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Here are some words on acquisitions from famed US investor Warren Buffett, the quote summing up my general feelings on corporate takeovers:
"The sad fact is that most acquisitions display an egregious imbalance: They are a bonanza for the shareholders of the acquiree; they increase the income and status of the acquirer's management; and they are a honey pot for the investment bankers and other professionals on both sides. But alas, they usually reduce the wealth of the acquirer's shareholders, often to a substantial extent. That happens because they acquirer typically gives up more intrinsic value than it receives."
Of course, it remains to be seen whether Lloyds TSB makes any further advances towards Abbey. And indeed, we won't know anything about giving up "intrinsic value" until a price tag for Abbey comes out into the open. But my misgivings of takeovers in general aside, the events leading up to today's news lead me to exercise caution towards any Lloyds TSB approach.
Flushed out
Lloyds TSB's interest in Abbey appeared after the latter announced it was in talks with Bank of Scotland (LSE: BSCT) over a possible offer for the Scottish bank.
But any proposed takeover of Bank of Scotland by Abbey, the talks of which are still ongoing, looks to be a non-starter. Simply, these negotiations are reversing the rationale of the traditional banking takeover, which is of buying an underperforming bank and bringing it up to the acquirer's performance. Instead, compared to Abbey, Bank of Scotland is widely recognised as having the greater management quality and superior financial record. If anything, Bank of Scotland ought to be have been pursing Abbey National.
So, you have to wonder why Abbey initiated the discussions with Bank of Scotland. Because, effectively, it was an admission that Abbey couldn't "go it alone". Thus, are the Bank of Scotland talks a cunning ploy by Abbey to put themselves "in play" and flush out a bid (eg from Lloyds TSB or Barclays (LSE: BARC)), this route being a far easier way to create shareholder value than struggling along in an increasingly competitive market?
Easy in hindsight
And now that Lloyds TSB have admitted an interest in Abbey, an interest that perhaps has been harboured for some time, will Lloyds TSB be forced to pay a full price? Investors will inevitably hark back to February/March this year and to the height of the "old economy" sell-off. Abbey National shares have almost doubled since their year low of 622p, at which point the shares yielded a juicy 7%.
And it's important to note that consolidation in the banking sector hasn't just suddenly appeared. Remember the Bank of Scotland and Royal Bank of Scotland (LSE: RBOS) battle for National Westminster that raged last year? Did that not signal to Lloyds TSB that further corporate activity was due in 2000? I mean, even I concluded that Abbey had distinct value/takeover characteristics at a share price far lower price than today's 1115p level, having bought Abbey shares at 730p during the summer.
In short, the actions from Lloyds TSB this week smack of a tardy reaction to the obvious goings-on within the banking industry. For well over a year now, the whole sector has been a tangled web of takeovers and speculation, yet up until recently, most banks ripe for acquisition have been sitting on bargain valuations. Lloyds TSB could very well end up overpaying for its failure to take a proactive role in the sector consolidation.
Where Next?
Bank Merger Time Again!
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