The Acquisition of Abbey by Banco Santander - Case Study Example

Introduction The Abbey bank of the UK and Banco Santander of Spain decided to integrate through an acquisition agreement in early 2004. In the agreement, Banco Santander would utilize the financial and technological strength it has all over the world to boost business in the UK. The Abbey bank on the other hand would benefit from technological programs and other beneficial services from the Spanish giant. This paper will therefore examine the reasons why Banco Santander Central Hispano acquired Abbey bank at a price which was lower than its peak market value. It will also examine which of the stakeholders in the two banks have so far benefited from the acquisition. It will particularly look at the way the acquisition was arrived at and what really happened; who was for the idea and who was not. On the 26th of July, 2004, Banco Santander Central Hispano and the Abbey national plc came up to an agreement that the Abbey bank would become a subsidiary of the Spanish bank. Although there was extensive consultation before the final agreement was reached, many of the stakeholders of Abbey bank felt that the deal would short-change them as the price was too low. The 8.9 billion euros was not enough to convince the shareholders of Abbey that Banco Santander would bring in new services and technology to the benefit of Abbey bank. The meeting called to discuss this issue was very stormy and there was vocal opposition for the deal. In fact, the stakeholders were forced to vote on the issue because the people could not reach a consensus. The vote count gave a 95% support for the deal and thereafter it got a legal backing when the courts approved the acquisition of Abbey bank by Banco Santander1 The merger acquisition of Abbey bank by Banco Santander in 2004 was one of the major milestones in the banking industry. Although it is only three years since the acquisition took place, a lot of expectations and uncertainties have been going on and it would be very unfair to criticize or praise the move by Banco Santander. However, few indicators have shown that the company is on track to success with earnings shooting over by 24% as at the end of 2005. The acquisition was however marked by controversy because of the value of acquisition that was noticed in that the price that Banco Santander bought the bank was really low compared to its peak market value as at the end of 2003. This issue was however overlooked because of the fact that the benefits that would be achieved after the acquisition would be greater considering a long term perspective2 Financial service businesses have adopted mergers and acquisitions as strategies to improving financial bases and market values in this coimp0etitive 21st century. This has therefore resulted in the consolidation of businesses units with a view to benefiting the two companies’ involved. This particular example is a case in hand which has been anticipated to fail but a lot is changing in the financial services sector and anything can benefit the business if it is well analyzed Abbey National plc which is popularly known as Abbey is rated as the 6th largest bank in the United Kingdom. In Europe alone, it is a leader in the mortgage business and it also the second largest lender not only in the UK but in other parts of Europe. The bank has now become a subsidiary of the Banco Santander of Spain after an acquisition done in 2004. Abbey bank is a big financial player in the United Kingdom and especially the mortgage market hence its presence in the company meant that more consumers of the former UK giant would shift base to the new bank. It has a strong distribution network that gives the shareholders of the newly formed company an upper hand in financial gains in terms of shares. The merger was necessary to apply commercial and technological practices of Banco Santander to the banking operations of Abbey in order for them to form a formidable organization that can outperform their competitors3. There is integration of the two banks came as an idea from the former chairman of Banco Santander met the CEO of Abbey bank, Mr. Arnold in London and expressed interest between the two parties. Before that, rumor had been spreading around in the British press that had linked the acquisition of Abbey bank to Barclays bank. It was realized that Banco Santander could bring in more strength to Abbey compared to other companies like HSBC, Barclays that experienced growth rates of approximately ten to fifteen percent. Abbey bank had great abilities that give it a competitive advantage over other retails banks in the UK and especially with specific regard to mortgages. The shareholders of the two companies saw that there was great integration of acquisitions which relatively lacks disruption in the financial performances between them hence the acquisition would be financially sound and correct. Banco Santander is a Spanish bank established in 1857 that has been able to expand globally to other countries since its inception. It is one of the most successful banks in the world today with a customer base of 41 million people according to the latest statistics4. It has also been able to set up branches in more than ten countries and as at the end of 1st January 2004; the bank was the second largest in terms of banking groups and deposits. The company before it acquired Abbey bank had a capital asset base of Ђ 351.8 billion. It also employs more than 102,000 employees in all its branches around the world numbering about 9, 197. According to the Spanish giants, Banco Santander would be able to link up with many other competitors in the UK and specifically obtain a market capitalization that would match the fit in UK. The group would also be subjected to UK law, London Sock Exchange rules and the Spanish financial regulations and law. There was prediction however, that the two companies may not agree on how to retain or dismiss the employee of abbey bank who would miss out the opportunity to work for the new company. In fact, the question of employees has not been resolved up to today5 Banco Santader has developed in business for the ten years and its technology has been changing since that time. Banco Santader has been getting into international markets and acquiring subsidiaries from other companies especially in Europe and Middle East hence able to build its hi-tech support. Banco Santader also has an excellent status of quality products and services which have helped it meet its market objective. The merger between it and Abbey bank has helped it regain its market share in Europe where there massive competition. The company has an equity interest in many more countries and more programs are being developed in order to ensure that the partnership and z\acquisition of Abbey bank will improve its expansion ability. Its global portfolio of services coupled with high quality products has been giving it a competitive advantage over the others in the banking sector. Banco Santader is currently a powerful player in the financial sector and it has dominated almost every corner of Spain and that is why Abbey bank recognized the need to at least make an impact in the world6. The company also has good reputation for value for money going by the quality of products and services it offers such as very many ATMS that are able to serve customers quickly, wider product base, among others. The company has grown substantially in the recent years going inline with technological changes in the sector of banking including online banking and E-commerce The company has experienced global expansion as its ability to adapt to technological (computer based) approaches has been appreciated both locally and globally. Banco Santader has a core capability relating to the use of banking technology to meet the needs of its clients. Since the company has developed new technological approaches and strategies to support its international logistic systems i.e. to see how the subsidiaries in other countries are performing in other parts of the world, it has been able to reach to its customers effectively. Banco Santader also trains people in its human resource development strategy to meet with the expertise changes that need people to have hands on experience on the way services and products are provided to the customers There are very many reasons that can be outlined as to why the Banco Santander acquired the Abbey bank and the most distinct of them is the fact that the retail banking skills of Banco Santander was realized to be very useful in transforming financial services in UK and more so in the city of London which has been branded as the headquarters of financial activity. Banco Santander also saw an opportunity to improve its market capital through the utilizations of the 714 branches of Abbey bank in the United Kingdom and more so getting an opportunity to access Abbey’s customers of more than 17.8 million. The two companies have also realized that they could make a formidable franchising force that would transform the world’s financial sector and superficially retail banking. There was also an opportunity for the two companies to offer revenue benefits as well as cost diminution programs through technology-based efficient programs offered by the Banco Santander to all the customers.7 The management of Abbey bank also found the deal to be cost –effective and reasonable not only to the shareholders but also to the customers of the bank. The premiums that would be gained by the customers of Abbey bank would increase to 28.4%, a value which was reasonably fair to them. The management also oversaw the possibility and chances that would be brought into play by Banco Santander such as the increased available of resources, skills, innovation, technology and improved financial service strategy by the company. This would therefore allow for quick growth in financial gains and risk reduction There was also a standpoint that was to be achieved in the form of long term positioning of the two companies. This would improve the provision of services to customers and more specifically better quality services and products. The tangible benefit that Abbey customers would obtain was the implementation of technology-based services including the improvements in service offers. This would mean more loans, more mortgages and better customer care services and financially-more secure returns for the future The major beneficiaries in the acquisition of Abbey bank by Banco Santander are the stakeholders. Shareholders of Abbey bank had the golden opportunity of owning Banco Santander in general which under the agreement was that for every one Abbey share the shareholders had, they would receive one new Banco Santander share. This is a financial plus for the shareholders of the Abbey bank. The overall benefits will therefore be shared as follows; 23.6% of the shares issued for Banco Santander will be owned by the shareholders of Abbey bank while the rest of the 76.4% of all the shares will be owned by the existing shareholders of Banco Santander8. The value of the deal was UK £8.78 billion such that the capital base for the new merger would propel the company to the number ten position in the world for large banks. This would therefore improve the image and global recognition for the bank hence is able to get more customers in future. The CEO of Abbey bank, Arnold, L. said, this company has an outstanding financial service and has an outstanding know-how on operational and marketing skills. This meant that there would be greater long term benefits for the customers and shareholders of both banks compared to short term benefits The new bank formed after the acquisition of Abbey bank has helped change things around. This is because of its ability to reach a wide scope of customers both in the UK and back at home in Spain where majority of the customers would fall. Given the investment opportunities currently available in UK, Banco Santander will be able to utilize the many branches that exist worldwide emanating from the acquisition. Financial experts have predicted that the company will be able to topple other banks in the near future through its expansion strategies. Abbey bank being the largest in terms of mortgage provision will be able to boost the mortgaging business of Banco Santander in United Kingdom since it has got many assets that help it to serve a wide range of clients. The recent government regulations in UK on banks are a threat to operation of Banco Santander business operation. This is because this bank has to obey and follow these regulations which may lead to augmented costs in business. The central bank normally controls issuance of credits by banks to organizations and persons. These controls are a threat to the new bank but with a strong customer and financial base, it will be able to penetrate the market faster. Government regulations through central bank like increase in rates of reserves are a threat to the general operation of this bank. Last year, there were reports of poor management especially in the financial sector those posses a threat of incurring losses in the new acquisition. Recent analysis shows that some of the employees in the finance sector of this bank show levels of ineffectiveness. On contractual basis, Banco Santander is linked to the Royal bank of Scotland therefore there were concerns that its influence on the acquisition was great and it may impact on future performance of the company. In fact, financial analysts have argued that in the case of Banco Santander and Abbey, some concerns have been raised from the acquisition of Abbey bank by this company hence Abbey bank has been able to focus its assets and service provision to the large UK market9. This shows that there is more in financial acquisition by the Banco Santander bank relating to changing the way financial services in Europe are being done Cave, of the telegraph UK described the acquisition of Abbey bank as tactical and other banking companies in Europe should brace for looming competition in the next decade. He explains that most of the cross-border take-over in the Europe is linked to the poor financial bases in the country.10He believes that the financial sector especially in Europe has a lot to benefit from especially when it explores opportunities elsewhere. Given the economic growth rates of other continents at the moment such as China in Asia, there is still more to come when it come to acquisitions. Conclusion The acquisition of Abbey by Banco Santander is an historical one especially in Europe and its success can be immediately assessed. The stakeholders who benefited most according to the current situation in all the subsidiaries and based on the agreement are the stakeholders of Abbey. This is because; they have been able to increase their share price by a whooping percentage year after year since the acquisition took place. However, it is worth noting that the position of both companies are now more solid, more consolidated and more productive compared to their past. Some people comment that there are still clouds in the sky and this would mean more opportunities for the two banks after their agreement. It is now three years since the deal was signed and most probably there is better productive years to come. People are watching to see the future of this distinct agreement. Reference Cave, A. (2004): Santander banked on Abbey boost, retrieved from http://www.telegraph.co.uk/money/main accessed on 12th Nov, 2007 Flanagan, M. (2004): Abbey's Scottish arm can breathe easier - for now; The Scotsman Heffernan, S. (2005): Modern Banking; Cass Business School. City University, London. Wiley Hempel, H. & Simonson, (2001): Bank Management Text& Cases, Wiley Read More