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

15.

Biblography

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 crossborder 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 2015, 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 predates 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 2015, 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 2015, 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 20152010 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
2015, 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

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 readymadecontacts 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 2015 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 2014 and into
2015, 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 2014 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
2014, 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 2015, 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 2015 (Graph
2.25).
When the 2015 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
synergies

to

RBSsinitial
had

turned

assessment

of

out

favourable.RBS

to

be

prospective

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 2015.

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 2014 and into 2015, 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, 2015:
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, 2015:
Barclays PLC has withdrawn its bid for ABN AMRO Holding.
As on October 4, 2015, 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, 2015:
The Securities Exchange Commission (SEC) had cleared the
transaction.Update on September 18, 2015: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, 2015:
The shareholders of RBS, had approved the proposed
acquisition of ABN AMRO Holding by the consortiumof banks.
Update on August 6, 2015:
Fortis shareholders voted in favor of the offer.
Update on July 16, 2015:
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, 2015:
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

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, 2015:
ABN AMRO invited Fortis, RBS, and Santander, to discuss
their proposals in relation to a potentialtransaction with the
company.
Update on May 6, 2015:
ABN rejected RBS consortium's $24,500 million offer for
LaSalle, which was tied to its proposal for entirestake in
ABN.Announcement (April 12, 2015):
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

Capitalia

and

DMCConsumer Finance
Shared Assets

Private

equity

portfolio,

stakes

in

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
2015 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 2015. 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 2015, 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

centthreshold required securing the deal.

the

80

per

8.

Comparison to other M&A of

Acquiring company
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 2015, HSBC had racked up writedowns 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
1975, the

Bank in

Woolwich in

1919,

2000

and

Mercantile Credit in
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,

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

acquire The

period,
Royal

Pitman

Bank

of

tried

unsuccessfully

Scotland in

to

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, LloydsTSB 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

success

as

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

maketheir

principles

money

by

of

private

buying

equity

companies

firms,

which

cheaply

and

borrowing against the newlyacquired companys assets.

Finally, the regulatory environment is turning towards crossborders 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 nondiscriminatory 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

performance

and

appraisal
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 misselling 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 2014 making a profit of
638m. Despite, the loss RBS said it had put aside 576m to
pay staff bonuses for 2015.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/our-values.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, re-balancing 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

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/2015/11/press-

release-rbs-to-act-on-sme-lending-reviewfindings.html#ci6wECuR30T8bcx0.99

14.
The

FSA

Conclusions
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 shortterm 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 2015 [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 2014 and 2015 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

management

capabilities

and

arrangements;

checks

balances;

and

in:

style;

banks

governance

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 2015 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 2014 and early

2015 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 2014, 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 one-dimensional 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
(savings,

splits

between

core

traditional

banking

deposits and payments) and risky financial

engineering and investments, the need to establish a

coherent

enterprise-wide,

becoming even more

integrated

important,

risk

with

approach

is

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.

15. BIBLIOGRAPHY

https://www.abnamro.com
www.bloomberg.com
https://books.google.co.in
https://en.wikipedia.org/wiki/ABN_AMRO