Absa Acquisition By Barclays Review

Name: Ngoni Michael Chifamba
E - Portfolio for Module code: PASMO2K
Semester Code: 01
Assignment number: 03
Student number: 77845595

Table of Contents
E - Portfolio for Module code: PASMO2K ..........................................................................................1
Evidence of participation 1........................................................................................................................3
Evidence of participation 5....................................................................................................................8
PART 2: STRATEGIC DECISION PORTFOLIO: Your individual integrated portfolio. This is a
comprehensive report on various aspects pertaining to strategic decision made by Barclays to
buy Absa................................................................................................................................................10
2.1. Introduction....................................................................................................................................10
2.1.1. Motives for Barclays acquiring Absa......................................................................................10
a. Mode of market entry – Barclays chose to acquire Absa in order to avoid excessive setup
costs of infrastructure and marketing their brand from the ground. The banking fraternity is
always revolving with new product innovation and acquiring an established brand was the
only financially logic decision. ............................................................................................................10
2.1.2. SWOT Analysis .........................................................................................................................11
2.2. Appropriateness of an acquisition as a strategic decision .....................................................11
Rationale for acquisition..........................................................................................................................11
2.2.1. Decision making trees ..................................................................................................................12
2.2.2. TOWS Matrix .................................................................................................................................12
2.2.3. What if analysis .............................................................................................................................13
2.3. Feasibility of chosen strategy .....................................................................................................14
2.3.1. Cash flow analysis ........................................................................................................................15
2.3.1.2. Operating cash flow ratio..........................................................................................................15
2.3.2. Break even analysis......................................................................................................................15
2.3.3. Resource deployment analysis...................................................................................................16
2.4. Acceptability of strategy chosen.................................................................................................16
2.4.1.1 Financial Analysis ...................................................................................................................17
2.4.1.1.2. Cost to income ratio ...............................................................................................................17
2.4.1.1.3. Productivity ratio .................................................................................................................17
2.4.1.2. Price earnings ratio................................................................................................................18
2.4.2. Risk..............................................................................................................................................18

2.4.2.1 Evaluating non-financial risk factors ....................................................................................18
2.4.2.2 Evaluating financial risk factors ............................................................................................19
2.4.3. Shareholder reactions ..............................................................................................................19
2.4.3.1. Shareholder mapping............................................................................................................20
2.5. Considering your findings from your assignments, indicate what you would have done
differently (20%) ...................................................................................................................................22
Question 3.1. Personal Reflection: A one page reflection on what you have learnt from a
personal perspective (not based on the course content) from this process ...............................23
3.2. You also need to indicate how you would apply your newly acquired academic knowledge
in your work context.............................................................................................................................23
Resources .............................................................................................................................................24
Evidence of participation 1
S M RAMONETHA
I'm struggling to understand
How does the merging or acquiring of a business work? In a case where the two
companies still use both of their names. (2013-04-11 11:04)
S J SHORT Hi Guys good answers
i have been struggling to understand the merger between ABSA and Barclays too in
terms of branding but the brand power of each company is relative to the specific
country.
Within South Africa ABSA has a strong brand loyalty and customer base, but outside
of South Africa (the rest of Africa) Barclays has the strong brand power thus
Barclays has to use the correct timing and strategy in order to build brand loyalty in
South africa. if one looks at Advertising alone i the television and radio media, you
used to see "ABSA part of the Barclays group" but little by little it has changed to
"Barclays ABSA" without us picking is up. The best example of this it the PSL
branding.
Good marketing and timing i must say.
(2013-05-13 09:50)
N XOZA Acquisitions often create brand problems, beginning with what to call the company
after the transaction and going down into detail about what to do about overlapping
and competing product brands. Decisions about what brand equity to write off are
not insignificant. And, given the ability for the right brand choices to drive preference
and earn a price premium, the future success of a merger or acquisition depends on

making wise brand choices. The merged companies decide on which strategy of
branding to use depending on their objectives.
These are the following branding strategies to choose from:
eep one name and discontinue the other. The strongest legacy brand with the best
prospects for the future lives on.
eep one name and demote the other. The strongest name becomes the company
name and the weaker one is demoted to a divisional brand or product brand.
eep both names and use them together. Some companies try to please everyone and
keep the value of both brands by using them together.
Discard both legacy names and adopt a totally new one.
Keeping both names and use them together is one of the best choices as it give
Some companies such as Pricewaterhouse Coopers, Absa Barclays a capability to
please everyone and keep the value of both brands by using them together. It is
often chosen as the best strategy if those involved with the deal are keen to
continue to promote their merger as a positive move for customers and the market in
general. Most merged companies have sat happily with customers and these joint
brands have now created personalities in their own right. The Value Implications of
Corporate Branding and Mergers found that branding strategies that ensure
elements of both brands are included in the merged brand generate more positive
investor responses both immediately after the merger and three years down the line.
In conclusion, the impact of keeping of both brands should not be underestimated.
Indeed, with customer retention being central to the success of a deal, branding
needs to be a priority consideration when deciding which firms to target and which to
leave well alone .on the other side compatibility is a vital consideration as each
brand has its own identity and values. If these values are too different from one
another, keeping both names may not work
(2013-05-10 13:09)
N NCUBE Hi all
my understanding from the discussion below, it means that organizations that go
into a merger or acquisition do so to enjoy the business strengths of the each other.
Barclays and Absa went into this merger to enjoy the strengths offered by each
business but still wanted to maintain their identity.
Could Brand reputation be one of the reasons why companies never change their
names when they merge?
(2013-05-10 13:04)
S M RAMONETHA Hi,
Thank you very much for clarifying me, now I understand and I can be able to
explain to someone.
Thank you (2013-05-08 15:58)

N M CHIFAMBA Hey everyone,
This is an interesting point. Barclays acquiring Absa and letting them trade under
their existing name. Barclays is a major shareholder and as such is now a parent
company. Therefore Absa becomes a subsidiary of Barclays. As already illustrated,
name change was not necessitated due to the Absa brand which in itself carries a
net present value of future potential revenue generated from customer loyalty and its
big customer base. Remember that rebranding also has a cost implication. Consider
Absa's branch and ATM distribution footprint. The deal was more for both banks to
enjoy each other’s strengths. Barclays was interested in Absa's infrastructure in
South Africa and its market position in retail banking while Absa also wanted a stake
in Barclays; African operations and thereby diversifying its investment portfolio.
(2013-05-08 06:37)
Author Message
N M CHIFAMBA
Good afternoon all,
What are your views on strategic management being a responsibility of line
management in terms of implementation against the reality of line managers slaving
away to operational demands and leaving organizations to outsource specialists? a
citation from Johnson etal for consideration;
"The result can be that strategic planning becomes an intellectual exercise removed
from the reality of operations"
Looking at the logistics industry i am in, i agree with the notion and i hope this
course will help me get a thought dimension shift. The results should be lucrative!
(2013-03-06 13:44)
S J SHORT Hi All,
I agree with Ramonetha that strategy needs to communicated better with employees
throughout the business but i have a question... What level of strategic
understanding would lower level employees have? Would it really have a positive
impact on the business or is it a more complex thing to gain understanding of?
Will the cleaner really understand how her keeping the office clean gives a good
impressing to customers and suppliers and the general wellbeing of the work
environment when she is the least paid and her worth is not really felt?
(2013-05-13 09:44)
S ABDUL Strategic planning needs to involve parties from different levels of management as
well as outside. In order to make an effective strategic decision, the strategic
gathering of information is vital, whether of the external or internal environment. In
order to do this, input is required on different levels. (2013-05-08 21:02)

D K BOTLHOKO Strategic management is the core responsibility of executive management. They
have to ensure its formulation and implementation by operational managers, who in
turn has to roll it to the production core so that they are conversant with the strategy
of the organisation and their role towards the success of that particular strategy, thus
"putting people at the centre of the strategy". (2013-04-28 20:32)
J A LUSENGA Hi colleagues,
After being away with work related matters, I am reading with interest on the
discussion on who is responsilbel for strtategy formulation and execution and my
take on the subject is that for bettter/sound and realistic strategy formulation and
execution, all managers at different level must be responsible because I don't
believe that strategy formuyaltion and execution should be monoplise by few within
the organisation whether in public or private sector,lastly Wonder was busy
coordinating the group discussion for those in Pretoria, any develomenmt since I
was away for two weeks but I did manage to submit my assignments on time despite
work pressure beyond my shoulder.
Regards
Jabu (2013-03-20 09:10)
Author Message
F
MACHEKANYANGA
The challenge of complexity of strategic decision making in a rapidly changing
business environment, for an organisation with relatively longer strategy life cycles.
What models should we use? How effective are contigency models and scenario
models under these conditions? (2013-02-10 21:14)
S ABDUL A decision tree could be used to gauge the appropriateness of various strategies.
The tree allows the orgnisation to make an initial strategy and analyse a range of
happenings which might occur and what actions are necessary to adapt.
Contingency tools and scenario planning tools are vital for forward planning,
espcially in environments where changes are frequencty occuring. It allows the
organisation to effectively evaluate it's current environment, future risks and further
allow quick decision making to stay on course.
(2013-05-08 21:10)
D K BOTLHOKO Hi all. My name is Kenny Botlhoko. I watched the video of Sheena Iyengar, the
Psycho-economist. She studies how people choose and what makes us think we are
good at it. Life is all about choices. The fact of the matter is what type of decision or
choice are we making, who will be affected by it and how, and what is the impact or
consequence of taking such a decision. Sheena Iyengar looks deeply at choosing
and has discovered many surprising things about it. For instance, her famous "jam

study", done while she was a graduate student, quantified a counterintuitive truth
about decision-making - that when we are presented with too many choices, like 24
varieties of jam, we tend not to choose anything at all. (2013-04-26 07:33)
N M CHIFAMBA Hi F Machekanyanga
For further reading on this consider Mintzberg and Walter's deliberate and emergent
strategies, and perhaps Johnson's cultural web. (2013-03-11 21:10)
Author Message
F MACHEKANYANGA
In coming up with a decision after evaluating strategic options, managers may
use their own judgement.
What tools and techniques can we use to instil objectivity and eliminate
negative subjectivity in decision making under situation?
(2013-03-23 07:27)
D K BOTLHOKO
Louw and Venter (2010:20) states that the success of an organisation is mainly
determined by the effectiveness (doing the right things) and efficiency (doing
things right) of its management. Management is responsible for evaluating the
appropriateness of emergent unplanned strategies. This is done by comparing
the emergent strategy with the organisation' s external environment and internal
resources and capabilities to assess whether there is a strategic link between
them, and whether there is alignment with the organisational purpose. (2013-
04-28 20:57)
N M CHIFAMBA
Greetings to the forum.
What i have realized as both a student and career person that there is always a
need to reconcile the textbook principles and the practical situations. Senior
managers utilize tools almost in a reflex action like manner. When formulating
strategy (intended) they will employ a few textbook principles as this is done in
an 'armchair perspective'. But from evaluating strategic options a senior
manager may also consider opportunity cost and therefore do a brief cost
benefit analysis to reach his own quick judgement before really breaking down
the options into models and mathematical tools. This formulates part of a senior
manager's business acumen. Before drilling the numbers they should be able to
employ logical thinking to establish if the option is viable or worth looking into.
(2013-04-23 17:03)
S ABDUL
Managers would need to consider the following; appropriateness, feasibility and
desirability of strategy. Under appropriateness they may also use the SWOT
matrix ordecision tree. (2013-04-14 09:29)
L JAMES I agree that a cost benefit analysis may be relevant but will this be applicable to

environments that are continuosly changing?
(2013-04-11 12:33)
W I NDLOVU
Colleagues, I agree managers can use their judgement, yet it depends on what
is the company long-term vision and teh addressable market for product drive
business. What are the numbers saying in terms directing the organazation
resources( cost benefits) and where to focus.
Often you find other business are cost effective to do business it but where you
consider market share and revenue it is low. A product driven business (i.e.
managers) will consider all the tools to understand market growth rate and
market share in conjuction to cost benefit analysis. (2013-04-11 10:34)
Z S MATSHAYA
i agree with Chifamba, cost benefit is more important as no one would wanto to
lose. (2013-04-10 11:29)
N M CHIFAMBA
One of the most prominant models is to do a cost benefit analysis based on
your organisational resources and srategic capabilities. It simplifies any
complex decision by weighing both sides of the coin and ultimately choosing the
more prominant so to say.
(2013-04-05 14:52)
Author Message
S M RAMONETHA I'm struggling to understand
How does the merging or acquiring of a business work? In a case where the two
companies still use both of their names. (2013-04-11 11:04)
N M CHIFAMBA hi Guys, I have just observed that acquisition and merger are being used
interchangeably in most of our forums. It is wise to take note of the below. The two
are not the same thing yet very similar.
Johnson et al. defines "An acquisition is where an organization takes ownership of
another organisation". Barclays bought 60+ percent of Absa's shares which is in
actual fact acquiring as their big stake gives them great voting and influence rights.
A Merger on the other hand, "a mutually agreed decision for joint ownership
between organisations".
Johnson, G, Whittington, R & Scholes, K. 2011. Exploring strategy: text & cases.
Ninth Edition
(2013-05-23 19:12)

S J SHORT Hi Guys good answers
i have been struggling to understand the merger between ABSA and Barclays too in
terms of branding but the brand power of each company is relative to the specific
country.
Within South Africa ABSA has a strong brand loyalty and customer base, but
outside of South Africa (the rest of Africa) Barclays has the strong brand power thus
Barclays has to use the correct timing and strategy in order to build brand loyalty in
South africa. if one looks at Advertising alone i the television and radio media, you
used to see "ABSA part of the Barclays group" but little by little it has changed to
"Barclays ABSA" without us picking is up. The best example of this it the PSL
branding.
Good marketing and timing i must say.
(2013-05-13 09:50)
N XOZA Acquisitions often create brand problems, beginning with what to call the company
after the transaction and going down into detail about what to do about overlapping
and competing product brands. Decisions about what brand equity to write off are
not insignificant. And, given the ability for the right brand choices to drive preference
and earn a price premium, the future success of a merger or acquisition depends on
making wise brand choices. The merged companies decide on which strategy of
branding to use depending on their objectives.
These are the following branding strategies to choose from:
Keep one name and discontinue the other. The strongest legacy brand with the
best prospects for the future lives on.
Keep one name and demote the other. The strongest name becomes the
company name and the weaker one is demoted to a divisional brand or product
brand.
Keep both names and use them together. Some companies try to please
everyone and keep the value of both brands by using them together.
Discard both legacy names and adopt a totally new one.
Keeping both names and use them together is one of the best choices as it give
Some companies such as Pricewaterhouse Coopers, Absa Barclays a capability to
please everyone and keep the value of both brands by using them together. It is
often chosen as the best strategy if those involved with the deal are keen to
continue to promote their merger as a positive move for customers and the market
in general. Most merged companies have sat happily with customers and these joint
brands have now created personalities in their own right. The Value Implications of
Corporate Branding and Mergers found that branding strategies that ensure
elements of both brands are included in the merged brand generate more positive
investor responses both immediately after the merger and three years down the
line.

In conclusion, the impact of keeping of both brands should not be underestimated.
Indeed, with customer retention being central to the success of a deal, branding
needs to be a priority consideration when deciding which firms to target and which
to leave well alone .on the other side compatibility is a vital consideration as each
brand has its own identity and values. If these values are too different from one
another, keeping both names may not work
(2013-05-10 13:09)
PART 2: STRATEGIC DECISION PORTFOLIO: Your individual integrated portfolio.
This is a comprehensive report on various aspects pertaining to strategic
decision made by Barclays to buy Absa.
2.1. Introduction
Barclays chose to acquire Absa as a mode of entry into South Africa because of Absa’s market
position within the banking fraternity and also due to the host economy being a support structure
of the SADC. Johnson et al. (2011) defines an acquisition as “… where an organization takes
ownership of another organization”.
2.1.1. Motives for Barclays acquiring Absa
a. Mode of market entry – Barclays chose to acquire Absa in order to avoid excessive
setup costs of infrastructure and marketing their brand from the ground. The banking
fraternity is always revolving with new product innovation and acquiring an established
brand was the only financially logic decision.
b. Stabilize other regional volatile business operations – Barclay’s other operations
especially within Southern Africa had absorbed a lot of economic fatal blows due to
ailing economies and souring political trade relations. This meant dealing in volatile
fluctuations in currency strength. Such units are those in Zimbabwe and Botswana which
were contributing either no profits or marginally breaking even. South Africa therefore
was a good host to stabilize these units through relocating AME headquarters and
actively managing risk from Johannesburg.
Johnson et al. (2011) identifies “three key success criteria which can be used to assess the
Viability of strategic options” as appropriateness, feasibility and acceptability. The three will form
the basis of this portfolio alongside with the SWOT analysis below. The SWOT analysis
“identifies options that address a different combination of the strengths, weaknesses,
Opportunities, and threats”. (Louw and Venter, 2010). The SWOT analysis can be arranged to

four quadrants which then form the basis of the TOWS matrix which will be discussed further in
2.2.1.
2.1.2. SWOT Analysis
A SWOT analysis suggests that firms using their internal strengths in exploiting environmental
opportunities and neutralizing environmental threats, while avoiding internal weakness, are
more likely to gain competitive advantages than other kinds of firms (Jay, Hesterly 2007).
2.2. Appropriateness of an acquisition as a strategic decision
Johnson et al. concluded that suitability measured the extent to which a strategy option would fit
key drivers and expected changes in the environment. An acquisition addressed the following
questions in the context of Barclays acquiring Absa;
Rationale for acquisition
a. Does an acquisition as a strategy of a powerhouse like Absa exploit the opportunities in
the market environment such as Absa’s existing client base, South Africa being an upper

middle economy (www.data.worldbank.org) with diversified economic sectors such as
agriculture mining energy etc.?
b. Does an acquisition as a selected strategy address threats involved in the banking
sector like heavy entrance legislative regulations from the Reserve bank, market entry
into an established sector against banks with firm roots and exposure to sector and
social issues such as inequality programs by the government to address wealth
redistribution as well as alleviate unemployment by meddling/governing private
institutions through taxes and levies.
c. Will acquiring Absa capitalize on Barclays’ strengths such as its global outreach, its vast
experience from operating in more than 50 countries since 1690. Barclays acquiring
Absa would also mean leveraging its Barclays card to the South African economy which
opens a gateway of convenience for the social and business travelers to access hard
currency abroad from their Barclays master card.
To be able to understand and critically evaluate the suitability of an acquisition as a strategy
choice we need to review the Macro environment and the micro environment. Such
mechanisms as the TOWS matrix, Decision making trees and ranking strategic choices maybe
utilized to evaluate how suitable the strategy is to ensure macro environmental concerns are
addressed and the internal strengths are harnessed and used to the organization’s advantage.
2.2.1. Decision making trees
Decision Trees are an excellent tool for helping in choosing between several courses of action.
They provide a highly effective structure within which you can lay out options and investigate the
possible outcomes of choosing those options. They also help you to form a balanced picture of
the risks and rewards associated with each possible course of action.
2.2.2. TOWS Matrix
The TOWS matrix enhances deploying strategies considering the relations between Strengths,
Weakness, Opportunities, and Threats as in SWOT analysis. The consequences of the internal
and external factors can be replaced in a matrix as illustrated below.
Barclays and Absa's environment consists of three known factors, thus the internal direct action
environment such as staff (or internal customers), office technology, wages, finance, etc., the
micro direct action environment such as the external customers, agents, distributors, suppliers,
competitors, etc. and the macro (external) indirect action environment, which involves Political
(legal) forces, Economic forces, Social-cultural force and Technological forces. The Tows matrix
brings all these factors into one quadrant. The TOWS matrix helps to identify systematically
relationships between threats, opportunities, weaknesses and strengths, and offers a structure
for generating strategies on the basis of these relationships (Weihrich 1982).

TOWS Matrix
From the TOWS matrix above, Barclay’s chosen strategy is based on quadrant one in green
which ensures they maximize on their strengths in order to exploit opportunities in the market. In
this case the most suitable strategy is to acquire an established brand to maximize on its
strengths and opportunities such as product packaging capabilities to capture a market gap in
capital markets and Bancassuarance based on the retail banking clientele through product
education and promotion.
2.2.3. What if analysis
What-if analysis helps answer the “How do we get there?” question and assist management to
formulate strategies to achieve business targets and avoid the default ‘hit & miss’ approach.
Understanding the sensitivity and impact of key drivers on performance improves the
management’s ability to forecast future financial performance. Barclays had set itself a
challenge of growing the business sustainably by 20% per annum after acquiring Absa. A

sensitivity allowance model would test how other factors which may affect this goal would
impact the investment if they indeed do happen such as a decline in sales/ or decline in demand
of products offered by clients due to the acquisition. Bearing in mind that acquisition do not
always gain favour in host economy before gaining full momentum in operations and tangible
benefits start to be realized.
There are always variables that are uncertain, such as future tax rates, interest rates, inflation
rates, foreign currency exchange rates, headcount, operating expenses and other variables may
not be known with great precision. Sensitivity analysis assists with addressing the issue of "what
if these variables deviate from expectations, what will the effect be and which variables are
causing it? “For example, if the Barclays AME operations are worth R1 trillion after the
acquisition of Absa, top management have set a target of a 20% annual growth ceteris paribus,
which is never the case due to other macro-economic factors such ecological deviations in
weather patterns which may affect agricultural sector which is a strong pillar in contributions
towards GDP in exports, thus affecting currency exchange rates and inflation which in turn
affects spending habits of consumers which Barclays/Absa serve both in South Africa and
regionally as SADC economies’ performance is aligned to South Africa’s economy. Sensitivity or
what if analysis sets to test how these deviations in the constants can affect overall goal of the
acquisition which is to attain a sustainable 20% growth annually;
2.3. Feasibility of chosen strategy
Johnson et al. (2011) Feasibility is concerned with whether a strategy could work in practice;
therefore, whether it has the capabilities to deliver a strategy. At this phase we consider if the

firm’s resources and its capabilities can meet the strategy chose. Resources include funding,
people, time and information.
2.3.1. Cash flow analysis
Cash flow analysis focuses on the cash being generated in terms of how much is being
generated and the safety net that it provides to Barclays. These ratios can give management
another look at the financial health and performance of Barclays after the acquisition in order to
determine the feasibility of the acquisition.
2.3.1.2. Operating cash flow ratio
Operating cash flow ratio, expressed as a percentage, compares a company's operating cash
flow to its net sales or revenues, which gives investors an idea of the company's ability to turn
sales into cash.
= 83.1% for FY2004
Source: Barclays Africa Information Memorandum V25 October 2004, in Barclays Africa: A Business
Overview’, Barclays Presentation, February 2005.
The percentage shows that before costs, Barclays would generate a healthy operating cash flow
ratio. It is important to note that this ratio though a good indicator for making strategic decision
has a weakness of actually converting sales to cash as debtors can default or pay late which
means Barclays/Absa will not have cash to meet its own financial obligations such as salaries or
paying suppliers.
2.3.2. Break even analysis
A firm may perform a break-even analysis to determine if a strategy is feasible. The break-even
point (BEP) is the point at which costs or expenses and revenue are equal: there is no net loss
or gain, so one has "broken even." (https://www.boundless.com/management/strategic-
management/strategic-management/making-strategy-effective/).
Operating cash flow ratio = £250,000,000.00
$301,000,000.00
= 0.830564784

The breakeven analysis will assist Barclays in accessing if they can operate profitably without
altering or reviewing their variable costs. Variable costs are expenses that change in proportion
to the activity of a business. (Garrison et al, 2011). Barclays setup the headquarters in Africa
and appointed Absa’s senior management along with a few expatriates to run the operations
from Johannesburg and reduced the travelling costs and allowances. Communication with
EXCO was setup in such a way that each visit was not just for formal business but to address
employees and oversee operations.
2.3.3. Resource deployment analysis
Resources are defined as “assets, skills and capabilities of an organization which they have
control over” (Louw et al. 2010). Resources are the inputs that a firm utilizes in its production
process and these can be tangible or intangible. They encompass financial resources, physical
resources, human resources, reputation and brand power to mention a few.
2.4. Acceptability of strategy chosen
Acceptability is concerned with the expected performance outcomes of a strategy. Johnson et al
(2011). The sub categories measuring are risk, return and stakeholder reaction. Risk is defined
as “the possibility that a company will have lower than anticipated profits, or that it will
experience a loss rather than a profit.” (Investopedia dictionary). Therefore an assessment of
the risk of deciding to adopt this strategy is evaluated through investment appraisals. Return is
concerned with the benefits which shareholders are to get from adopting a certain strategy.
Financial calculations are used to measure return. Last but not least, Stakeholder reactions
measures the likely reaction of those involved in the company’s reaction to the new strategy e.g.
shareholders employees government etc.
2.4.1. Return

Returns are the benefits which stakeholders are expected to receive from a strategy. Johnson et
al (2011). Stakeholders are the entities who are affected by the operations of Barclays in the
acquisition of Absa such as the shareholders, the employees, the government and the South
African community at large. We therefore deduce that return will not only be measured in
financial terms, they are also non-financial factors to be considered in evaluating the
acceptability of the strategy.
2.4.1.1 Financial Analysis
Financial analysis refers to an assessment of the viability, stability and profitability of a business.
This information is drawn from the accounting statements of the company, in order for as one of
their bases in making business decisions.
2.4.1.1.2. Cost to income ratio
It is a key financial measure, particularly used to measure banks by showing their costs in
relation to their income. This ratio gives insight into how the firm is being run. Barclays before
acquiring Absa had a 54% cost to income ratio in 2004 (see table below), it had improved as the
bank had reduced costs by taking the back offices out of the various branches and putting them
into one place, as well as by standardizing its products and processes. The cost to income ratio
is a good indicator how costs are being managed against what the bank is actually making. So
an acquisition to support the declining cost to income ratio was in order to support the ailing
operation
2.4.1.1.3. Productivity ratio
PRODUCTIVITY RATIO is the ratio of outputs to inputs. The closer the ratio is to 1.0, the higher
the productivity; the closer the ratio is to 0.0, the lower the productivity. Productivity is important
because it relates to an organizations ability to compete, and to the overall wealth and standard
of living of a nation. Productivity is affected by work methods, capital, quality, technology, and
management. (Accounting dictionary, 2010). Barclay’s productivity ratio before acquiring Absa
was 51%, which translates to 1:0.51 which is above the break-even point. To accumulate more

momentum, Barclays had to move its headquarters from Dubai to Africa were the action was.
Absa therefore is a feasible choice as it has the pinnacles that best align with Barclay’s product
offering, and hence the acquisition being a viable option.
2.4.1.2. Price earnings ratio
The price-to-earnings ratio, or P/E ratio, is an equity valuation multiple. It is defined as market
price per share divided by annual earnings per share. By comparing price and earnings per
share for a company, one can analyze the market's stock valuation of a company and its shares
relative to the income the company is actually generating. Stocks with higher (or more certain)
forecast earnings growth will usually have a higher P/E, and those expected to have lower (or
riskier) earnings growth will usually have a lower P/E. Investors can use the P/E ratio to
compare the value of stocks: if one stock has a P/E twice that of another stock, all things being
equal (especially the earnings growth rate), it is a less attractive investment.
(http://en.wikipedia.org/wiki/Price%E2%80%93earnings_ratio)
Barclays had to increase their acquisition offer from R79.00 per share to R84.50, including a
R2.00 dividend. This offer represents a 36 percent premium from the first time that a formal
announcement was made, but it is in line with independent evaluations done by UBS, a
European investment bank. UBS calculated the fair value of Absa at R80 with a dividend of
R1.80. The final offer of R82.50 represents a P/E ratio of 8.9, lower than that of Barclays.
(Adapted from Research done by Wilco De Viliers, University of Stellenbosch 2008)
2.4.2. Risk
Risk is defined as the likelihood of a negative outcome by the Longman dictionary (1999). In the
Barclays context risk is the “extent to which the outcomes of a strategy can be predicted”
(Johnson et al.) in acquiring Absa. Firer, et al. (2004) states that, the acquisition of one firm by
another is an investment made under uncertainty, and therefore the basic principles of valuation
must apply. Risk assessments also help to define preventive measures to reduce the probability
of these factors from occurring and identify countermeasures to successfully deal with these
constraints when they develop to avert possible negative effects on the competitiveness of the
company.
2.4.2.1 Evaluating non-financial risk factors
Non-financial risk factors may come in the form of losing key players in the acquisition such
senior management, big stakeholders such as SANLAM passing a vote of no confidence in the
operations and withdrawing at a market sensitive period of the acquisition phase. Absa’s biggest
shareholders included Sanlam, the biggest South African-owned insurer with a 21.3 percent
stake in the bank; investment company Remgro, with a 9.4 percent stake; South Africa's Public
Investment Commissioner, with 8.7 percent; Investec Asset Management, with 5 percent; as
well as the life insurer Sage Group, with 4 percent (Kollewe, 2004). Barclays and Absa
minimized this particular risk by engaging this array of shareholders before finalizing the deal.
Barclays was also facing risk in their money lending portfolio. By acquiring Absa their
neutralized the risk by centralizing debt approvals to their Johannesburg headquarters and
putting strict turnaround times. The risk of bad debts was reduced substantially by the
acquisition for Barclays’ sub Saharan operations.

Global acquisitions have a high risk of failure due to the lack of a gelling mechanism of the two
management structure and business cycles. To make an acquisition successful, employees
were formally trained and the communication structures clearly elucidated in order to report any
success and failures to the EXCO. The risk of getting over taken by events was therefore limited
in the strategy adopted.
2.4.2.2 Evaluating financial risk factors
Studies have shown a relationship between accounting ratios and market risk measures, and
also propose that certain accounting ratios can be used as proxies in predicting future security
betas (Beaver et al 1970; Elgers and Murray 1982). It is proposed that financial statement
analysis yields valuable information that can aid in investor decision making. It uses the
following model;
Where V = Market value of Absa, E (FCF) = estimated future cash flows and r = Discounted rate
Prior to the acquisition, Absa Group Limited (Absa) was listed on the JSE, one of South Africa's
largest financial services groups. Absa mostly conducts its business in South Africa, but the
Absa Group also has equity holdings in banks in Mozambique, Angola and Tanzania. By 30
June 2007, Absa’s total assets were R554 billion, with more than 770 physical outlets, 8.8
million customers, close to 7 500 automated teller machines and almost 36 000 permanent
employees (Absa, 2007). Therefore V = R554billion.
Rappaport (1979) states that discounted cash flow criteria apply not only to internal growth
investments, but also to external growth investments, such as acquisitions. Some of the
discounted cash flow methods commonly used over the last couple of decades includes the free
cash flow model by Modigliani and Miller, and the discounted cash flow model developed by
Rappaport. The estimated future cash flows of Absa after Barclays had acquired them is
£250Million per annum.
The main aim to calculate the discounted cash flow is to establish if the acquisition will be
sustainable in the near future.
The cost to income ratio is 1:0.5 meaning that the operating capital can be recouped every two
years from profit. The operating capital is £250Million and the annual profit is £125Million which
is a healthy ratio. This is a positive indication as risk of minimized by recouping the investment
every two years.
2.4.3. Shareholder reactions
Shareholder reactions deal with anticipating likely reactions from stakeholders. Measuring
shareholder reactions is “useful in understanding the likely reactions of stakeholders to new

strategies, the ability to manage these reactions, and hence the acceptability of a strategy.”
Johnson et al.
Stakeholders are anyone who can affect or is affected by an organization, strategy or project
(http://www.stakeholdermap.com). Stakeholders are therefore crucial to the success of a
business and must therefore be managed effectively in order for them to pro-actively support
the business.
In measuring acceptability of the Barclays Absa acquisition, one critical factor to consider is the
stakeholders. Their expectations have to be identified and the strategy evaluated to see if it will
meet them. One technique to do so is shareholder mapping;
2.4.3.1. Shareholder mapping
Step1 – Identify stakeholders
In the Barclays Absa acquisition the stakeholders are the Absa current shareholders, the Absa
employees along with their unions, the South African government as a regulator and Absa’s
customers. Identifying the various stakeholders helps come up with various communication
channels to disseminate information to the stakeholders and hence gauge their sentiments on
the proposed strategy before fully committing to it.
Step 2 – Stakeholder analysis
At this phase we identify the interests of the stakeholders;
a. Absa Shareholders could oppose issuing of new shares to support Barclay’s acquisition
as this will reduce their stake in the company from a share ratio perspective and may

reduce any future dividends declared. Shareholders may also not be keen on a change
of senior management as this may prejudice their investment from market reactions.
b. Employees and unions representing them may also oppose outsourcing from fear of
losing their jobs. Absa employees may also feel a sense of unease as they might feel
their jobs are threatened due to not fully understanding the status quo of the acquisition.
c. Customers could have questions on support and quality. They may feel the acquisition
offers them nothing tangible and might prefer other wholly locally offered products.
d. Government is also an important stakeholder. They may be concerned with investigating
and monitoring if Barclays has no ulterior motives which may be harmful to the banking
sector. They will also want to benefit from social initiatives that are born as a result of the
acquisition.
Table
Key players are those with influence and power in the organization due to their interests being
represented such as shareholders who have invested their money.

Meet their needs group is those with high influence but less interest in the organization such as
employees.
Least important group is that group with less influence and less interest in the organizations
such as
Slow consideration group is that with less power and influence but a high interest.
Step 4 – Engage
a. Shareholders - Shareholder consultations and briefings where done extensively to
engage the shareholders into buying into the deal. On 13 June 2005 the Absa
shareholders approved a transaction that would see Absa being acquired by Barclays
plc. Barclays acquired 53.96 percent of Absa’s shareholding for R29.7 billion (Absa,
2005), translating to R84.50 per share (Carte, 2007). Although the deal was dilutionary
to shareholders the Public Investment Corporation, South Africa’s largest institutional
investor, supported the deal because it diversified Absa’s income outside South Africa.
The deal gained overwhelming minority shareholder support of 98.85%, enabling
Barclays to raise its shareholding in Absa from 55.5% to 62.3% through the issue of
129.5-million new shares.
b. Employees – Absa adopted a policy of over communicating to its staff the progress of
the acquisition, even in instances where it was not necessary to keep them informed and
in the know in order to alleviate unnecessary rumors which would disrupt operations.
According to Dr Leatitia van Dyk (2008), the human resource and marketing director
during the period before the transaction, the status of the transaction was communicated
weekly via television broadcast to all branches. Even when there was nothing to report, it
was still conveyed to the employees.
c. Government – Absa and Barclay’s seeked regulatory approval before engaging all other
stakeholders in negotiations. Government is an important stakeholder and requires that
all public companies publish their books annually and this was conformed to.
d. Customers – Access to a broader range of products and services
e. Community – Barclays offers a commitment to an upliftment and continual development
of Africa and South Africa through HIV AIDS outreach programs and education bursaries
to under privileged communities.
2.5. Considering your findings from your assignments, indicate what you would have
done differently (20%)
The scholar would have suggested an alliance as a strategy rather than an acquisition.
Acquisitions have a hidden cost of liability. This liability may manifest itself after a few years of
the acquisition and legally the buyer assumes the obligation to settle. Acquisitions are risky in
that sense. Whereas an alliance can be dissolved if the operations of the new entity no longer
suit either of the parties. Acquisitions also have employment issues. Acquiring a firm normal
goes with its staff compliment which maybe more than necessary and retrenching may prove
costly and may shake investor confidence.

Alliance carry similar advantages to an acquisition. Had Barclays formed an alliance with Absa
they could have mutually benefitted from the following advantages;
a. Exploit new opportunities to strengthen your position in a marketwhere you already have
a foothold
b. Increase sales through harnessing the best of both Absa and Barclays
c.
Question 3.1. Personal Reflection: A one page reflection on what you have learnt from a
personal perspective (not based on the course content) from this process
The scholar learnt that before making decisions, information other than that from tacit
knowledge has to be employed from a thorough research on both internal and external factors.
The scholar now has an awareness of how it is important for everyone within an organisation to
know the overall strategic direction in order to be able to contribute meaningfully towards a
successful outcome in productivity.
The main reason the scholar decided to focus on strategic decision making was because of the
career path he is in. The subject is very engaging and challenges the scholar to think outside
the box and resort to unlikely sources for information such as engaging a senior Absa
consultant on the way they were educated of the acquisition and what their fears were and how
they overcame them. The scholar position is at an operational level, which involves decision
making on operational issues. But without engaging in this training the scholar had a limited
appreciation of his overall role in actually understanding and pursuing the overall goals of the
organization. The mode of training was a bit challenging to the scholar as the scholar is
accustomed to the conventional learning model were they are indirect contact with education
facilitators and other scholars, were information may be shared through verbal and none verbal
communication. Despite the scholar’s involvement in the discussion forums, the scholar felt the
mode of learning requested self-discipline and having clear objectives and a clear view on how
to achieve them. The scholar would like to thank all those involved in offering this learning
opportunity.
3.2. You also need to indicate how you would apply your newly acquired academic
knowledge in your work context.
With this dimension shift in thought, the scholar will attempt to bridge the gap in addressing the
strategic direction of his employer to lower level employees. The main aim being to raise
awareness on how improving workflow processes and resource allocation will contribute to the
overall success of the company in achieving its goals. The scholar also intends to be involved in
doing research on the viability of the company’s operations in the unforecastable future by doing
a mock scenario analysis.

The scholar will also endeavour to change the impression of intangible assets and leveraging
them to improve operations and meeting budgets through this process. The scholar intends to
leverage the company fleet with its diverse route allocation system to ensure each route is
generating efficient return rather than incur whatever costs and transfer them to their clients.
The scholar intends to also raise awareness on organizational knowledge such courier
experience in certain areas/suburbs and client preferences and use the knowledge to train other
couriers so that they can work interchangeably without the organization’s clients noticing.
Therefore organizational knowledge will be standardized. The scholar wants to improve
relationships with third party carriers such as South African airways as they are part of the
scholar’s organization’s value chain. These relationships can be the difference in gaining
competitive advantage when coupled with a capability of tailor made courier services for same
day deliveries on behalf of banks. The scholar has learnt a lot and will employ this knowledge to
his everyday operations. Thank you.
Resources
Beaver,W. P.Kettles, and M. Scholes, “The Association between market determined and
Accounting determined risk measure”, October 1970, PP654-682
Elgers P. and D Murray, “The impact of the choice of the market index on the imperical
evaluation of accounting risk measures”, The accounting review, April 1982, pp 358-375
Kollewe, J. 2004. Barclays targets South Africa bank. The Independent (London), 24
September.KPMG. 1999.
Van Dyk, L. 2008. The Absa-Barclays transaction. Presentation at University of Stellenbosch
Business School, Bellville, 16 May.
Carte, D. 2007. Absa’s Corporate Raid. Citizen, 21 February
(http://www.stakeholdermap.com).
Porter, M.E. 1985, Competitive Analysis. Free Press: New York.
Rappaport, A. 1979. Strategic analysis for more profitable acquisitions. Harvard business
review, July-August.
Firer, C., Ross, S.A., Westerfield, R.W. & Jordan, B.D. 2004. Fundamentals of corporate
finance. New York: McGraw-Hill.
Hayes, J. 2007. The Theory and Practice of Change Management. Second edition. Hampshire:
Palgrave Macmillan. USA
Weihrich, H. 1982. The TOWS Matrix: a tool for situational analysis, Long Range Planning 15,
pp2
Accounting Dictionary, 2010, [online]. Available at http://www.ventureline.com/accounting-
glossary/P/productivity-ratio-definition/

Garrison, Noreen, Brewer. 2011, Managerial Accounting and Costs Concepts, pp 48

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