Mergers Of Abbey National And Santander Finance Essay

Mergers Of Abbey guinea pig And Santander Finance EssayAs Watson Head (2007 310-311) explained the terms Merger and Acquisition argon used interchangeably barely the differences are quite noticeable. The term Merger stirs the friendly reorganisations of assets into a new organization the two similar sized organizations will and so become whizz entity with both sets of existing packetholders. On the other hand, Acquisition or a Takeover suggests obtaining ones companys ordinary share capital by another one. In an encyclopaedism the one of the organizations is capaciousr in size and monetary stability and has the dominant power over the other one. The Acquisition process is lengthy and very complicated in nature. Acquisition of any particular organization can have several motives, the acquirer may want to amplify their economies of scale, commercialize share or to tally the financial synergy through declining the companys cost of capital. All these can be classified asHoriz ontal Merger and Acquisition Involves companies at the same storey of production in the same industry. i.e. the eruditeness of Cadbury by Kraft in 2010Vertical Merger and Acquisition This involves companies at contrastive stage of production hardly within the same industry. The vertical integration can either beForward movement towards the production process, i.e A furniture manufacturer merging with a retail furniture outlet.Backward movement towards securing the suppliers, i.e A furniture manufacturer merging with a wood supplier.Conglome point Merger and Acquisition involves companies in uncorrelated contrast lines. i.e. A clothing company acquiring a jewellery company.Trends in MA act 2004 to 2010 in atomic number 63 Banking Industry get word 1 One in Five companies plans to go for large scale Acquisition in 2010 some industries expect to be even more active. ascendant USB and BCG chief executive officer/Senior Management MA survey- 2009 on 166 European Companies.As fr om the Figure1 and chart1 , The MA trend in Retail and redress industries are in inclining nature, but we can observe an inclining trend in the Banking industry MA in Western Europe compared to the planetary trend. The Western Europe Banking sector MA shows a parallel movement with the global MA trend, suggesting that the Western Market is very susceptible to the overall market movement. The inclining nature of the MA in the Western Baking Sector (from mid 2005- mid 2009) suggests the upturn of the MA trend in the during the current recession crisis, the desires were devising internets with the global trends in M&A as these banks are also earning fees from their advisory and other services, such as syndicated banking facilities to support leveraged bids. The trend also suggests the wave of cross-border MA with the movement of the global trend in order to expand the business.Graph 1 Trend in Global MA activity (2004-2010), compared to tocopherolern and Western Europe banking industry MA. Source BloombergIn the current recession years with low interest rate, poor bond yields and high take aim of liquidity- the banking industry within the Western Europe is embracing the MA opportunity as many corporations have pushed back the bidding deals.1Table 1 MA trend from 1/01/2010 to 29/03/2010. Source BloombergAcquirer RegionTarget RegionAverage Size (GBP million)GlobalGlobal110.63MGlobal northwesterly the States174.94MGlobalEurope79.60MGlobalAsia peaceable65.29MGlobalLatin the States Caribbean331.65MGlobalMiddle East Africa106.65M coupling America pairing America159.79MNorth AmericaEurope114.29MNorth AmericaAsia Pacific48.36MNorth AmericaLatin America Caribbean47.84MNorth AmericaMiddle East Africa17.54MEuropeNorth America546.90MEuropeEurope65.42MEuropeAsia Pacific636.53MEuropeLatin America Caribbean1.14BEuropeMiddle East Africa95.87MAsia PacificNorth America128.86MAsia PacificEurope41.68MAsia PacificAsia Pacific46.56MAsia PacificLatin America Caribbean18 0.35MAsia PacificMiddle East Africa94.18MLatin America CaribbeanNorth America183.26MLatin America CaribbeanEurope455.35MLatin America CaribbeanAsia Pacific73.86MLatin America CaribbeanLatin America Caribbean506.03MLatin America CaribbeanMiddle East Africa11.21MMiddle East AfricaNorth America10.50MMiddle East AfricaEurope485.98MMiddle East AfricaAsia Pacific21.17MMiddle East AfricaLatin America Caribbean7.62MMiddle East AfricaMiddle East Africa134.77MFrom the table above, the MA trend is inclining more towards emerging markets as the target regions although, emerging markets are also opting for MA activities in the same or different emerging markets to expand the business.An Acquisition CASE Abbey national PLC acquired by Banco Santander SABackground of Abbey home(a) PLCThe Abbey National Building Society was formed following the nuclear fusion of the Abbey Road Building Society and the National Building Society in 19442. In July 1989, Abbey became a public limited c ompany and floated on the London investment company Exchange. With 12 million customers and assets of 177 billion, it is ranked the sixth largest bank in the UK by assets and the fifth largest by deposits (with a 9% share of the market). Reflecting its origins as a create society, it is the second largest mortgage provider in the UK, with an 11% share of the market. Furthermore, with 15% of the market, at the time of acquisition, it was the third largest provider of insurance protection products and has a large distribution network with more than 700 branches (EMCC, 2008). Abbey had two main business divisions, Personal Financial Services and the Portfolio Business Unit.Background of Banco Santander Central Hispano SASantander is a bank that has transform itself from being a middle player in the Spanish banking market 20 years ago, it is now a major global bank in operation(p) in Spain, Portugal, Germany, the United Kingdom and other European countries, as well as in Latin Ameri ca. The group is currently the leading consumer bank in Europe and has over 10,500 branches globally (excluding those branches gained through the acquisition of Banco Real as a result of a deal with ABN AMRO). Santander is a technologically advanced bank, with an tuition technology platform that is regarded as a strong competitive advantage. Excluding Banco Real employees, the group currently employs approximately 130,000 people worldwide, of whom 50% are working in Latin America. There are also large numbers of employees working in the UK and Spain. (EMCC, 2008).Banco Santander was a small retail bank when it started its business in 1985, since then it initiated its local market growth through mergers and strategic adhesions and later implemented Low-scale cross-border elaborateness through strategic alliances and acquisitions. Gradually, the implementation of Large-scale cross border expansion took place.Chart 1 Banco Santander Acquisition Transaction Overview till January 2010 . Source ReutersOverview of the AcquisitionThe objectivity of this particular acquisition/takeover was to diversify the business of Banco Santander PLC to mortgage and financial services not to mention to explore the retail banking opportunities in the UK market. Therefore, the motive for this MA was to gain economies of scale through synergy and also to entering a new market in order to optimize their market share, hence buying Abbey was a mean to enter into Europes second largest consumer financing market. In 2003 Abbey National PLC was pricey for Santander and in 2004, Abbey incurred losses from its entry into the money market and Santander decided to go ahead with the Acquisition plan in order to penetrate the UK market. merely, the secondary objective of this acquisition was to under-cut the local competition for Banco Santander with the hopes of obtaining higher profitability in the UK market. Moreover, Banco Santander already had the expertise in the retail banking and built a strategic alliance with the Royal Bank of Scotland from 1988. Therefore, Santander had already gathered banking knowledge and futuristic opportunities. As stated by Parada et al., (2009 666-667) Acquiring Abbey National PLC would make Banco Santander the biggest bank in Europe and Latin America and dominating their business in the strong currencies- the Euro, US dollar and the Pound. The acquisition had boosted the companys operation in six segments Retail Banking, Global Banking Markets, merged Banking, Private Banking, Group Infrastructure and Sold Life Businesses. After the acquisition Abbey National PLC became Santander UK PLC in January 2010.3Abbeys leadership position in the United Kingdoms mortgage alter market, together with its extensive branch network, represent for the shareholders of Banco Santander and of Abbey an opportunity to create nurse based on the application of the best business and technological practices of Banco Santander to Abbeys banking operations. Abbeys business to a great extent contributes to reinforce our pan-European franchise and provides the Group with a more balanced earnings stream.-(Emilio Botn, Chairman of Banco Santander, July 2004).4Table 2 Overview of the Abbey National PLC acquisition. Source ReutersAs noted in Parada et al., (2009, 666-668) in 2004 Abbey was suffering from losses from entering in the whole-sale money market therefore, Santander grabbed the opportunity to launch a friendly bid. Santander managed to overpower all the regulatory obstacles. Although the acquisition was initiated in 2004 but the tentative completion of this acquisition is expected to be at the end of 2010 given Abbey National PLC will be renamed as Santander UK PLC.Figure 2 The 3 steps of internationalization implemented by Santander in 2004. Source Authors.Acquisition of Abbey National PLCGraph 2 The dimensions of Santander acquisition with its growth (2000 to 2004). Source BloombergThe graph above portrays the rising nature of Santander shell out price after the Abbey acquisition at the end of year 2004.Defence Strategy implemented by Abbey National PLCDuring the Acquisition offer, Abbey National PLC urged its rivals British banks to make counter-bid offer in order to push back the 8.9 billion offer do by Banco Santander. Moreover Abbey spent out 9 million worth of Legal documentation to its approximately 1.8 million shareholders in the hopes of bouncing off the Acquisition offer made by Banco Santander.5Valuation of the AcquisitionThe asking price for the acquisition was 10 billion and the sold price was 8.9 billion. The terms of the Acquisition were based on the legality market capitalisation of the two companies over the one-third months prior to 23 July 2004. Based on the average closing market price for a Banco Santander Share on the Spanish stock market was 8.70 and the average closing mid-market price for an Abbey Share on the London furrow Exchange was 4.69 at an exchange rate of 1.5054 1, th e terms of the represent a premium of approximately 28.4 % with a value of severally Abbey Share at 6.03 or 603 pence ( taking into account the 6 pence for dividend differential, crack the financing section), and the entire issued ordinary share capital of Abbey at approximately 8.9 billion.6Financing the Acquisition BidThe acquisition was finance through the purchase of Abbey shares and blend Bid offer was initially offered to precede the acquisition where, Santander (the largest bank in North American and Spain) offered one of its own shares and 31 pence in cash for for each one share of London-based Abbey shareholders.7The special dividend of 25 pence will be paid along with 6 pence (31 pence in total) worth dividend differential to compensate the Abbey National shareholders as historically the dividend grantment of Banco Santander was usually lower than Abbey National Dividend payment (Table3). Later on, in November 2004, the acquisition was carried out through an exchange of one new Santander Share for each of Abbey share.94.6% backing support (based on the share counting only 64.8 % shareholders agreed to the acquisition deal) was received from the Abbeys shareholders in order to proceed with the takeover. The deal was worth or so 9 billion (or 13.5 billion to be exact at the time of acquisition offer the exchange rate was 1.5054 to 1). The enlarged company would be 76%-owned by existing Santander shareholders, with the rest in the hands of Abbey shareholders.8Regulatory FrameworkThe acquisition took place under section 425 of UK Companies Act 1985. Moreover, Santander had to provide many paper-works and expand plans to the European Authorities regarding the Abbey Acquisition (See Appendix, Illustration 2). As a result of the acquisition, Abbeys remaining private shareholders became entitled to one Santander share and the shares are traded in Euros in the Madrid Stock Exchange.9Table 3 Capital Value estimated for the Abbey Shareholders, Source h ttp//www.vernimmen.com/ftp/sch-abbey.pdfCultural DifferencesAlthough, the Spanish culture and British culture vary in many ways they run business. In British Culture, organizations rely mainly on their Human Resource, whereas, Spanish Culture relies more on the technological upgrading. Abbey National PLC had about 33% back-office employees whereas, Santander had about 6% to 10% employees as back-end personnel. Therefore, after the acquisition the employee number in Santander PLC came down to 16 thousands from 24 thousands in the UK. At the time of acquisition Santanders cost to income was 42%, whereas in UK it was on about 50% or more.10The acquisition may be affected by different tax incentives and regulations. Any change in the Spanish Banking policy will affect the Santander UK subsidiary both economically and financially. Moreover at the time of acquisition in 2004, the UK national savings rate is only 14.7% of GDP, compared with over 23% in Spain. Therefore, the spending and sa ving nature in the UK are very diverse than in Spain.As quoted in the Guardian (2005) Santander .. treats its Spanish shareholders to an unusually attractive range of perks, from discounted medical insurance and dental care to cut-price hams and crates of wine.11. Therefore, such treatments in the UK can be perceived as manipulative technique due to the variance in these two cultures.Performance in Share Price and Stock Market- Post AcquisitionSince Banco Santander is a Spanish bank, the shares was listed in Spanish Stock Market and the shareholders had to face exchange rate volatility since the dividend were being paid in Euros nonetheless, the Spanish taxation issue can be quite complicated to the UK shareholders. The Abbey shareholders were given the option to sell the shares to any Spanish Organization in the UK, but Abbey shareholders who held on to their Santander shares over time have to pay tax on any dividends they get.12Banco Santander new shares after the acquisition we re not admitted to the Official List or to trading on the London Stock Exchange during the post period of the acquisition.13In 2009 Santander 1.1 million new current accounts with our 25 million customers, and reported to redeem more than 30% profit in five successive years after the acquisition.Chart 2 The Overview of UK Competitors. Source H1 09 Reports Data and BBA Abstract by HSBCGraph 3 Santander UK PLC share price performance. Sourcehttp//www.h-l.co.uk/shares/shares-search-results/s/santander-uk-plc10-38-non-cum-stlg-pre/chartsThe Santander UK PLC is in the second place after Lloyds Banking Group in the Mortgage market share in UK with relatively reasonable Market share in Retail Banking (Chart 2). Moreover, The EPS of Banco Santander has been performing quite poorly after 2005, it has declined from 0.337 in 2005 to 0.27 in 2009 (See Appendix, Illustration 3 ).The share price of Santander UK PLC has been rising from the year 2005 (Graph 3), partly because the dividend was 15% higher than that paid in the mid of the year 2005. As of in 2006, 25% higher dividend was paid. In 2008, Banco Santander announced its agreement to take over Alliance Leicester PLC (AL). Under the terms of the agreement Banco Santander will offer one Company share for every three AL shares. The European Commission had approved Banco Santander 1.3 billion takeover of Alliance Leicester Plc. Moreover, in year 2008, Banco Santander had agreed to buy Bradford Bingley PLC retail deposits and branch network. Santander had agreed to pay about 400 million to acquire 2.7 million Bradford Bingley customer savings accounts containing some 21 billion of deposits. Therefore, Santander UK PLC is still at its growth stage in the UK Market and it is focusing more on acquiring local financial institutions.Reuters reported in October 2009 that, Banco Santander SA planes to maintain its policy of paying half its net profit in dividends in 2010. Moreover, according to the Yahoo Finance (April, 201 0), Banco Santander SA has higher Dividend yield of 6.80 % and global Foreign Money Centre Banks Industry has the rate at 1.96%, which suggest a favourable investment option to the potential shareholders. The Santander Group is working towards the policy of maximizing shareholders profit.Moreover, as reported in Bloomberg, Banco Santander SA is seeking to list its UK business in London Stock Exchange listing from February 2010 in order to raise funds for possible future buy-up opportunities, the listing offering may value at more than 15 billion. Banco Santander is looking for funds to bid for Royal Bank of Scotland PLC network of 300 branches.On the other hand, Santander UK is willing to sell 25% of its stake in order to be listed in FTSE 100 and also to pay out about 1 billion a year in dividends to construe an attractive deal to the investors (Source The Times).ConclusionAlthough, there were many speculation against the Abbey acquisition due to its cross-border nature, but all th e speculations were proven wrong. Although, this particular acquisition was the most talked about topic in the UK financial market, and many believed the acquisition would not create any value for the Abbey Shareholders. With proper understanding of the local market, Banco Santander had utilized its previous acquisition knowledge when it came to this acquisition. Banco Santander knows what its UK shareholders want and trying to live up that expectation to serve their UK shareholders. Banco Santander is seeking to expand its business in the UK. Although, till date the Abbey bank transformation is still under progress, but Banco Santander had been patient with the UK market because they know- slow and steady wins the race.BibliographyHuws, U. OKeefe, B. 2008. Managing Change in EU Cross-Border Acquisition, Case example Santander and Abbey Expansion modify access to new markets. EMCC Company Network, 1-4.Mayer-Sommer, A. P. , Sweeney, S. Walker, D.A. 2005. Effect of Bank Acquisition on Shareholder Returns. Bank Accounting and Finance, 1-7, June-July.Lausberg, C. Stahl, T. 2009. Motives and Non-Economic Reasons for Bank Mergers and Acquisitions. The Icfai University Journal of Bank Management, 8(1) 1-25.