Acquisition Of Abbey National Plc By Banco Santander

Published Date: 02 Nov 2017

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April 8, 2013

Acquisition of Abbey National plc by Banco Santander

Introduction

Mergers and acquisitions (M&A) have become an integral part to ensuring business continuity. To many firms, mergers and acquisition is a major source of external business growth once the organic growth of the firm reaches its peak. Globalisation of the economy has enabled firms to expand their business through M&A and to compete with strong domestic players (Bose, 2006). This paper will highlight the major aspects surrounding the acquisition of Abbey National, a UK bank, by Banco Santander, a Spanish bank, in November 2004.The acquisition greatly transformed the business profile of Santander Group through increased market capitalization, diversified risk and lucrative growth opportunities in the most attractive and profitable UK market. This study looks at the strategic histories and performance of Abbey National and Banco Santander prior to the acquisition and the impact of financial performance in the stock market. Although the cross border merger and acquisition was considerably beneficial to Santander, this paper will determine whether or not this acquisition was justified from the point of view of shareholders and depositors. The main focus of Santander is to deliver value to shareholders acquisitions and organic growth and therefore it is prudent to consider whose shareholders, between Abbey National and Banco Santander, benefited the most from this M&A.

Strategic history and performances of Abbey and Banco Santander

Deregulation and privatization have substantially altered financial markets since the early 1970s (Saunders & Watters, 1993). A perfect example of deregulation is the introduction of the single Euro currency which encouraged many European countries to open their markets to facilitate foreign competition. Over the last century, Abbey national went through major transformation from a building society to a successful ‘bid’ bank in the market. From its success in the past, Abbey national had grown to become a reputable household name in the UK. In order to maintain its market share and position, Abbey National expanded its business through mergers and acquisitions. Nevertheless, the lack of focus and diversification of its core businesses resulted in huge losses from the year 2001 onwards with the bank’s total loss amounting to £984million in 2003 (Competition Commission, 2001). The Competition commission and the Office of Fair trading overturned a possible takeover of Abbey National by Lloyds TSB in 2001 on grounds that such an acquisition would result in a one bank having a considerable large market share in the UK. To Santander, Abbey National was a safe investment when judged against other banks in Latin America that had been posting losses for the past couple of years. In addition, by acquiring Abbey National, Santander materialized its interest in retail banking which had been Abbey’s strength (Bose, 2006).

Operations of Banco Santander can be traced back to 1857 when the bank was first formed to finance cash flows at Santander, a Spanish port. After Emilo Botin assumed office in 1986 as the chairman of the bank, Santander was ranked as the seventh largest bank in Spain in terms of market capitalization. By 2003, the bank had grown beyond expectations to become the eleventh biggest bank in the entire world (Competition Commission, 2001)). The bank specializes in investment banking, commercial banking, telephone and internet banking. Santander’s retail banking is driven by a combination of four Spanish banks. In 2005, Banco Santander was awarded with the Euromoney Award for Excellence for being the world’s finest global bank (Bose, 2006). This award was meant to recognize Santander’s reporting on international finance and banking. For a period of 20 years, Santander has continued to post a growth on over 20% in earnings and company assets. By acquiring Abbey National in 2004, Santander has been able to fuel its growth to 66 million customers, €70 billion in market capitalization and profits that are 60 times higher in 2005 than they were 20 years ago.

The growth of Banco Santander from 1985 to 2005

1985

2005

Net profit (€)

133 millions

6,220 millions

Market Capitalization (€)

2,455 millions

69,700 millions

Number of customers

750,000

66 million

With over 18 million customers, Abbey National is among the finest retail banks in the UK focusing on personal financial services. The bank offers a variety of services to its clients such as savings, loans, mortgages, credit cards, insurance and pension’s unit trusts. The development of Abbey National bank can be traced back to 1849 following the establishment of the National Freehold Land and building society which later merged with Abbey Road Building society in 1944, leading to the creation of Abbey National building society. In July 1989, Abbey National was the first building society to achieve a plc status and following the conversion to a listed bank, the bank’s shares were floated in the London Stock Exchange (Allen & Song, 2005). Despite the poor economic climate in the early 1990s, the pre-tax profit of Abbey rose by 23% to 942 million pounds in the four year period between 1990 and 1995. In 1996, Abbey National merged with the National and Provincial Building society, an acquisition that resulted to an increase in branch network by 200. In the late 1990s, Abbey lost a significant share of the mortgage market from 12.2% in 1998 down to 10.9 % in 1999 (Busquets, Rodón & Vera, 2011).

History of the acquisition and why Abbey was acquired at a lower price

Despite the good performance of its stock, Abbey National proposed a possible takeover by the Bank of Scotland, a proposal that was shortly declined. After rejecting a £17.1 billion takeover offer from Lloyds TSB in December 2000, Abbey’s unprecedented growth began to decline from 2001 with its share price reaching an all time low of 317 pence (Competition Commission, 2001). This massive decline was attributed to the collapse of Abbey National treasury services which accounted for nearly 25% of Abbey’s profit. Despite posting £284 million in pre-tax profit, incidences such as the September 11 terrorist attacks led to a decline in Abbey National equity holding. Things got even worse for Abbey in the following a massive 47% decline in its share price and after its credit rating was downgraded to AA- further aggravating the poor financial performance (El-Bannany, 2008). In July 2002, Ian Harley, the then CEO of Abbey National stepped down and was immediately succeeded by board Chairman Lord Burns. The bank’s poor performance couple with the resignation of its CEO brought Abbey to the spotlight as a possible target of acquisition. Santander acquired Abbey National in November 2004 in a takeover deal worth £8.9 million. This purchase gave birth to one of the biggest banks in Europe and was one of the largest deals involving financial firms to take place in the European market (Casu & Girardone, 2009).

The acquisition of Abbey National was done under the UK law and during the deal, it was agreed that each Abbey shareholder would receive new shares of Banco Santander in the ratio of 1:1. In addition, the shareholders of Abbey National also received 31 pence in form of a special cash dividend on every Abbey share they held. A special meeting for shareholders facilitated by Santander was conducted to confirm the financing of the acquisition. The stipulations of the acquisition stated that the Abbey National would shareholders would be given one new Banco Santander share for each Abbey share that every shareholder held. After the acquisition, it was decided that Abbey shareholder would own 23.6% of Santander while the remaining portion (76.4%) would be owned by Santander’s shareholders (Parada, Alemany & Planellas, 2007). It was agreed that Banco would control and oversee the management of the bank, decide on the bank’s major decisions and carry out all the operations of the bank. Furthermore, Santander imposed its working culture and activities into Abbey and make substantial effort to control costs and unify the management. The only thing that remained after the acquisition was the Abbey brand. During the acquisition, the then vice president of Santander Alferdo Saenz stated that Abbey was a lucrative venture whose potential had been underutilized (Parada, Alemany & Planellas, 2009).

The acquisition’s asking price was £10 billion and Abbey National was sold for £8.9 billion. The acquisition terms were based on the capitalization of the equity market of both Abbey and Santander over the past three months prior to the acquisition date. The average mid-market closing price of Abbey was £4.69 in the London Stock Exchange while Banco Santander’s average share market closing price was €8.70 in the Spanish Stock Exchange. At the time if the acquisition, the exchange rate was £1: €1.5054 resulting in a premium of around 28.4 %. Each Abbey Share was now valued at 603 pence or £6.03. This represented a major gain to Abbey National shareholders (Guillén & Tschoegl, 2008).

Justification of the Acquisition

To analyze whether or not this acquisition was justified from the point of view of shareholders and depositors, this paper considers two different perspectives; financial and economic. The acquisition of Abbey National by Banco Santander led to increased earnings per share since the bidding company (Banco Santander) had a higher price/earnings ratio that its target company (Abbey National). A financial synergy is created in the event the cost of capital decreases after a direct acquisition. Since the acquisition of Abbey in 2004, Banco Santander has experienced a substantial growth (Guillén, 2005). This is evident following a 9% increase in profits to £9.9bn in 2008 when several banks were experiencing losses resulting from the economic meltdown. The financial synergy that was created after Santander and Abbey merged their assets created an addition flow of capital thus enabling Santander to make bolder lending transactions that increase profit. Instead of borrowing from the wholesale markets during the boom years, Abbey has been able to solely rely on funds from savings deposits.

From the depositors’ perspective, the cash flows of the two companies substantially reduced the volatility of cash flow leading to a decreased cost of capital and low business risk. At the time of its acquisition, Abbey was making huge losses and was probably highly undervalued. Therefore, to shareholders of the merging companies, the buy was a bargain that has over the years lead to a substantial appreciation of Santander’s shares. The acquisition of Abbey by Santander created an economic synergy where the operations and assets of the two companies completed each other to create more value for the shareholders (Santillán-Salgado, 2011). The merger may have resulted in the elimination of incompetent employees and redundant departments. The goal of Santander to realize both economic and financial synergies for the investors and depositors led to a massive job cuts of around 4000 Abbey National employees. In 2005, Santander stated that there would be further job cuts and close to 6500 employees of Abbey would be affected. The most affected areas comprised of business segments that were no longer operational or areas that Santander was already strong hence allowing Abbey to realize and enjoy economies of scale (Rugman, 2009).

The role of the FSA in the Acquisition

Santander has continued to expand and grow its operations through aggressive strategies of cross border acquisitions characterized by very robust post acquisitions. Following the acquisition of Abbey in 2004, Santander posted a 35% increase in pre-tax profit in the first quarter of 2005. Due to the high profitability, the shareholders have been receiving high dividend payouts. Amid concerns, Financial Services Authority (FSA) was involved in probing the corporate governance and standards of Banco Santander. According to the Joseph Eyre, the FSA spokesperson, this investigation was meant to provide insight into two major questions. The FSA wanted to establish whether the acquisition was to the interest of consumers as well to determine whether the acquirer was proper and financially fit. For an M&A involving a financial institution, it is standard procedure for the FSA to request an inquiry and such an investigation is triggered when a financial institution that sells investment products to the public seeks to change its ‘control’ (Wachman, 2004; Wülbern, D 2005).

After the acquisition of Abbey National by a foreign based Banco Santander, it is evident that the barriers that hinder cross-border banking in Europe were surmountable. It was intuitive to begin process that provided Santander with a first-mover lead in terms of reach, size and potential for further growth (Templeton & Clark, 2001). Santander has been associated with a very sound business model that has made it possible for the bank to scope the Euromoney and the Banker awards. From a viewpoint of corporate strategy, the major objectives of Santander to achieve diversification and an increased market share was appropriate considering the saturation of the domestic market in respect to potential for more growth through consolidation and the characteristics of the European banking sector. Abbey acquisition was well as it allowed Santander to directly venture into the British banking industry without having to increase its customer base, increase its market share and product offerings by combining with  corresponding businesses from Abbey (Vives, 2005).

Lessons from the acquisition

Considering that Abbey had good quality assets in terms of customer base and brand name, the franchise was not performing even after Abbey went through a series of business restructuring phases before being acquired. This was a perfect opportunity for Santander to export its retail business model, spare management capacity and IT systems in order to execute and leverage on the integration. Using its capabilities, Santander was able to accelerate the turnaround at Abbey National by establishing the basis for increased competitiveness and business growth with respect to other competing banks in the UK. The considerable success of the Abbey-Santander acquisition may be attributed to the company’s internal development through proper management of costs and investing more towards technology and innovation (Slama, Saidane & Fedhila, 2012).

Acquisitions of all forms, domestic or international, present a challenge to managers or chief executive officers because they must ensure that the acquisition is productive and beneficial. The acquisition must generate returns and at the same time, the bank on the other side must put effort on realizing synergies which, from the observations presented in this paper, should be the second priority after ensuring that the acquisition is generating revenues as expected. In this paper, for instance, Abbey National was acquired by Santander (Malyneux, 1999). The first strategy that Santander Bank used was ensuring that they retain clients, execute new business strategies, rebranding and invigorating the Abbey National IT system. This IT system was old and outdated since it had been in use for nearly 3 decades. Therefore, Santander introduced Parthenon IT system. This approach increased cost revenues and reduced expenses simultaneously; a significant strategy that a bank that is being acquired and the acquiring bank should take into account for the acquisition process to be successful (Fricke, 2007).

For a bank to generate returns and achieve synergies, the most important aspect in an acquisition process is retention of clients. In the case of Santander, they ensured that their customers get the best services by moving back office employees to front office. The employees were taken through special training sessions with regards to customer care service so that they can deal with customers in a professional and efficient manner. When employees are trained in customer care service, it ensures that they can deliver what is required of them with ease leading to customer satisfaction (Grant & Venzin, 2009). This approach is particularly important if the target bank initially offered poor services to customers. The bank which is making an acquisition should ensure that they transfer the culture of their organization to the target organization by implementing their strategies in the other organization. However, the acquiring bank should retain the talented and experienced staff in the target bank because the experience of such employees could be advantageous to the organization in one way or another (Guillén & Tschoegl, 2008).

In cases where the acquisition is being done on a global scale, the acquiring bank could involve its board members in elaborately discussing the details of the acquisition process. For instance, Santander involved its board members in discussing all the details of the acquisition and then implemented the best approaches and recommendations put forward by the board. This stage is important because the acquiring bank will be informed in advance about the areas of the target bank which require improvement. Santander’s team of 30 board members analyzed the problems faced by Abbey before proceeding with the deal (Hopkins, 2008; Glaister & Buckley, 1999). Similarly, both the acquiring and bank being acquired must merge their operations because this will make it simpler for both structures to thrive in a deregulated environment and hence creating new revenues. Some of the operations that could be combined by the two banks are IT and finance related operations (Gup & Marino, 2003). Developing a modem and efficient IT system is one of the best strategies of cost reduction. As mentioned earlier, Santander implemented Parthenon IT platform after acquiring Abbey. Parthenon IT system was developed from an IBM database which integrated and stored all the customer details in one location. The efficient IT system reduced costs and generated revenues.

The other significant aspect to be taken into consideration during an acquisition process is good governance. When an organization is equipped with good and productive leaders, they facilitate the implementation of strategies, completion of tasks, realization of goals and assimilation of the two organizations becomes simpler and effective. In the case of Santander’s acquisition of Abbey, Francisco Gomez Rolden was chosen to be the chief executive officer of Abbey following the acquisition. Francisco Gomez Rolden was a perfect choice for the bank because he had past experience with bank amalgamation strategies. He had previously been appointed a CEO during acquisition processes of other Spanish banks Argentina and Banesto. Therefore, implementing the business models and organizational culture of Santander Bank into Abbey would not be a challenge for him. He was a perfect fit for the position and he managed Abbey effectively (Howcroft & Whitehead, 1990).