Spain’s Banco Santander Central Hispano is playing the leading role in the first pan-European bank takeover. It recently acquired Abbey National Bank of Britain, with a package of shares worth €13.4 billion ($16.1 billion). For Santander, the acquisition opens the door to Britain’s retail banking sector, the most competitive in Europe. For Abbey, it is an opportunity to get back on track. Abbey’s operations showed a loss in 2002, after taking a hit from junk bonds and underperforming markets. The merger announcement has been greeted with both cheers and harsh criticism. Some people are applauding Santander for its willingness to become a European leader. Others are asking why Abbey agreed to this marriage after rejecting other suitors who looked a lot more appealing at first glance.
Early on the morning of July 26, Banco Santander Central Hispano chartered an urgent flight to London for the entire Spanish press corps that covers the bank. All doubts about the future had disappeared; Santander was buying Abbey.
Three months earlier, Santander’s growing interest in Abbey had already become front-page news. On April 30, The Financial Times and Expansión, the Spanish daily, ran an article saying that Santander was maintaining “informal discussions” with Abbey. Within four days, this news sparked an 8% rise in the price of Abbey’s shares. Only one month earlier, Alfredo Sáenz, Santander’s managing director, had said that negotiations between the two banks were being undermined by leaks to the press.
In late July, however, the rumors resurfaced after Abbey reported to the Bank of London that it had been “approached” by an institution “that may or may not make an offer.” Abbey did not specify the name of its suitor. The revelation by Abbey came in response to requirements set by British regulators following the 15% rise in the price of Abbey’s shares. Meanwhile, in Spain, the National Stock Market Commission (CNMV) had suspended trading in Santander after the Spanish bank acknowledged that it was holding conversations with Abbey. On top of that, Santander had convened an extraordinary meeting for Sunday, July 25.
Both sides in the talks refused to confirm what the entire market already accepted as a fait accompli: Santander was buying Abbey.
Finally, on July 26, in front of the entire international press, the two banks finally admitted that the acquisition was taking place. They no longer disguised what was happening by using the term “merger.” After regulators give their approval, Santander’s shareholders will control 76.4% of the capital [of the new institution], and Abbey’s shareholders will hold the rest – 23.6%. Moreover, Santander will take control of the bank’s management, impose its corporate culture and, as much as possible, centralize management – even human resources and services – in Spain, in an effort to control costs. Only one remnant of the past would remain – the Abbey brand.
Praise and Criticism
To finance this deal, Santander chose to issue new shares worth €13.4 billion at face value. The shares will be exchanged for shares of Abbey on a one-to-one basis. Before that happens, Abbey shareholders will receive 25 euro cents for each share, and an additional ordinary dividend of six euro cents that had been promised before the offer.
The deal is priced below other proposals that Abbey received earlier, and rejected. The first such offer came from Lloyds TSB. In 2000, Lloyds offered £18 billion pounds (€27.2 billion) for Abbey. Although regulators vetoed the move, other banks made offers, including the Bank of Scotland, the National Australian Bank, and the Bank of Ireland. “Abbey has rejected many suitors in the past, so why must they now accept a much lower offer from Banco Santander?” asked Grant Ringshaw in the Sunday Times.
“If [Santander] decided to make this move, it’s because it realized that another major institution was interested,” says José Ignacio López Sánchez, professor of business management at the Complutense University of Madrid. Adds Juan Antonio Maroto, finance professor at the Complutense University: “This move totally contradicts what all the experts were thinking until now. They were all focusing on the problems facing cross-border mergers in Europe until every aspect of the European Union’s expansion is cleared up. That’s why this move is so surprising. It makes you think they did it because it is a good business opportunity.”
Maroto is certain that this deal was all wrapped up even when Santander was saying that it had broken off its talks with Abbey. “Their comments were so artificial; they made them the very same day their biggest Spanish competitor, BBVA, released its results for the first six months.” On July 26, BBVA announced that its profits had grown 1.61% to €1.355 billion, and confirmed that business was strong in such sectors as mortgages and funds. The company also announced that business was growing in Latin America.
Analysts argue that Santander is very exposed in Latin America and it needs to diversify its risks. Moreover, for some time, Emilio Botín, Santander’s president, had reiterated that his company was interested in expanding in Europe. “Santander is following a strategy of growth through expanding into new markets. Growth comes from offering the same products but in various markets,” explains Sánchez. He believes Santander’s goal is “to become number-one in Europe, probably within five years.”
With its acquisition of Abbey, Santander will become the leading bank in the euro zone; the fourth largest bank in Europe, and the eighth largest bank in the world measured by market capitalization, which now climbs to $61.9 billion. Abbey is the sixth largest bank in the United Kingdom, and the second largest bank in the mortgage industry. Although Abbey’s market capitalization is only one-third as large as Santander’s, its assets represent 70% of the [newly expanded] Spanish company. It has 16 million customers, of which only 11.2 million have either a mortgage or a savings account. Its 753 branches are about half as many as those of such competitors as Barclays, Lloyds TSB and HSBC. The Royal Bank of Scotland – in which Santander has a 5% ownership – has three times as many branches as Abbey.
Analysts also question the opportunity Abbey represents for Santander. In the United Kingdom and Spain, the two hottest countries in Europe, the mortgage business is threatened by a real estate bubble. This is the core sector of Abbey. According to its own data, Abbey has an 11% market share in mortgages and a 6% to 9% market share in checking accounts. Abbey’s excessive exposure to the mortgage market will be a challenge that Santander has to confront skillfully; especially when it is getting established in the market. On several occasions, British authorities have expressed concern that the volume of credit has shot up 15%, despite the fact that the Bank of England raised interest rates as high as 4.5% during the last year.
Maroto argues that the good sense of Emilio Botín, president of Santander, justifies optimism about the deal. “This has to be a good move, or Botín wouldn’t make it. He never lets his prey get away after taking the first bite.” According to Maroto, one of Santander’s goals could be “to find synergy in Spain’s British residents, who are going to move their mortgages to the new institution.” For the British, Spain is a favorite tourist destination, and many Britons have a second home in Spain or choose to retire there.
The Role of Abbey
Analysts find it harder to figure out Abbey’s behavior, especially when compared with earlier offers that Abbey rejected. Abbey has been dogged with losses ever since 2002, when it registered £1.16 billion (€1.756 billion) in red ink because of the poor performance of its wholesale bank, as well as junk bonds. Although Abbey’s results have since improved, it has not managed to show a profit. Analysts doubt that it will be able to do so this year.
From that point of view, Santander’s arrival on the scene seems the perfect solution to Abbey’s problem – regarding not only liquidity but also takeover offers. Abbey’s excessive exposure to the mortgage market is a risk that needs to be addressed, as Abbey opens up on other fronts, including retail banking. Santander seems to combine all the necessary attributes to get that done. Alfredo Sáenz, vice-president and managing director of Santander, recognized that fact when the acquisition was announced. “What we know best is commercial banking, which contributes 85% of our profits. That is what we are going to do with Abbey. It is a very important brand that has under-utilized potential.”
“If Santander applies this approach to Abbey, it can make major gains in the British market,” predicts Sánchez. He emphasizes Santander’s strategy of achieving greater size. “The huge scale it operates on means that small variations in margins lead to millions [of euros of] profits that can be invested. Botín cannot stop now; he has to continue growing so he can meet expectations.”
Already, Santander has announced that it expects to achieve synergies on spending and revenues amounting to €650 million, starting during the third year after the deal. These savings will be achieved by making improvements in information processing and by cross-selling products.
“Another point in favor of Santander is that it has demonstrated that it has a lot of experience fixing things from the inside. Everything indicates that Santander will be able to raise the bar to a higher level, as it has already done with Banesto,” recalls Sánchez. Ten years ago, the Bank of Spain took over Banesto. Now, under the helm of Santander, and with Ana Patricia Botín (Emilio Botín’s daughter) as its president, Banesto is once again one of Spain’s major banks. Recently, Banesto joined the prestigious Ibex 35 Index, the most important list in the country.
Regardless of objective economic explanations, Maroto makes another point – the consequences of Basle II, the new agreement about banking capital that will establish the basis for regulating the solvency of financial institutions around the world.
“We should think about how far Abbey was going to be able to comply with every requirement of Basle II. I have the impression that things were going to wind up being very complicated,” says Maroto. “Perhaps, this acquisition is more of an opportunity than a strategy. Whatever it is, we’ll eventually find out.”
Adds Maroto: “In the future, after Basle II is definitely established, mergers in Europe will have more to do with the fact that some banks have more than enough capital and other banks don’t have enough. Those two kinds of banks will join forces.” Sánchez has no doubt that Santander will make additional acquisitions. “It won’t stop here. It started here, so it can make acquisitions in other European countries that are more important. Its strategy is similar to Vodafone’s: Acquire operators in the main European countries so that, later on, companies in other countries want to join forces with your enormous organization.”