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Global banking the acquisition of ABN amro / and the role of fortis - Assignment Example

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Global banking the acquisition of ABN amro / and the role of fortis

Barclays were already negotiating with them for a friendly takeover; however, the RBS led consortium approached with a proposal that aimed at acquiring AMRO's prized asset, LaSalle Bank, based at Chicago in the US. The offer was turned down because that necessitated a split up in ABN AMRO’s assets. Barclays’ offer was initially superior in the sense that they did not insist for any split in ABN AMRO's assets and offered a sum of USD 91.2 billion for entire takeover. Countering Barclays offer, RBS consortium offered much higher price to the tune of USD 99 billion. Further negotiations continued between the concerned parties and a deal was struck at $100 billion between ABN AMRO and RBS consortium; however, the acquisition deal soon brought an unparalleled disaster for the consortium members (Kennedy, 2008). The fallouts of this buyout were catastrophic to the consortium members. Firstly, the consortium paid very high price – most of them in cash for this acquisition causing a distress to their own financial conditions. Unfortunately, the timing of this deal coincided with the famous subprime crisis that emerged across the US leading to financial upheavals across most parts of the world. Valuation of the assets in the portfolio of banks came down crashing across all developed nations. Their capital adequacy ratios as prescribed by the regulatory bodies went completely haywire and the whole episode of subprime crisis impacted RBS and their partners significantly because they had already parted huge funds to acquire ABN AMRO. It will be quite appropriate to say that ABN acquisition by RBS consortium turned out to be a curse for them. ‘The Economist’ says that the UK government had to provide huge ?46 billion of fund to prevent collapse of RBS. The paper argues that deal was done at an inflated price. RBS had to fork out USD 38.25 billion for wholesale banking and Asian Operations (Harish, 2009). Barclays just escaped from this deal by sheer chance on one hand and due to aggressive bid offer by RBS on the other. On enquiry by the Financial Services Authority's (FSA), RBS officers said that decisions to acquire ABN AMRO were purely taken on the basis of possible revenue and the cost synergies. Banking norms necessitate maintaining certain minimum capital in the coffers and accordingly, RBS was maintaining its core capital ratio in the range of 7%-8%. Excess liquidity prompted them to declare either dividend for shareholders or using funds for buy back of the bank shares. It is worth noting that HSBC, another British bank, maintained this capital ratio above 10%. RBS categorised several assets in their portfolio in a way that did not force them to maintain any capital against them. When the FSA reframed the RBS balance sheet on the basis of BASEL 3, they found the actual capital only up to 2% of assets (Royal Bank of Scotland, 2011). The FSA on RBS observes, "Only ?2.3bn of core tier 1 capital was held to cover potential trading losses which might result from assets carried at around ?470bn on the firm's balance sheet” (Royal Bank of Scotland, 2011). In 2008, the losses attributed to the credit trading area alone were ?12.2bn. Thus, trading book risk was not adequately evaluated by RBS and the risk worsened significantly after their acquiring ABN AMRO. That also shows that RBS was allowed to increase their trading risk exposure without corresponding increase in capital buffers (Royal ...Show more

Summary

The acquisition of ABN AMRO and the Role of Fortis Part A) The ABN AMRO acquisition is known as the biggest banking takeover in the history and one of the failed mergers for several reasons. Royal Bank of Scotland's (RBS), Fortis and Banco Santander formed a consortium and made a joint bid for taking over ABN AMRO bank during 2007…
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