Worst M+A Deals in Banking History

Bankamerica/Countrywide Credit, Commerzbank/Dresdner Bank, Lloyds TSB/HBOS, RBS/ABN Amro....the list is long and the memories have begun to fade, but deals such as these should feature prominently in any business book or university class about 'Business Strategy' or 'M+A'. If all the high-powered executives at the helm of these institutions would have lived in the same spot one could have suspected that there was a suspicious substance in the local water supply that made them all lose their collective marbles while they were throwing away the wealth of their shareholders in an act of wanton destruction. And they cannot argue that they had not been warned. At the time the storm signs in the financial markets were clearly indicating force 12 on the Beaufort Scale. But while the damage has been done these deals should forever be a warning not to allow management - or deal-hungry investment bankers - to get into value-destructing transactions.

Oppenheim / Deutsche Bank - Haste makes Waste

While it may appear to be a cheap shot to criticise Deutsche Bank's takeover and rescue of Germany's venerable Sal. Oppenheim in the summer of 2009 one aspect of the transaction can definitely be described as representing poor management practice. As this report illustrates, the decision to bid for the bank was made with undue speed and it is clear that proper due diligence would not have been possible. Time may have been of the essence - it always is in rescue bids - but the bidder can only gain from any delay. If the situation the target finds himself in (Merrill Lynch, HBOS, Dresdner Bank) is really dire the value of the asset has only one way to go: Down. Managements of highly rated organisations such as Bankamerica, Deutsche Bank,  Lloyds TSB or Commerzbank should really be aware of this simple fact and all managements in all acquiring companies should never feel under time pressure (real or imagined) - as Terra Firma's Guy Hands found out to his cost when bidding for EMI.

Bank Austria pays for costly Kazakh mistake

We were concerned about the high price that BA paid for ATF Bank in 2007 and our worries about buying an emerging market bank were proven correct. Regulators in Almaty have asked BA to inject another Euro 198 million. The lesson should be clear: never buy such risky assets in a seller's market.

Raiffeisen buys 70 pct of Polbank - valuation more realistic than pre-crunch

News that the Austrian Raiffeisen International buys a 70 pct stake in the aptly named Polbank in Poland confirms that the market for banking assets in the emerging markets is still decoupled from the market valuations in many developed markets. The price paid to the former holder of the stake, the Greek Eurobank EFG, represents around 12.7 pct of Polbanks balance sheet of Euro 5.5 billion (per Sept 2010). This is a much less aggressive valuation than those seen applied to banks in Eastern Europe a few years ago but still puts a lot of hope into the possibilities of reaping economies of scale from merging the business with Raiffeisen's existing network in Poland.

Morgan Stanley may try to offload Hedge Fund stake - a warning

Rumors about Morgan Stanley's efforts to offload its stake in the hedge fund firm Frontpoint should be seen as a warning for potential investors in hedge fund businesses. Often these firms are dependent on one or a small handful of managers. If any troublesome news hits the business the value of the firm may evaporate very quickly. Potential acquisitions in the field should only be undertaken in an extremely cautious way and structured so that it is not just a win-win proposition for the selling insiders.

M+A: Success ratio lower than at Russian Roulette

The statement may seem to be a bit extreme but anyone contemplating a Merger or Acquisition would do well to keep this warning in mind. All too often senior management falls in love with an idea or is egged on by advisers who are paid on completion only and therefore have no real stake in the ultimate success of the transaction.

Deutsche Boerse: another Euro 450 mio written off on ISE

In 2007 the German Stock Exchange (Deutsche Boerse) acquired the International Stock Exchange ISE for more than Euro 2 billion. This write-off follows a provision of Euro 420 million in the last quarter of 2009. Acquisitions are minefields for the unwary and should only undertaken after careful analysis and after consulting advisers that give objective advice based on long financial and markets experience.

Deutsche Bank set to leave Postbank alone after merger

We were never sure if the frugal customers of Deutsche Postbank really will make a large impact on Deutsche Bank's profitability. The headline makes us wonder even more. What is the point of buying the bank when it will be managed with such a light touch?

Goldman to write down stake in CMC Markets

News that Goldma Sachs is to write down the value of its £140 million minority stake in CMC Markets is proof for the fact that even the most savvy acquirers sometimes succumb to hype and a good story. Over the years we have seen numerous instances when a gullible financial press has reported valuations of businesses about to be floated that were inspired more by the aspirations of the selling shareholders and their advisers rather than by thorough analysis of the underlying values of the business. Numerous academic studies have demonstrated that at best half of all acquisitions are successful and any firm contemplating strategic transactions would be well advised to consult advisers that are not driven by fees but have the interest of the client at heart.

Pitfalls of Acquisitions

The 2005 takeover of Eurohypo by Commerzbank is just another example in a long list of acquisitions that led to disastrous consequences for the acquiring party. While not many people could have predicted the Credit Crunch at that time it confirms the conclusion of many studies that say that at least half of all acquisitions are not successful. Utmost due diligence is therefore the order of the day when undertaking M+A projects. Unfortunately, too many deals are driven by egos - especially those of CEO's who brush aside all concerns - quite often even those voiced by their internal strategy and planning departments.

BBVA acquires 24.9 % stake in Turkey's Garanti Bank

While the price may appear to be high compared to still depressed share prices in most banks it is not a dramatic premium compared to prices paid for banks in emerging markets during the pre-crunch euphoria when they were way above intrinsic value.

JP Morgan to acquire Brazilian Hedge Fund

It is not necessarily a logical consequence that banks that now are required by regulators to scale down their proprietary activities have to compensate for this by buying into hedge funds. Hopefully they do so if they expect to make a profit out of their stakes. But apart from the hefty price tags hedge fund businesses still attract, we think that adding to in-house asset management offerings runs counter to the tendency towards using 'open architecture' in asset management - and in particular with respect to the product selection for a bank's high net-worth and other retail clients.

Abacus CDO Deal: Moral Equivalency

It is surprising how many commentators see nothing wrong with the Paulson/Goldman Sachs Abacus CDO deal. We admit to disagree. In our business that kind of behavior would mean that we try to place a candidate we know is to be dodgy or helping to sell a business that suffers from substantial deficiencies. Thanks to our loyal clients we are in the fortunate position not to be that desperate to make a buck!

Private Equity burns its fingers with BAWAG-PSK

News that the value of the stake in Austria's BAWAG-PSK bank that the private equity fund Cerberus bought in conjunction with an investor group may only be worth a quarter of the purchase price makes sobering reading. It demonstrates that overpriced acquisitions are not only the consequence of muddled thinking by the managements of established banks but can also lead the hard-nosed managers of private equity funds astray. While traditional managers are often seduced by the excitement of the hunt the fund managers may be pressurised by the need to put to work the money they have collected in the fund.   

Bawag - problems of Private Equity or Hedge Fund Control

The diffuse ownership structure of the Austrian BAWAG Bank - where an alternative fund management firm has orchestrated a buy-out consortium a few years ago - is an apt illustration of the problems created by allowing alternative asset managers to control banking institutions. Apart from the fact that the financing often is debt-heavy there is the potential risk that conflicts of interest are not controlled properly. The age-old temptation of using a banking institution to supply credit on easy terms to controlling shareholders is one of the key areas that banking regulators have to focus on. There is also a potential conflict of interest when other banks (Goldman Sachs, Lehman Brothers in this case) are shareholders in competing institutions.

Warren Buffett on foolish acquisitions

In his 2009 Letter to Shareholders the sage from Omaha says it better than we ever could: many acquisitions are value-destroying.

Overpaying for Acquisitions

We were quite staggered by the prices some Western Banks paid when they acquired banks in 'high growth potential markets' in Eastern Europe or other Emerging Markets. Case in point is Austria's Raiffeisen that supposedly paid nearly Euro 1 billion for Ukraine's Bank Aval in 2005. This represented nearly two thirds of Aval's balance sheet. Similarly high multiples were shelled out by other banks while we continuously advised that it would make more sense to plough the money into organic expansion. After all, the banks that were acquired were themselves only built up over a short time-span nor had they proven themselves through the business cycle.

BayernLB: State-owned Banks no solution

The sorry state of Bayern LB demonstrates that public ownership of banks is no solution to the problem posed by banking supervision. While a large part of the BLB's losses are due to the sub-prime credits generated in the US a not insignificant part is due to mistakes made by management - in particular the ill-fated acquisition of Hypo-Alpe-Adria just at the beginning of the Credit Crunch in Spring 2007.

Danger of trying to buy market share

A short press article ('As Merrill Lynch sputtered, it made a big bet on Brazil', Wall St Journal, 10 March 2009) reminded us of the danger of trying to buy market share in any business by throwing money at top people working for the competition.
Not only is it far from certain that the executives lured away will flourish in a different business culture at the new employer. If their recruitment can only be effected at high - or even exorbitant - compensation levels it may also be an indicator that the business one tries to enter has already reached a peak and may no longer offer the growth prospects one is looking for.
Selective hiring of top individuals at top compensation levels may be worthwhile in isolated cases. However, employers should take great care before committing themselves to a large financial outlay and conduct extra due diligence rather than getting carried away or 'falling in love' with prospective candidates.

Danger of trying to buy market share

A short press article ('As Merrill Lynch sputtered, it made a big bet on Brazil', Wall St Journal, 10 March 2009) reminded us of the danger of trying to buy market share in any business by throwing money at top people working for the competition. Not only is it far from certain that the executives lured away will flourish in a different business culture at the new employer. If their recruitment can only be effected at high - or even exorbitant - compensation levels it may also be an indicator that the business one tries to enter has already reached a peak and may no longer offer the growth prospects one is looking for.Selective hiring of top individuals at top compensation levels may be worthwhile in isolated cases. However, employers should take great care before committing themselves to a large financial outlay and conduct extra due diligence rather than getting carried away or 'falling in love' with prospective candidates.