RBS Bought ABN AMRO at the Worst Possible Moment
The largest banking takeover ever completed closed in late 2007, funded substantially with cash and executed just as credit markets were deteriorating.
The Deal
In 2007 a consortium comprising Royal Bank of Scotland, Fortis, and Santander acquired ABN AMRO for approximately 71 billion euros, then the largest banking takeover ever completed. The bank was broken up between the acquirers, with RBS taking the wholesale banking and investment banking operations.
RBS had won a contested process against Barclays, and the consortium's bid was structured with a substantially larger cash component.
Why the Cash Component Mattered
The funding structure was the decisive element. A cash acquisition consumes capital directly. A share based acquisition dilutes existing shareholders and preserves capital.
Paying cash at that scale left RBS with a materially thinner capital position at exactly the moment when capital was about to become the only thing that mattered.
Winning the auction required paying more cash, and paying more cash consumed the buffer that would have absorbed what came next.
The Timing
The deal completed in October 2007. Credit markets had already begun deteriorating during the summer, and the acquired investment banking operations carried exposures to structured credit that would generate substantial losses.
Diligence was also constrained. The competitive process and the structure of a consortium bid limited the examination the acquirers could perform on assets that turned out to be central to the outcome.
The Consequence
RBS reported a very large loss for 2008 and required a rescue from the British government, receiving capital in the region of forty five billion pounds and leaving the state as majority owner for many years.
Fortis, the second consortium member, was itself broken up and partially nationalised in 2008. Santander, which had acquired businesses it understood and integrated them into an existing franchise, fared considerably better.
The Governance Question
Subsequent official review examined how the decision was approved. It highlighted the limited diligence, the aggressive capital position, and a board culture in which the transaction faced insufficient challenge.
The general pattern is familiar. Competitive auctions create momentum, and the desire to win becomes detached from the value of what is being won. Deal fever is a recognised phenomenon precisely because it is common.
What to Take From It
Two checks apply to any large acquisition. What does the funding structure do to the buyer's capital position, and would the buyer survive a severe downturn immediately afterward.
And what diligence was actually possible given the process. A competitive auction with a compressed timetable on a complex balance sheet is an environment where the buyer knows less than it believes.
The Bottom Line
RBS won an auction by paying cash it needed as capital, closing weeks before the capital became existential. The funding structure of an acquisition is a statement about how much adversity the buyer can survive.