Wednesday, January 2, 2008


The case needs to be developed. Presently relevant materials are being assembled
3rd Jan 2008

THE 71 billion takeover of Dutch bank ABN Amro was a coup. Sir Fred Goodwin, the 49-year-old chief executive of Royal Bank of Scotland (RBS) has been confirmed as the uber-hero of Scottish business and finance. The three-way takeover, in which RBS acquired the Dutch lender's European corporate and investment banking arms as well as its Asian operations, with other parts going to RBS's bidding partners Banco Santander and Fortis, is the largest and most complex banking takeover ever. At a stroke it has transformed RBS into a much more global financial services player, enabling it to narrow the gap with giants such as Citigroup and HSBC.

The most challenging task facing Goodwin and his close colleague Mark Fisher (RBS's director of manufacturing) is to deliver on promises they made to investors during the gruelling takeover battle, which lasted from April to October. This will include dividing up the spoils between the three winning banks without upsetting customers or staff as well as integrating the businesses that RBS has acquired with the Edinburgh-based bank's existing operations - again without alienating ABN Amro's customers or staff.

Given that Goodwin has promised cost savings of 1.3bn a year from the parts of ABN Amro that he is acquiring, job losses are clearly on his agenda. There could be as many as 20,000, and he has said they will not uniquely fall on the previously underperforming Dutch side of the equation.

On December 6, 2007, Goodwin - said: "One of the most important things we've been doing is looking at management structures. One of the things we did after NatWest, and it slows things down a little bit but it's critically important, in making all the management appointments, is to go through an interview process and we involve external consultants in the process, to ensure fairness and also to ensure an appearance of fairness. Once the senior appointments have been made, it removes a lot of uncertainty."

RBS's shares were trading at 705p on February 16, 2007 before Goodwin announced his intention to bid for the Amsterdam-based bank. They have since fallen 39% to 432p.

Admittedly, all bank shares have taken a hammering over worries about exposure to bad debts arising from the sub-prime mortgage crisis. Investors have been fretting about the true level of that exposure, enmeshed as it is in opaque and convoluted financial instruments such as collateralised debt obligations (CDOs), which are basically parcels of debt extended to sub-prime borrowers in the US.

After the $10.5bn acquisition of Ohio-based Charter One Financial in May 2004, Goodwin came in for a similar drubbing from investors, dismayed that he had overpaid for the US bank. Goodwin was forced to promise to steer clear of further big acquisitions and pledged to do more to boost shareholder value, through organic growth, higher dividends and share buybacks. For a couple of years, he kept to his pledges, but when the opportunity to acquire ABN Amro arose last spring, he could not resist having a go.

Writing in the Financial Times in October, Lina Saigol claimed that Goodwin and his Dos Amigos - Emilio Botin, patriarch of Madrid-based Banco Santander and Jean-Paul Votron, boss of Belgian-Dutch bank Fortis - were "driven by ego, conceit and a deep-seated need for power" to plough ahead with the ABN Amro deal even as global capital markets were collapsing. She argued they were paying a 70% premium to ABN Amro's share price prior to the announcement of its abortive tie-up with Barclays. Many critics argue the three bidding banks would have been better advised to walk away or at least lower their offer for ABN Amro. They say they could have invoked a so-called "material adverse change" clause, arguing that the sub-prime crisis - which had yet to erupt when they made their offer in April - had changed the value of ABN Amro for good.

James Eden, bank analyst at Exane BNP Paribas, says: "We did not condone the decision by RBS management to press ahead with the value destructive acquisition of ABN Amro. In our view, it could - and should - have walked away, or at least secured a lower acquisition price."

In October and December he was keen to stress the value that he believes lurks within ABN Amro's international franchise. He also said it had only about £300 million of markdowns on its sub-prime related investments.

Speaking on December 6, Goodwin argued that RBS's prime motivation for the ABN Amro deal was to diversify its asset base and give the Edinburgh bank a wider range of strategic options. "What we've been trying to do for a long time now is build a group that has sufficient diversification in its income streams that we've opportunity to participate in growth whenever and wherever it happens No single economy is ever going to be booming all the time but having a finger in a greater number of pies gives us a greater opportunity to deliver sustainable good quality earnings."

On that occasion Goodwin also took the opportunity to reassure investors that RBS's annual results for 2007 (due in February) will be ahead of analysts' estimates - in other words more than £10 billion - and that the merged bank's exposure to the whole sub-prime mess would be much lower than had been feared. Overall, he said the bank will write-off about £1.5bn because of its exposure to the toxic tide and that large areas of RBS are performing strongly.

After biting his tongue for several weeks while the brickbats fell all around, Goodwin clearly relished being able to deliver a much more positive story than many in Square Mile had expected on December 6. He said: "It hasn't exactly been beer and skittles this year but we're anticipating a strong set of results. I think you'll see in the body of the pre-close trading statement a comment suggesting that when you strip out the markdowns and the gains, you'll see a growth trajectory that's pretty consistent."

Goodwin is also surprisingly upbeat about the outlook for the UK economy - which some believe will follow the US into recession. "It is not in bad shape," he says. "Slowing down never feels as good as speeding up or being at a constant speed. From our customers' perspective it doesn't look too bad. Obviously the retailers are all looking to see anxiously what happened over the Christmas period but touch wood so far so good. We're seeing some very high levels of credit-card spend."

Nor does Goodwin believe the crisis at Northern Rock will affect consumer confidence or cause people to leave their credit cards at home. He says: "Insofar as there's any damage from Northern Rock, I think it's more to do with international perceptions of the UK financial services industry. I don't think it will affect the behaviour of the consumers in the UK because no consumers have lost any money as a result of Northern Rock."

He also points out that RBS has been a major beneficiary of the Newcastle-based lender's collapse, with many depositors shifting savings to RBS and NatWest as part of a "flight to quality". Overall, he says, RBS saw inflows of more than £1bn during September (the month in which Northern Rock collapsed).

Goodwin was rumoured to have been approached to take over from Charles "Chuck" Prince as chief executive of Citigroup. Even though such a move would see him multiply his remuneration package tenfold, Goodwin is seen as unlikely to want to take over the reins at the New York-based banking giant. He recognises that his job at RBS is far from complete. As long as he can apply the same ruthless determination to integrating ABN Amro as he applied to the integration of NatWest, he will almost certainly be able to prove his critics wrong.

Excerpts from the article from Sunday Herald, 3 Jan 2008

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