Was ABN the worst takeover deal ever?
Royal Bank of Scotland's deal for ABN Amro is acknowledged as a shocker. But is it the worst ever? Mathieu Robbins counts down the top ten bad deals
Tuesday 20 January 2009
Is Royal Bank of Scotland's horrendously damaging acquisition of Dutch rival ABN Amro in 2007 the worst ever M&A deal? According to academics, it seems maybe not. Indeed, mergers and acquisitions seldom live up to their promise of delivering strategic benefits, easy growth and a boost in the value of the acquirer's shares. To be sure, some do work. According to academics, as many as 35 per cent do. But that still means more than 60 per cent of deals fall flat chasing the elusive goal reached by a minority.
"Over the three to five years after the deal on average, the share price of the acquiring company tends to drop," said Paul Guest, a researcher at Judge Business School, Cambridge University. There are many reasons deals fail. Buyers can get carried away and overpay at the top of the market, shortly before a crash, as is the case with RBS. Alternatively, even if a deal is well-priced, the difficult part is often not so much the agreement but the integration. Buying a company can lead to top staff leaving unless an acquirer is careful. It can also lead to two separate businesses continuing to run in parallel, undermining cost cuts and the spread of know-how that are part of a deal's objectives.
Scott Moeller, director of the M&A research centre at Cass business school, said: "Most deals fail not because they are the wrong deal. The reason they fail tends to be the integration – the way cultural differences and other such issues are handled during the integration sometimes means they can't work together."
We have, below, tried to gather some of the ten worst such deals. The list does not include any single deal by Marconi, which around 1999 squandered its cash on a misjudged buying spree that led to its meltdown. Nor does it look too hard at private equity firms, whose crop of overpriced, overleveraged transactions conducted at the height of the credit boom in 2006 and 2007 may yet turn out to make similar top tens a few years from now.
AOL – TIme Warner JANUARY 2000
The AOL founder and chief executive, Steve Case, and the Time Warner boss, Gerald Levin, toasted the new millennium with the $164bn deal in what both thought was a vision of the future. It took less than two years to unravel.
The deal, announced at the height of the dotcom bubble, was hailed as an exciting mix of old media – magazines, film production companies and television networks – and the brave new world of the internet. But the merged group reported a loss of $99bn in 2002, with a $45bn write-down on AOL. In the same year, Time Warner dropped AOL from its name.
In 2005, Mr Case called for the media group to be split into four separate units, saying the company had failed to integrate the various businesses. The deal is estimated to have destroyed 97 per cent of shareholder value.
Invensys – Baan 2000
At the height of the dotcom euphoria, the British engineering conglomerate Invensys forked out €762m for Baan, a troubled Dutch software company that was once worth ten times that sum. As Invensys tried to convince a shocked market it hadn't lost its mind, a series of write-downs and profits warnings related to Baan slashed the price of its shares. Invensys eventually sold Baan in 2003 for $130m.
Taylor Woodrow – Wimpey JULY 2007
In business, timing can be everything, and it is fair to say the timing of Taylor Woodrow's merger with Wimpey in a £5bn all-shares deal was lousy. It came just before the UK housing market peaked. Since then, property prices and sales have plunged in Britain and the US, where the group still builds a substantial number of homes.
More than £4bn has been wiped off Taylor Wimpey's market value. Yesterday, its shares closed down 3.25p, or 16.9 per cent, at 16p. The company, which is in survival talks with lenders and has debts of about £1.55bn, said this month that its total property sales fell by 35 per cent in 2008.
The housebuilder says it has taken decisive action to cut costs, existing financial liabilities and debt levels but admits it faces an uncertain future.
HSBC – Household 2003
HSBC bought Household, a US sub-prime mortgage lender, for $15bn. By the end of 2007, HSBC had racked up write-downs of $17.2bn from the unit. By last March, it was writing off $51m a day in loans to poor Americans as more and more defaulted on mortgages, credit cards, personal loans and car finance. Knight Vinke, an activist investor, is now pressing HSBC to sell the troubled Household business.
Quaker Oats – Snapple 1993
In a business school case study of how not to go about mergers and acquisitions, the American breakfast cereals company Quaker paid $1.7bn for the drinks brand Snapple, outbidding Coca-Cola in the process.
Quaker assumed it could use the same strategy it employed to sell its Gatorade sports drinks to market Snapple. But it did not reckon with their different customers: Gatorade's image clashed with the rather more New Age mindset of Snapple drinkers. Four years later, Quaker sold Snapple to Triarc for a measly $300m.
The disaster cost the chairman and president of Quaker their jobs and helped bring about the end of Quaker as an independent company – it was sold to Pepsi in 2000. To rub salt into Quaker's wound, Triarc sold Snapple on to Cadbury Schweppes for about $1bn.
BMW – Rover 1994
The German car-maker BMW bought an 80 per cent stake in Rover for £800m from British Aerospace, and a 20 per cent holding from BAe's partner Honda. After investing millions in production and new models but failing to stimulate demand for Rover cars, it sold the company back to a group fronted by the former Rover executive John Towers for £10 in May 2000. Rover went into administration in 2005.
Royal Bank of Scotland – ABN Amro 2007
The Royal Bank of Scotland and two other European banks forked out more than €71bn for part of the Dutch lender ABN Amro, which RBS's arch-rival Barclays had agreed to buy.
The consortium – RBS, the Belgian-Dutch bank Fortis and Banco Santander of Spain – paid three times the book value for the Amsterdam-based bank, which at the time was already expensive for a bank based in a mature European country.
By the time that RBS, then led by its chief executive Sir Fred Goodwin, had secured the ABN Amro deal, the Dutch bank had sold on to Bank of America the asset which was most prized by RBS – its Chicago-based LaSalle unit.
This left the Edinburgh-based RBS with only an underperforming London-based investment banking franchise (with what turned out to be a few dubious loans on its books) and some small Asian operations.
Even worse, RBS went ahead with the buyout without trying to amend its terms once the credit crunch started to hit in the summer of 2007 and it became apparent that ABN would not deliver the earnings RBS expected.
By the time the deal was closed, many banks were trading at around book value, making the initial price paid by RBS looking even more of a folly. Now struggling under the cost of the acquisition, and with toxic assets it acquired with ABN, RBS is into its second government bailout. The first rescue package in October had to be so radical that it saw the Treasury take a 58 per cent stake in the bank.
The RBS-ABN Amro deal is also unusual in that it led to the fall of not just one buyer but two: the Belgian-Dutch bank Fortis was nationalised by the Dutch government last year to avert a liquidity crisis.
France Télécom – Orange 2000
At the height of the dotcom and tech boom, the French telecommunications giant France Télécom bought the UK mobile phone operator Orange from Vodafone for €45bn.
The Paris-based company floated a small stake in Orange in February 2001 after the dotcom bubble burst, but embarrassingly had to repeatedly slash the price. France Télécom's chief executive, Michel Bon, had hoped to raise at least $15bn but got only $9.5bn – including $2.9bn from a convertible bond. Several asset write-downs later, France Télécom ended up buying back all minority shares in 2003 for about €7.1bn, in an attempt to use Orange's profits to offset losses in other parts of the group, something it could not do without complete ownership of the unit.
Daimler – Chrysler 1998
In the mid-1990s, Chrysler, the smallest of the three major US car-makers in Detroit, was the most profitable. It had taken a risk that paid off and ignored the perceived wisdom that Americans preferred imports by designing quintessentially American cars such as the sports utility vehicles under its Jeep brand. Chrysler's success and entrepreneurial spirit appealed to Daimler, and the German company paid $36bn for it in 1998. The lack of integration between the companies, and the staid Daimler culture which clashed with Chrysler's entrepreneurial spirit, saw the US firm flounder. Daimler sold an 80 per cent stake to buyout specialist Cerberus in 2007 for $7.4bn. Cerberus has fared little better, with Chrysler now needing a US government bailout.
British Commonwealth– Atlantic Computers 1988
British and Commonwealth Holdings was a financial services company, once listed on the FTSE 100. The company, established in 1955 as a shipping business, diversified into finance in the early 1980s and was responsible for establishing the fund managers Gartmore and Oppenheimer.
However, it diversified too far when it bought the IT leasing company Atlantic Computers for £434m in 1988.
Atlantic used a different form of accounting to BCH, and booked its future earnings as instant profits. So it could only stay profitable by growing and signing new contracts and, when such growth stopped, so the money stopped rolling in. The acquisition proved so ruinous there was no way back. Both the buyer and its target went into administration in 1990.
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