Mergers and Acquisitions

Some of my previous blogs have looked at the effect of dividend policy and capital structure on shareholder wealth creation, this blog will focus on mergers and acquisitions.  Can they really create shareholder wealth or is it just a rather enlarged CEO ego that drives M&A activity?

Sabadell, the fifth largest bank in Spain made a takeover bid for TSB for £1.7bn (BBC News, 2015).  Sabadell highlighted a number of reasons for their takeover bid; firstly they want to increase their international presence as a result of a business drying up thanks to the recession, secondly they believe that they can increase business lending and reduce household mortgage costs by taking over TSB (The Telegraph, 2015) Oh and lasty.. Lloyds were ordered by European regulators to sell the bank as a condition of its government bailout during the financial crisis (BBC News, 2015) so they don’t have a massive choice in the matter as they only have until the end of 2015 to sell the rest of their TSB stake and other offers aren’t exactly flooding in!

This can be classed as a horizontal merger as both firms are in the same industry, banking (Watson and Head, 2013). In this case the TSB- Sabadell seems to be a friendly takeover; Sabadell offered 340p a share which TSB stated they are willing to recommend (BBC News, 2015), however the offer of cash didn’t seem to install much faith in Sabadell’s current shareholders.   Shares in Sabadell were suspended after they suffered a 9% fall due to the takeover announcement (The Telegraph, 2015) I would assume because investors may have predicted Sabadell would need a hefty rights issue to fund the cash takeover!

Coffey et al (2002) argue that related acquisitions are more likely to succeed as they have the advantage of transferring product knowledge as well as increased economies of scale.   Some savings could be achieved as a result of the takeover as TSB currently rents its IT systems from Lloyds at a cost of £100m a year, which will double in 2017, if the bank can move into a new infrastructure with Sabadell they can expect a payment of up to £450m from Lloyds! (The telegraph, 2015)

One of the reasons some mergers fail can be due to the people and organisation fit between the two companies (Coffey et al, 2002).  Whilst Sabadell said they were unlikely to make changes to TSB because ‘We are very respectful about the way British banks do banking’ (Hawkes, 2015) who’s to say they Spanish culture and the British culture will merge?  TSB’s boss Paul Pester said the only job losses would be in the investor relations department as they would no longer be needed once the bank ceases to have a separate stock market listing (Hawkes, 2015).  Will this mean employees will feel secure knowing that only one department will lose their jobs? Or will it result in reduced employee motivation and fear of more job cuts?

Ottone and Murgia (2000) conducted a study in the banking industry and concluded that there is a positive increase in shareholder wealth at the time of the deals announcement; with regards to commercial banks they argued that there is a significant market reaction for a period of around 11 days.

We can see from the chart below as they day of the announcement (12th March) saw a dramatic increase in TSB’s share price, almost two weeks later and the share price has remained high and constant, showing investors approval of the takeover bid and the potential for increased shareholder wealth.   This is consistent with Jensen and Rubecks (1983) findings that the shareholders in the target company are likely to achieve a positive gains, whilst the bidding companies shares will decrease after the announcement, which we can see has occurred (Chart below).   Sabadell’s shares dropped significantly upon the announcement and as previously mentioned had to be suspended, however they are showing signs of improvements, possibly because of the positive reaction of TSB to the takeover? 

TSB's share price at the deal announcement. Source (London Stock Exchange) 

http://m.londonstockexchange.com/exchange/mobile/stocks/chart.html?tidm=TSB

Sabadell's share price at the deal announcement. Source (London Stock Exchange) 

http://m.londonstockexchange.com/exchange/mobile/stocks/chart.html?tidm=0H00

In conclusion, I would agree that mergers create shareholder wealth, but like the findings of Jensen and Rubeck (1983) it seems that a takeover only benefits one party, in this case TSB.  Whilst M&A’s are largely criticised for being unsuccessful in creating shareholder wealth in the long run it does appear they are successful in the short term particularly at the time of the merger announcement.  However this merger will be subject to regulation due to concerns over Sabadell’s capital strength within the European banking market (Euronews, 2015).   It will be interesting to see how the Spanish and British cultures will merge in this takeover, whether any synergies will occur and whether it will be beneficial for shareholders of both Sabadell and TSB in the long run.

References:

BBC News. (2015, March 12). TSB confirms £1.7bn takeover move by Spain's Sabadell - BBC News. Retrieved from http://www.bbc.co.uk/news/business-31848517

Coffey, J., Holbeche, L., & Garrow, V. (2002). Reaping the benefits of mergers and acquisitions: In search of the golden fleece. Oxford: Butterworth-Heinemann.

Cybo-Ottone, A., & Murgia, M. (2000). Mergers and shareholder wealth in European banking. Journal of Banking & Finance, 24(6), 831-859. doi:10.1016/S0378-4266(99)00109-0

Euro News. (2015, March 14). Sabadell bid for TSB could be blocked by UK regulator. Retrieved from http://www.euronews.com/business-newswires/2979216-sabadell-bid-for-tsb-could-be-blocked-by-uk-regulator-analysts/

Hawkes, A. (2015, March 21). TSB's new owner Banco Sabadell pledges to support small firms. Retrieved from http://www.thisismoney.co.uk/money/news/article-3005749/TSB-s-new-owner-Banco-Sabadell-pledges-support-small-firms.html

The Telegraph. (2015, March 12). TSB shares jump as Spain's Sabadell considers takeover offer - Telegraph. Retrieved from http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11466405/TSB-shares-jump-as-Spains-Sabadell-considers-offer.html

Watson, D. & Head, A. (2013). Corporate Finance: Principles and Practice. (6^TH ed.), Harlow: Pearson.