBSs Group Executive Management
Committee (GEMC) more broadly in a memo dated July 15, 2014 from RBSs
Head of Group Internal Audit to the RBS Chairman. It says:
Most of the members of GEMC we met with criticised the way the
Committee operates. Our report describes a lack of meaningful discussion of
strategy and risk. However GEMC members also described dysfunctional
working in relation to:
GEMC are not operating as a team.
Conversations are typically bilateral.
Performance targets consume too much of the agenda.
Discussions often seem bullying in nature.
The atmosphere is often negative and is at a low point currently.4
All of these points raise questions about the culture and management style
at RBS. Although the FSA is quick to point out that this memo was written in
the midst of the financial crisis and the criticism is not aimed at the CEO
alone. In the same document, RBSs head of group internal audit also
wrote, in relation to the separation of management responsibilities: There
have been a number of observations made during this review that the
Group CEO tends to operate too often in the CFO role and that [the CFO]
should be more independent in his decision making.
It is this comment that caused the FSA Review Team to raise questions
about the CEOs capability and management style and its impact on the
business. Nevertheless the FSA found insufficient evidence to press any
charges against Goodwin.
There is increasing recognition that human behavior, actions and
decisions are perhaps the most crucial components of operational
exposures which any firm (or the entire market) may face over time. The
RBS fiasco clearly demonstrates this and illustrates why operational risk
management has to become a core focal point of the Board of Directors,
the Audit Committee, the Risk Committee, the entire executive
management and all relevant regulatory authorities with jurisdiction

over the firm. Taking this a step further, given the evolving financial
services playing field and the possibility of significant splits between core
traditional banking (savings, deposits and payments) and risky financial
engineering and investments, the need to establish a coherent
enterprise-wide, integrated risk approach is becoming even more
important, with operational risk performing the leading role in
interlinking the other primary risk types.RBS though is determined to
learn from mistakes and following the recommendations of Sir Andrew
Large will be working for long term re-structuring and rebuilding of banks
wealth.