What happens to Barclays if the British bank fails to snare a deal with ABN Amro? The question is top of mind among the world’s banking bigwigs in light of attempts by a deep-pocketed group led by Royal Bank of Scotland to bust up Barclays’ talks with the Dutch bank. One thing the British bank’s talks with ABN have made abundantly clear is that it is eager to do a transformational deal. But if it can’t bring home its preferred option, Barclays may have put itself in play.
Chief executive John Varley is acutely aware of this possibility. When word of his talks to acquire ABN surfaced in late March—and before Royal Bank and its allies Banco Santander and Fortis made their entreaties—he sent a note to staff on the matter. “I know that you will have read about the risk to Barclays if we try and are unable to conclude a transaction,” Varley wrote. “I’ve said to you before, and I continue to believe, that we will have an independent existence for as long as we want it.”
Actually, Barclays’ shareholders will ultimately determine the £49billion ($98billion/Rs4,11,600 crore) bank’s fate. The question, then, is who would be best positioned to make a move on Barclays that would sufficiently tempt its owners to sell. A British rival like HSBC would be able to extract the most costs and pay the highest price. But UK competition authorities, which blocked an even smaller transaction when Lloyds bid for Abbey National, wouldn’t let that happen. So, an HSBC deal would probably require spinning off retail operations to pass muster, which would be messy and probably destroy value.
Few European banks are big enough to swallow Barclays.
Meantime, those in the ballpark, such as Unicredito Italiano and BNP Paribas, are focused on Continental Europe. That leaves the Americans. Citigroup and JP Morgan might like Barclays’ consumer finance businesses, but would struggle to integrate Barclays Capital, the corporate and investment bank that reaped a third of the company’s overall profits last year. “This would be a case of 1 plus 1 equals 1.2,” remarks an executive at one of the New York banks.
All roads, then, lead to Charlotte, North Carolina, headquarters of Bank of America. The institution run by Kenneth Lewis has been linked to a Barclays bid in the past. And the logic stacks up. The $230 billion bank is prevented from expanding its deposit base in the US by regulators. It’s pretty well tapped out its share of the domestic credit card business, too, after buying MBNA. Barclays would give it a top position in both the UK, from which the two could extract cost savings, and toeholds in Spain, South Africa and elsewhere.
Moreover, BofA’s attempts to create a world-class investment bank have not panned out. Meantime, Bob Diamond has focused Barclays Capital on the global fixed-income markets to great advantage. BarCap’s revenues last year surged 39% and pretax profit ballooned by 55%. By contrast, BofA’s global and investment bank grew revenues and profits by 10% and 6%, respectively, in 2006. Given these successes, former Credit Suisse executive Diamond would be a natural to run the business.
But while the strategic fit looks good, what about the finances? Here, too, logic favours a deal. Slap a 30% premium on Barclays’ current stock price, and the bank would be worth £64billion. Since, Merrill Lynch estimates Barclays will earn £6.2billion in three years’ time, a takeover would generate a return on investment of near 10% for BofA. But vector in cost cuts of just a tenth of Barclays’ projected operating expenses, and the return reaches a hearty 12%. That’s reason enough for the folks at BofA’s Charlotte headquarters to be applying for their passports.