Cf report rbs


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Cf report rbs

  1. 1. Introduction Mergers and acquisitions (M&A) and corporate restructuring are a big part of the corporate finance world. Every day, Wall Street investment bankers arrange M&A transactions, which bring separate companies together to form larger ones. When they're not creating big companies from smaller ones, they are doing the reverse by breaking up companies through spin-offs, carve-outs or tracking stocks. Not surprisingly, these actions often make the news. Deals can be worth hundreds of millions, or even billions, of dollars. They can dictate the fortunes of the companies involved for years to come. Broader Scope of Leveraged buyout The Main Idea One plus one makes three: this equation is the special alchemy of a merger or an acquisition. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies - at least, that's the reasoning behind M&A. Synergy Synergy is the magic force that allows for enhanced cost efficiencies of the new business. Synergy takes the form of revenue enhancement and cost savings. By merging, the companies hope to benefit from the following: Staff reductions As every employee knows, mergers tend to mean job losses. Consider all the money saved from reducing the number of staff members from accounting, marketing and other departments. Job cuts will also include the former CEO, who typically leaves with a compensation package. Economies of scale Whether it's purchasing stationery or a new corporate IT system, a bigger company placing the orders can save more on costs. Mergers also translate into improved purchasing power to buy equipment or office supplies - when placing larger orders, companies have a greater ability to negotiate prices with their suppliers. Acquiring new technology To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge. Improved market reach and industry visibility Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies' marketing and distribution, giving them new sales opportunities. A merger can also improve a company's standing in the investment community: bigger firms often have an easier time raising capital than smaller ones.
  2. 2. Varieties of Mergers Here are a few types, distinguished by the relationship between the two companies that are merging: Horizontal merger Two companies that are in direct competition and share the same product lines and markets. Vertical merger A customer and company or a supplier and company. Think of a cone supplier merging with an ice cream maker. Market-extension merger Two companies that sell the same products in different markets. Product-extension merger Two companies selling different but related products in the same market. Conglomeration Two companies that have no common business areas. Leveraged Buyouts LBO is the generic term for the use of leverage to buy out a company. The buyer can be the current management, the employees or a private equity firm known as outsiders. Some leveraged buyouts occur in companies experiencing hard times and potentially facing bankruptcy. Common buy out Scenarios Positive and Negative Effects Leveraged buyouts can have positive and negative effects, depending on which side of the deal you are on. There are many scenarios driving a buyout, but four examples are the repackaging plan, the split-up, the portfolio plan and the savior plan will be discussed by us. The Repackaging Plan The repackaging plan usually involves a private equity company using leveraged loans from the outside to take a currently public company private by buying all of its outstanding stock. The buying firm's goal is to repackage the company and return it to the marketplace in an initial public offering (IPO). The acquiring firm holds the company for a few years to avoid the watchful eyes of shareholders. This allows the acquiring company to repackage the company behind closed doors, making adjustments here and there and dressing it up. Once the acquired company is dressed up, it is offered back to the market as an IPO. Those who stand to benefit from a deal like this are the original shareholders (if the offer price is greater than the market price), the company's employees (if the deal saves the company from failure), and the private equity firm that generates fees from the
  3. 3. day the buyout process starts and holds a portion of the stock until it goes public again. Unfortunately, if no major changes are made to the company, it's a zero-sum game and the new shareholders get the same financials the old company had. The Split-Up The underlying premise in this plan is that the company, as it stands, is worth more when broken up or with its parts valued separately. This is fairly common with conglomerates that have acquired various businesses in relatively unrelated industries over many years. The buyer is an outsider and may use aggressive tactics. If successful, the company is dismantled after it is bought out and the parts are sold off to the highest bidder. This method is the most feared by employees and management as they know their jobs are just numbers on a page in this situation. These deals usually involve massive layoffs as part of the restructuring process. There will ultimately be two sides of the story, but the thought that any company could be taken out like this should inspire all levels of management to keep their companies as healthy as possible. The Portfolio Plan The portfolio plan has the potential to benefit all participants, including the buyer, the management and the employees. In a competitive marketplace, a company may use leverage to acquire one of its competitors (or any company where it could achieve synergies from the acquisition). The plan is risky: the company needs to make sure the return on its invested capital exceeds its cost to acquire, or the plan can backfire. If successful, all parties can benefit: the shareholders may receive a good price on their stock, current management can be retained and the company may prosper in its new, larger form. The Savior Plan The savior plan is often drawn up with good intentions, but frequently arrives too late. This scenario typically involves a plan involving management and employees to borrow money to save a failing company. The term "employee owned" often comes to mind after one of these deals goes through. While the concept is commendable, if the same management and tactics stay in place, the likelihood of success is low. On the other hand, if the company turns around after the buyout, everyone benefits. History Tracing back to history, merger and acquisitions have evolved in five stages and each of these are discussed here. As seen from past experience mergers and acquisitions are triggered by economic factors. The macroeconomic environment, which includes the growth in GDP, interest rates and monetary policies. First Wave Mergers The first wave mergers commenced from 1897 to 1904. During this phase merger occurred between companies, which enjoyed monopoly over their lines of production like railroads, electricity etc. the first wave mergers that occurred during the aforesaid time period were mostly horizontal mergers that took place between heavy manufacturing industries.
  4. 4. End of 1st Wave Merger Majority of the mergers that were conceived during the 1st phase ended in failure since they could not achieve the desired efficiency. The failure was fuelled by the slowdown of the economy in 1903 followed by the stock market crash of 1904. The legal framework was not supportive either. The Supreme Court passed the mandate that the anticompetitive mergers could be halted using the Sherman Act. Second Wave Mergers The second wave mergers that took place from 1916 to 1929 focused on the mergers between oligopolies, rather than monopolies as in the previous phase. The economic boom that followed the post World War I gave rise to these mergers. Technological developments like the development of railroads and transportation by motor vehicles provided the necessary infrastructure for such mergers or acquisitions to take place. The government policy encouraged firms to work in unison. This policy was implemented in the 1920s. The 2nd wave mergers that took place were mainly horizontal or conglomerate in nature. Te industries that went for merger during this phase were producers of primary metals, food products, petroleum products, transportation equipments and chemicals. The investments banks played a pivotal role in facilitating the mergers and acquisitions. End of 2nd Wave Mergers The 2nd wave mergers ended with the stock market crash in 1929 and the great depression. The tax relief that was provided inspired mergers in the 1940s. Third Wave Mergers The mergers that took place during this period (1965-69) were mainly conglomerate mergers. Mergers were inspired by high stock prices, interest rates and strict enforcement of antitrust laws. The bidder firms in the 3rd wave merger were smaller than the Target Firm. Mergers were financed from equities; the investment banks no longer played an important role. End of the 3rd Wave Merger The 3rd wave merger ended with the plan of the Attorney General to split conglomerates in 1968. It was also due to the poor performance of the conglomerates. Some mergers in the 1970s have set precedence. The most prominent ones were the INCO-ESB merger; United Technologies and OTIS Elevator Merger are the merger between Colt Industries and Garlock Industries. Fourth Wave Merger The 4th wave merger that started from 1981 and ended by 1989 was characterized by acquisition targets that wren much larger in size as compared to the 3rd wave mergers. Mergers took place between the oil and gas industries, pharmaceutical industries, banking and airline industries. Foreign takeovers became common with most of them being
  5. 5. hostile takeovers. The 4th Wave mergers ended with anti takeover laws, Financial Institutions Reform and the Gulf War. Fifth Wave Merger The 5th Wave Merger (1992-2000) was inspired by globalization, stock market boom and deregulation. The 5th Wave Merger took place mainly in the banking and telecommunications industries. They were mostly equity financed rather than debt financed. The mergers were driven long term rather than short term profit motives. The 5th Wave Merger ended with the burst in the stock market bubble. Hence we may conclude that the evolution of mergers and acquisitions has been long drawn. Many economic factors have contributed its development. There are several other factors that have impeded their growth. As long as economic units of production exist mergers and acquisitions would continue for an ever-expanding economy. History in Pakistan Pakistan and M&A M&A activity has grown in Pakistan in the recent years. The Competition (Merger Control) Regulations 2007 (the regulations) regulate the mergers and acquisitions in Pakistan. Horizontal Year Acquirer Acquired Merger or Acquisition 2008 NIB Bank ltd. PICIC Merger 2007 ABN AMRO Bank Ltd. Prime Bank Ltd. Acquisition 2007 LINK dot net WOL/DANCOM Acquisition 2007 Standard Charted Bank (Pak) Union Bank Ltd. Acquisition 2005 Itislat PTCL Acquisition Conglomerated Year Acquirer Acquired Merger or Acquisition 2007 Pak Suzuki Motor Company Suzuki Motorcycle Acquisition 2008 Fatima Group/Arif Group Pakarab Fertilizer Acquisition 2005 Ibrahim Group Alfalah Bank Ltd. Acquisition Vertical 2008 Dalda Foods Wazir Ali Industries Acquisition In Pakistan, banks have chosen to acquire / merge with other banks in order to comply with the statutory requirement of raising their paid up capital to at-least Rs.6 billion by the end of 2009. Although, some of the banks have tackled the requirement of capital adequacy by increasing their paid up capital, however M&A has become a
  6. 6. business reality in the country. This has involved merger of investments banks with their mainstream banks as well as acquisition of smaller banks by the larger banks. The privatization policy of the government has resulted in acquisitions of ABL, UBL and PTCL. Ratio Analysis Ratio Analysis of RBS 2004 2005 2006 2007 £(000) £(000) £(000) £(000) Assets 588,122 776,827 871,432 1,840,830 - - - - Equity 33,905 35,435 40,227 53,038 - - - - Debt 39,242 126,077 147,219 310,095 - - - - Current Assets 536,117 720,743 812,468 1,654,533 - - - - Current Liabilities 474,541 646,324 727,094 1,575,089 - - - - Fixed Assets 52,005 56,084 58,964 186,318 - - - - C.A- Inventory 4,409,915 4,783,035 5,674,074 4,005,769 - - - - No. of Shares 92,135 120,744 131,438 157,303 - - - - Sales(Interest Income) 16,632 21,331 24,688 32,252 COGS 6,505,262 10,572,634 11,212,111 14,531,477 - - - - G.Profit(int. income- int.exp) 9,071 9,918 10,596 12,069 - - - - Net Income 5,289 5,558 6,497 7,788 - - - - Total Liability 554,217 741,392 831,205 1,787,791 Years 2004 2005 2006 2007
  7. 7. Liquidity Ratio Current Ratio 1.13 1.12 1.12 1.05 Debt Ratio Debt to Equity 115.74% 355.80% 365.97% 584.67% Debt Ratio 94.24% 95.44% 95.38% 97.12% Common Equity Ratio 5.76% 4.56% 4.62% 2.88% C.L to Equity 14.00 18.24 18.07 29.70 Profitability Ratio Net Profit Margin 31.8% 26.1% 26.3% 24.1% Gross Profit Margin 54.5% 46.5% 42.9% 37.4% Return on Asset 0.9% 0.7% 0.7% 0.4% Return on Equity 15.6% 15.7% 16.2% 14.7% EPS - - 0.54 0.64 Activity Ratio Asset Turnover 0.03 0.03 0.03 0.02 Fixed Asset Turnover 3.13 2.63 2.39 5.78 Solvency Ratio Net Total Solvency Income Deprecation liabilities Ratio 2004 5289.00 1674.00 554217.00 1.26% 2005 5558.00 1825.00 741392.00 1.00% 2006 6497.00 1678.00 831205.00 0.98% 2007 7788.00 1932.00 1787791.00 0.54% 2008 (38344.00) 3154.00 2342773.00 -1.50%
  8. 8. Circumstances/Reasons for Acquisition of ABN Amro ABN AMRO had come to a crossroads in the beginning of 2007. The bank had still not come close to its own target of having an ROE that would put it among the top 5 of its peer group, a target that the CEO had set upon his appointment in 2000. From 2000 until 2006, ABN AMRO's stock price stagnated. Financial results in 2006 added to concerns about the bank's future. Operating expenses increased at a greater rate than operating revenue, and the efficiency ratio deteriorated further to 69.9%. Non-performing loans increased considerably year on year by 192%. Net profits were only boosted by sustained asset sales. ABN AMRO Financial Data Financial Data Years 2002 2003 2004 2005 2006 Sales net of interest €18.280mn €18.793mn €19.793mn €23.215mn €27.641mn EBITDA €4.719mn €5.848mn €6.104mn €6.705mn €6.360mn Net Result Share of the group €2.267mn €3.161mn €4.109mn €4.443mn €4.780mn Staff 105,000 105,439 105,918 98,080 135,378 On February 2007, the call came from the TCI hedge fund which asked the Chairman of the Supervisory Board to actively investigate a merger, acquisition or breakup of ABN AMRO, stating that the current stock price didn't reflect the true value of the underlying assets. TCI asked the chairman to put their request on the agenda of the annual shareholders' meeting of April 2007. Events accelerated when on March 20 the British bank Barclays and ABN AMRO both confirmed they were in exclusive talks about a possible merger. On March 28, ABN AMRO published the agenda for the shareholders' meeting of 2007. However, in April, another British bank, the Royal Bank of Scotland (RBS) contacted ABN AMRO to propose a deal in which a consortium of banks, including RBS, Belgium's Fortis, and Spain's Banco Santander would jointly bid for ABN AMRO and thereafter break up the different divisions of the company between them. According to the proposed deal, RBS would take over ABN's Chicago operations, LaSalle, and ABN's wholesale operations while Banco Santander would take the Brazilian and Italian operations and Fortis, the Dutch operations. On April 23 ABN AMRO and Barclays announced the proposed acquisition of ABN AMRO by Barclays. The deal was valued at €67 billion. Part of the deal was the sale of LaSalle Bank to Bank of America for €21 billion. After that the RBS-led consortium brought out their indicative offer, worth €72 billion, if ABN AMRO would abandon its sale of LaSalle Bank to Bank of America. During the shareholders' meeting the next day, a majority of about 68% of the shareholders voted in favor of the breakup as requested by TCI. Bank of America absorbed LaSalle effective October 1, 2007. On July 23 Barclays raised its offer for ABN AMRO to €67.5bn, after securing investments from the governments of China and Singapore, but it was still short of the RBS consortium's offer. Barclay's revised bid was worth €35.73 a share — 4.3% more
  9. 9. than its previous offer. The offer, which included 37% cash, remained below the €38.40- a-share offer made the week before by the RFS consortium. Their revised offer didn't include an offer for La Salle bank, since ABN AMRO could proceed with the sale of that subsidiary to Bank of America. RBS would now settle for ABN's investment-banking division and it’s Asian Network. On July 30 ABN AMRO withdrew its support for Barclays’ offer which was lower than the offer from the group led by RBS. While the Barclays offer matched ABN AMRO’s “strategic vision,” the board couldn’t recommend it from “a financial point of view.” The US$98.3bn bid from RBS, Fortis and Banco Santander was 9.8% higher than Barclays’ offer. Barclays Bank withdrew its bid for ABN AMRO in October, clearing the way for the RBS-led consortium's bid to go through On October 9, the RFS consortium led by Royal Bank of Scotland, bidding for control of ABN AMRO, formally declared victory after shareholders, representing 86% of the ABN AMRO’s shares, accepted the RFS group’s €72bn offer. Sources of Financing used for Acquisition of ABN Amro Forecasts for Acquisition RBS believed that this transaction would provide enhanced growth prospects and attractive financial returns. As a result of the transaction, RBS expected to deliver cost savings amounting to €1,237 million and net revenue benefits amounting to €481 million, by the end of 2010. The internal rate of return on the acquisition of the ABN AMRO Businesses was 15.5% post-tax, well above the Group’s hurdle rate of 12% post-tax. The acquisition was expected to deliver a after tax return on investment of 13.2% in 2010, and to increase Group adjusted earnings per share by 2.0% in 2009 and by 7.0`% in 2010 (which actually turned out to be negative 1.69). The acquisition of ABN AMRO gave RBS the ability to accelerate their existing strategies and growth outside the UK, particularly in rapidly expanding markets and increasing customer franchises. The integration would create synergies which were expected to total €2.3 billion, compared with the original estimate of €1.7 billion. Sources of Financing The offer, given by RBS Group of €71 billion included 37% cash, which would give €38.40-a-share to ABN share holders. RBS would acquire the investment banking business, commercial clients, the Asian units and any thing that was left of the LaSalle Bank (which was sold to Bank of America for 23billion) for a consideration of €27 billion. This was financed by Tier 1 capital. RBS’s Tier 1 capital ratio at 31 December 2007 was 7.3% and our total capital ratio 11.2%, which decreased considerably as compared to Tier 1 ratio 7.5% and Total capital ratio 11.5% of 2006. At the time of the bid for ABN AMRO RBS indicated their intention to rebuild their capital ratios. RBS thought that the improved financial returns
  10. 10. expected from the acquisition would help to accelerate rehabilitation of the Group’s capital ratio. Santander acquired the Italian and Brazilian units of ABN for a consideration of €20 billion (Santander sold the Italian units to the Italian bank, Monte Dei Paschi Di Siena, for €9 billion). Fortis acquired the Dutch divisions by paying €24 billion. The bank tapped shareholders for €13.4 billion (issued right shares) to pay for its €24 billion portion. This financing of €38-a-share offer, which included €35.60 in cash, to finance the purchase Fortis issued right shares, available to the existing shareholders at a discount, €15 per share. However, by June 2008, Fortis announced that an international financial crisis was coming and that it needed to fortify its capital by raising an additional € 8.3 billion. An extra 200 million shares were issued at €10. Critical Analysis RBS had debt equity ratio of 365.97% in 2006 which was higher then industry average of 276.03%. In 2007 and 2008 the ratio increases to 584.67% and 1733.24% respectively. Due to this high Debt equity ratio RBS financed the acquisition with equity.
  11. 11. References Journals The Economist Financial Times Wall Street Journal Yahoo Finance Investment Dealer’s Digest Websites Annual Reports of RBS 2006, 2007, 2008 Annual Reports of ABN AMRO 2006, 2007 Books Corporate Finance by Ross, Westersfield Principles of Corporate Finance by Brealey, Myers Fundamental of Financial Management by Eugene F Brighum, Houston