Throw out the rule book. This time it really is different. US stocks fall another 4%, adding to the global financial crisis. It all confirms HBOS had to be bought, and fast.
"This time it's different" are the four most expensive words in the investing language.— Sir John Templeton
But this time it really is different.
The very fabric of capitalism is under serious threat. The banking system has frozen. Hundreds of years old banking organisations are disappearing in the blink of an eye.
Desperate times call for desperate measures.
The events surrounding yesterday’s Lloyds TSB (LSE: LLOY) takeover talks with HBOS (LSE: HBOS) are well documented in this outstanding article by fellow Fool contributor Stuart Watson.
These days I live in Australia. Down here, the US market closes at 6am local time, the Australian market opens at 10am and closes at 4pm, almost in time for the UK market to open at 5pm. For stock market traders, it has been heaven. It’s probably now hell, just like it is most places around the world.
The past few days, as you’ve slept (you have been able to sleep, haven’t you?) I’ve been watching the news wires from the US with utter amazement. The article I wrote last night UK time was out of date virtually before it was even published.
Lloyds Agrees To Buy HBOS For £2.32 Per Share
Foolishly, I thought shares were going to soar yesterday. I was right. Briefly. Compounding my foolishness, I said it was hard to imagine HBOS shares being worth less than they were yesterday, in a few year’s time. As I write, HBOS won’t exist as a separate entity in a few year’s time. In a matter of hours, they have been gobbled up by Lloyds TSB.
As you slept, details of the Lloyds TSB were coming through. According to the BBC, the boards of the two companies agreed to an all share deal valuing HBOS at 232p per share. Official confirmation came though at 7am this morning…
“Under the terms of the Acquisition, HBOS Shareholders will receive 0.83 Lloyds TSB Shares for every 1 HBOS Share. The offer values HBOS at £12.2 billion (based on Lloyds TSB's closing price on 17 September 2008 of 279.75 pence).”
You can read the full announcement here.
A combined Lloyds TSB and HBOS will dominate the UK banking scene. As Stuart Watson’s article said yesterday…
“In terms of mortgages, HBOS has 20% of the mortgage and Lloyds TSB has around 10%. The combination of the two, with mortgages totalling some £350 billion, will be three times larger than their nearest competitors Abbey and Nationwide, each of which have around 10% of the market.
The combined firm will also dominate personal current accounts with a 33% market share, twice the size of the next largest player.”
Mr Unpopular Gordon Brown Strikes Again
The deal was apparently brokered by none other than Prime Minister Gordon Brown himself. Some sections of the media, and more than a few investors, including some here on the Banking Sector discussion board at The Motley Fool, have sharply criticised the process and the outcome of this banking merger.
Whilst the process – the deliberate leaking of the Lloyds TSB/HBOS merger talks to BBC journalist Robert Peston – has clearly not followed the rules, as I said above, these are desperate times, and desperate times call for desperate measures. This time it really is different.
Mr Unpopular Gordon Brown has probably not helped his popularity rating. The rescue of HBOS at a knock down share price is not going to go down well with the 2.1 million small HBOS shareholders.
The merger with Lloyds is going to result in redundancies and branch closures. Indeed there have already been estimates as high as 40,000 job losses and 1,000 branch closures, should the deal go ahead. It won’t be popular amongst them.
Finally, there are competition issues. The combined Lloyds TSB/HBOS (surely to be called LLOS) will have around 30% of the UK’s mortgage market, totalling some £350 billion, making it three times larger than their nearest competitors. The combined firm will also dominate personal current accounts with a 33% market share, twice the size of the next largest player.
Well Done Gordon Brown
My Foolish cap goes off to Gordon Brown and those other Government, Treasury and regulatory boffins who brokered this deal. They may not get much thanks for it, and Mr Brown will probably not be Prime Minister after the next election, if not before, but in terms of dealing swiftly and practically to this financial crisis, they deserve great praise.
In hindsight, the demise of HBOS was obvious on Monday. The fact that it has been bought, rather than nationalised like Northern Rock, is a massive result for the Government.
Competition issues can be negotiated later, once this whole financial crisis finishes playing out. The process had some flaws, but this was all about outcome. Desperate times.
It’s Not Over Yet – The Lloyds TSB Share Price Will Remain Volatile
Of course this doesn’t end the whole financial crisis. Lloyds TSB’s share price (and therefore the share price of HBOS, until the deal is finalised) will likely remain extremely volatile. There are still plenty of financial institutions around the globe who are seen to be in trouble.
Last night in the US, the Dow Jones Industrial Average plummeted another 450 points, or 4%. Disturbingly, the share prices of Wall Street’s last two remaining independent investment banks – Morgan Stanley (NYSE: MS) and Goldman Sachs (LSE: GS) – lost 24% and 14% respectively. Are they next?
Bloomberg is reporting Morgan Stanley is weighing a merger with Wachovia (NYSE: WB) and several other banks. Wachovia, the fourth latest US bank, is not without its problems either, as judged by its own 21% share price fall yesterday.
As Good As Putting Your Money Under Your Bed
Here in Australia, shares in our largest investment bank Macquarie Group (ASX: MQG) slumped over 20%. Back in the US, the nation's oldest money fund, Reserve Primary did what no competitor had done since 1994 – allow its net asset value to fall below $1 a share, or break the buck. That means investors today wouldn’t get back all the money they’ve invested in the fund. It’s a huge blow to the industry's reputation as the safest place for money after bank deposits and U.S. Treasury debt.
It makes you think…is anything safe? Gold jumped 9% or US$70 an ounce overnight and 3-month US Treasury Yields fell to virtually zero, about the same rate of interest you’ll get if you put your money under the bed.
No Answers Yet
As I’ve done for the past few days, I’ll end by saying I don’t have any answers at the moment. This market is so unpredictable that any investment or prediction right now is little more than a gamble.
The whole debt fuelled bubble lasted at least 5 years, probably longer. The popping of the bubble is happening before our very eyes, in very fast motion. I have a gut feeling the worst may be closer to being over than not, but it’s just a guess.
The reverberations will carry on for years, if not decades. As for me, as well as nursing a very battered and bruised share portfolio, I’m going to keep and frame the front pages of the financial newspapers, to remind me of these extraordinary times long into the future.
Hang in there.
> Join in on the discussion on our very popular Banking Sector discussion board to get up to the minute reactions to the latest developments as they break.
> Of the companies mentioned in this article, Bruce Jackson has a beneficial interest in HBOS.
