The ABN AMRO Break-up, 2007Medium

What happened

• March 2007 — a Dutch bank is in discussions with a UK bank about an agreed combination in shares.
• April 2007 — a consortium of three European banks assembles a competing offer, mostly in cash, and higher. Each member is to take specified parts of the target.
• October 2007 — the consortium offer prevails and completes, as the largest banking transaction of its time, paid overwhelmingly in cash.
• Within a year — the wholesale funding markets tighten severely; one consortium member reports very large losses and receives a UK government recapitalisation in October 2008.
• The Dutch parts are taken into state ownership by the Netherlands in October 2008.

The mechanism

• Cash consideration takes the buyer's shareholders out of the decision. In a share deal they vote on issuing the currency; in a cash deal of this shape they frequently do not, and the balance-sheet effect lands on them anyway.
• A consortium bid is several acquisitions in one offer. The separation of the target is agreed before completion, which raises the price a seller can achieve and multiplies the execution risk after it.
• The price was paid in capital. Cash for a bank acquisition is regulatory capital leaving the buyer's balance sheet at the moment it is committed, not when the accounts are prepared.
• Due diligence on the target was limited in the contested phase, which is a structural feature of a hostile or competitive situation rather than an oversight — see what kills a deal on the diligence blocker.
• Nothing here required the transaction to be wrong to be dangerous. The same purchase funded in shares would have left a different capital position facing the same year.

What it teaches

• Ask what the consideration does to the buyer's balance sheet, not only what it does to earnings per share. A deal can be accretive and still leave the acquirer thinner.
• Competitive tension raises the price and lowers the information. Both move together, and a seller running a process is buying the first with the second.
• A consortium multiplies the post-completion risk: three integrations, three sets of assumptions, one signature.
• Timing is a risk nobody underwrites. The cycle is not a diligence item, and a transaction agreed in one funding environment completes in whichever one arrives.

The mechanisms behind this

Every case on this site is an instrument or a mechanism doing exactly what it was built to do, in a situation nobody had pictured. These are the pages that explain the machinery:

• Recommended offer — the agreed route the competing bid displaced.
• Hostile takeover — why contested bids see less of the target.
• Carve-out — dividing a business, which here was agreed before completion.
• Northern Rock, 2007 — the funding market that closed in the same months.