Study of the key Mergers & Acquisitions of Banco Santande (2002-2010)
Mergers and acquisitions (M&A) play a vital role in the corporate finance world. For many companies, M & A is source of external growth when company organic growth has already reached at peak. Globalisation of the world economy allows company expanding their operations and also competes against the domestic players through mergers and acquisitions. This study highlights the success story of acquisition of UK bank “Abbey National” by Spanish Bank – “Banco Santander” in November 2004.This acquisition profoundly transformed the Group Santander’s business profile, provided the growth opportunity in most profitable & attractive market, diversified the risk and substantially increased the market capitalisation. This study examines the Santander strategic development post acquisition, impact on their financial performance & also their long term performance in stock market. This cross – border M & A has been very beneficial for the Santander. Santander continues to focus on delivering value for shareholders through organic growth and acquisitions. Analysis of the topic has been demonstrated by several examples. The data and the information source are publisher’s websites, literatures, news, and, various articles.
1. 0 INTRODUCTION
Privatisation and deregulation have brought substantial changes in the financial markets since the 1970s. In 1980 deregulation was encouraged in the EU which brought major structural change. Introduction of the single currency in Europe was example of further deregulation, which encouraged countries to open their markets to foreign competition.
Abbey National had gone through a big transformation in the last century from a building society, to successful bank and finally to a “bid” on the market. Abbey National was a well-established domestic name in the UK. It has been a successful business in the past.
Abbey National proceeded to expand through mergers and acquisition in order to maintain its market position, however, diversification of its core businesses and a lack of focus resulted in large losses for the group from year 2001 & had total loss of ?984million in 2003.
In 2001 the Lloyds TSB placed offer to takeover, which was likely to result in a large market share ownership within the UK by one bank. This was overturned by Competition Commission and the Office of Fair Trading as it was against the public interest. Santander realised Abbey National as a safe investment compared to its Latin American banks that have been losing money for the last two years. Moreover, this acquisition for Santander was a new interest in retail banking, which was Abbey National’s strength.
Abbey National plc and Banco Santander Central Hispano, SA reached an agreement on the terms of a recommended acquisition by Banco Santander of Abbey on 26 July 2004, which was formally approved by the courts and Abbey became part of Grupo Santander on 12 November 2004.
2.0 LITERATURE REVIEW
Mergers and acquisitions are source of external growth when organic growth is not possible. For smaller companies there is constant threat to their continued independent existence by the big player/competitor. The terms Mergers & takeover are synonymously used although there is narrow distinction between the two. Merger is reorganisation of assets into a new organisation having agreement of both their shareholders. Merger involves company of similar size which reduces the dominance of each other. A take over is acquisition of the ordinary shareholders capital by another company. This may be financed by cash payment, an issue of securities or a combination of both. In acquisition bidding company is larger and dominant than the target company.
Broadly takeovers can be classified into following three categories –
“Horizontal takeover” – Company operating in the same industry and similar stage of production
“Vertical takeover” – Operating at different stages production within the same industry. Vertical takeover may be a move forward in the production process to secure distribution outlet, or a move backward in the production process to secure the raw material supply.
“Conglomerate takeover”- Combining two companies operating in different area of business.
When there is international dimension involve it is called cross border acquisition.
Justification for acquisitions –
“Synergy” – “When assets and /or operations of two companies complement each other, so that sum of their combined output is more than individual some”.
“Economies of scale” – “Similar to above as the scale of operation is larger and better efficiencies/ output are experienced1.”
“Elimination of inefficient management” – “Acquisition helps replacing inefficient manager by efficient managers leading to deliver better performance and output1.”
“Entry to new markets” – “Entry to new geographical and business area right from scratch may not be an economical option so acquisition is chosen as efficient route to expansion.”
“To provide critical mass” – “Smaller companies experience lack of credibility because of their small size. Because of the increasing importance of R & D and brand investment, merging company’s pool resources to establish critical mass required to provide cash flows to finance such requirements1.”
“Means of providing growth” – When company finds organic growth difficult then this strategy will be a quick solution for providing growth.
“Market Power & share” – Horizontal acquisitions increases market share and earn monopoly profits, whereas vertical acquisition increase company power in raw material or distribution.
2. “Financial “
“Financial synergy” – If the cost of capital decreases as a direct result of acquisition. In conglomerate takeover because of lack of correlation between the cash flows of different companies reduces the volatility of cash flow. These results in reduced business risk and cost of capital may decreases.
“Target undervaluation” – “Target company’s shares are undervalued where capital markets are not efficient as a result company may be a bargain buys”.
“Tax consideration” – Tax exhausted company will be benefited with the acquisition of non tax exhausted company so that tax allowable benefits can be brought forward which may offset capital allowance & interest.
“Increasing earning per share” – “Earning per share increases if the bidding company has a higher price/earning ratio than its target company”.
3. “Managerial Motives” – This may also arise if managers are more concerned satisfying their own objective rather than with increasing the wealth of shareholders. Sometimes motives behind such acquisitions are to increase managers pay & power.
Factors influencing takeovers & trends are as follows –
(i)“Booming Stock exchange” – With the increase in share prices it attracts the bidding company to have acquisition of the target company.
(ii) Increase in company’s real liquidity and profitability encourages takeover.
(iii) Deregulation & external source of finance (debt) more & easily available in the market.
3.0 RECENT HISTORY –
3.1 Origins & Growth
The Abbey National Building Society was formed following the merger of two long standing building societies in 1944. During the period of 1970 and 1980 it gained reputation for innovation & changes. In 1988, Abbey National plc was incorporated as a bank and in 1989 the Society transferred business to Abbey National plc. September 11th attack in New York & Enron turned out in 2001 damaged confidence in various financial areas. From this point, Abbey struggled from financial losses and a tarnished image. In 2003, the brand name was shortened to Abbey. There was major reorganization of the bank in September 2003.
In 2004 it became a wholly owned subsidiary of Grupo Santander of Spain After two successive years of losses Abbey returned to profit in 2004 even though there was big cost of reorganization & post acquisition charges (?564 million). Abbey was renamed Santander UK in January 2010.
Table 1 – Grupo Santander’s Performance comparison in Year 2004 & 2005
Source – Santander Annual Report 2005 http://www.santandershareholder.com/financial-information/reports-and-publications/
Table 2- Abbey Full Year Results for the Year 2004 & 2005-
Source – Abbey 2005 Full Year Results – http://www.aboutsantander.co.uk/investors/financial-results-and-presentations/2005.aspx
3.2 Main economic and legal environments in main market –
There has been a good economic environment for business growth till 2007. Market was hit by deep recession in 2008 which continued till 2009. Year 2010 saw the recovery.
Table 3 – Main Economic highlights
3.3 Strategic developments (2002-2010)
Santander Consumer continued to develop its two-pronged growth strategy – organic and selective acquisitions – with excellent results. Banco Santander has expanded its operations aggressively with several acquisitions in the last decade.
Santander strategy is to follow the business model of proven success in European and Latin American countries, and was applied in Abbey.
The pillars of this model are –
Focus on retail banking
Prudence in risks
Balance sheet strength
Flexible style of management, which enables them take advantage of business opportunities
Adapt easily to the countries where they operate and to the changes and new challenges.
3.4 Business Opportunities
On 26 July 2004 “Banco Santander Central Hispano” announced the acquisition of “Abbey National plc”, the acquisition was formally approved by the courts on 12 November 2004.
In June 2006, “Banco Santander Central Hispano” purchased almost 20% of Sovereign Bank.
In May 2007 consortium “Banco Santander Central Hispano”, “Royal Bank of Scotland” and “Fortis” made an offer to takeover “ABN AMRO”.
In October 2007 acquired “ABN AMRO”. As part of the deal, “Grupo Santander” acquired “ABN AMRO’s” subsidiary in Brazil and its subsidiary in Italy.
On 13 August 2007, “Banco Santander Central Hispano” changed its legal name to “Banco Santander”. In November 2007, it sold Banca Antonveneta to Monte dei Paschi di Siena.
In March 2008, Banco Santander sold Interbanca, a subsidiary of Banca Antonveneta, to GE Commercial Finance
In July 2008 it intended to takeover the UK bank Alliance & Leicester, & the acquisition was completed in October 2008.This was followed by the acquisition of the savings business of UK bank Bradford & Bingley (B&B) in September 2008. The banks, along with Abbey, are to be merged together under the Santander name in the UK by the end of 2010
These acquisitions saw Santander managing diversified portfolio which reduced the risk and also provided a profitable growth to emerge as the largest financial in the world.
Santander’s continues to focus on the attraction, engagement, development, progression and retention of its senior leaders.
3.5 Long term performance in stock market –
Table 4- Stock market Key Performance for Santander 2002- 2010
The above table shows Santander Group robust performance in the last decade. Share prices had doubled prior to the 2008 when there was worldwide recession and stock prices tumbled down. Company has shown a great resilient performance and recovered slowly to a steady growth position.
Figure 1 – Share Prices of Banco Santander
Figure 2 – Market Capitalisation of Banco Santander
4.0 Empirical Supports
Table 5 – Key Ratios & Performance of Banco Santander
4.5.1 Liquidity ratio
Liquidity ratio shows company’s ability to repay short-term creditors out of its total cash. The liquidity ratio is the result of dividing the total cash by short-term borrowings.
Current ratio = Current Assets/Current liabilities
Figure 3 – Current Ratio of Banco Santander
4.5.2 Profitability ratio
These ratios express the company ability to generate earnings as compared to its expense. Various measures used in this analysis are Return on equity (ROE), return on capital employed (ROCE), and return on asset (ROA) .
184.108.40.206 Return on equity
Return on equity (ROE) – This measures rate of return on the ownership interest. It’s efficiency of generating profits from every units of shareholders equity. This is expressed as following formula –
ROE = Net profit after taxes/Average shareholders’ equity
Figure 4 – ROE of Banco Santander
220.127.116.11 Return on capital employed
This measure earning with capital invested in the company. This is expressed as ratio of earning before interest & taxes to the capital employed. Capital employed is represented as total asset less current liabilities or fixed asset plus working capital.
ROCE = Net profit after taxes/Capital Employed
Figure 5 – ROCE of Banco Santander
18.104.22.168 Return on Assets
This measures the profitability of company’s assets in generating revenue. This is ratio of Net Income to mode of total asset.
ROA = Net profit after taxes / Total Assets
Figure 6 – ROA of Banco Santander
22.214.171.124 Cost-Income ratio
This is measure of efficiency. This measure change of cost compare to income. It directly affects the profit margin. As the efficiency decreases means cost decreases or income increase or increase in cost is less compared to income. This results in improved margin.
Figure 7 – Efficiency of Banco Santander
4.5.3 Investment valuation ratios
Investment ratio is measure of returns in future. This is an anticipated value/Forecast on the investment.
126.96.36.199 Dividend payout ratio (DPR)
This ratio measures the percentage of earnings (net income) per common share allocated to paying cash dividends to shareholders. Dividend payout ratio is indicates the earnings of dividend by every share against the earning per share.
DPR= Dividends per common share/Earnings per share.
Figure 8 – DPR of Banco Santander-
188.8.131.52 Earnings per share (EPS)
This express part of a company’s profit allocated to each outstanding ordinary share. Earning Per Share is a measure/tool used by investors to asses profitability based on the number of shares they hold/own.
EPS = (Net Income – Dividends on preferred stocks)/Average outstanding ordinary shares
Figure 9 – EPS of Banco Santander
In this study the research has been carried out on the M & A in general and role of M & A on the financial performance of Banco Santander in particular. Deregulation of having single currency Europe wide & globalisation opened the market for foreign companies to expand their operation & compete against domestic players. This acquisition is a case of cross- border where Santander got opportunity of acquiring diversified portfolio which reduced risk in their business.
Ratios such as Liquidity, Profitability, Investors, Gearing & Returns have been considered pre & post acquisition for analysis in order to understand the financial performance of the bank in the last decade. Santander continued to grow organically and also followed very aggressive cross border acquisitions as a strategy. Santander has shown a very robust performance post acquisition. In 2005 after acquisition of Abbey Santander profits soar & group shown 35% rise in profit during the first six months. Overall rise was 44% in the year. Santander continued acquisitions and business growth has been significant year on year basis. Santander performance has been resilient during recession and shown great recovery in 2010. Assets, Market Capitalisation, Profits, Earning Per Share has shown significant growth in the last ten year. High profitability led Santander to pay high dividend to share holders. Santander continues to focus on shareholder values and paid big returns to share holder’s money. Santander emerged as world’s biggest financial group in a decade.
Watson, D. & Head, A (2010) Corporate Finance: Principles & Practices,
Abbey National (2004) “History” According to http://www.aboutabbey.com
Abbey National (2004) “Annual Report” According to www.abbeynational.co.uk
BBC News (2001) “A battle for Abbey National” According to http://news.bbc.co.uk/1/hi/business/1170339.stm
BBC News (2003) “Abbey National slumps into losses” According to http://news.bbc.co.uk/2/hi/business/2799905.stm
Forbes (2004) “Abbey National Shareholders OK Takeover” According to www.forbes.com
Taylor. G (2003) “UK Building Society demutualization motives” Business Ethics, Volume 12 Issue 4 Page 394
Webster. J (2001) “Final Thematic Report – Retail Financial Services” According to www.tcd.ie/erc/Servemploi/reportspdf/FinalThRep/sevthrefiancial.PDF 5th Edition, Harlow: Prentice Hall