Hostile bids don’t usually work in banking or financial mergers; takeovers are usually put together in talks between the respective boards and their advisers.
Hostile offers usually lead to bad blood, an exit of executives and customers and a lot of wasted money.
We saw that that here where the unwanted $2.7 billion cash and shares offer from the Bank of Queensland was rejected by the target, Bendigo Bank.
In Europe, where after long talks, a possible counter offer and lots of commentary, Barclays and ABN Amro (minus its US banking business, sold for $US21 billion) agreed to terms for a $102 billion merger, only to see a hostile counter offer emerge from the Royal Bank of Scotland Group Santander Central Hispano of Spain and Fortis of Belgium offered 39 euros a share to buy ABN Amro.
Royal Bank offered 70 per cent in cash and 30 per cent in its shares and is seeking to trump the bid that ABN Amro agreed to accept from Barclays. The bid is worth around $118 billion.
It is now the biggest ever battle in the financial services sector and will test whether hostile bids make or break value. History is on the side of value being destroyed.
In Australia the Bank of Queensland’s approach to Bendigo Bank was ham-fisted, and illogical because a lack of prior top level talks.
There’s been quite a few words written about the rejection by Bendigo Bank of the unwanted B of Q offer, but little has been said about the Brisbane-based bank’s stuffing up of a the opportunity.
Nor was there much in the way of recognition that in banking mergers, value is destroyed not created unless the target bank is so badly rundown that it is acquired for a small premium or none at all, or if the two banks are not direct competitors.
The takeovers of the Bank of Melbourne and the Challenge Bank of Perth by Westpac are the good examples of money being paid for little in the way of returns. Westpac’s market shares are still low in Victoria and WA.
Takeovers by foreign banks are a bit different (the Royal Bank of Scotland buying Bankwest in Perth) while the creation of St George Bank out of a merger with Advance Bank in Sydney and a bank in Adelaide worked because the two Sydney banks were of similar building society backgrounds and cultures.
The B of Q and Bendigo Bank had vastly different approaches to banking and therefore very different cultures. BEN is community-based, provincial with its shareholder base being concentrated around the central Victorian city.
The B of Q is a more entrepreneurial operation with a banking franchise, active growth ambitions and a style that reflects its small Brisbane base.
They do compete for deposits and business in some parts of Australia but it is the dramatic difference in business approach and culture that proved the stumbling block
To overcome all of this would have been tough but it could have been done if the B of Q management and board were far more patient and talked to BEN to see if a deal could be struck.
A quiet discussion with a deal hammered out, a price range proposed to allow a negotiated discussion and options to meet expected objections from Bendigo. It would have been easy to arrange and construct and yet the offer was lobbed on the BEN board without prior warning.
The simplest way would have been to propose a simple combination through a new company to own both banks rather than the B of Q being the vehicle; to handle the transition slowly, not to try and sell the deal to greedy banking analysts on the basis of the $70 million a year in cost savings, but the slower construction of a new force in regional banking with two approaches.
It would have been tougher but such is the liquidity and the amount of money available it would have got support, if it had been well thought out and then argued in public.
Some commentators have attacked the BEN board for knocking back the offer and for even daring to consult shareholders, but in the cases of Qantas, Rinker, Orica and APN News and Media, there are shareholders taking a stand and saying no to substantial premiums and profits on offer.
These are big holders, institutions, favoured by many business commentators and analysts and others in the finance industry who tend to think individual shareholders are greedy opportunists and can’t think for themselves.
There’s no difference between the ‘no’ to B of Q attitude from small BEN holders than the ‘no’ to the price on offer for Qantas from Airline Partners Australia.
What is clear is that it is still open to the B of Q to return with a higher offer or the same deal but with a different structure that reflects the successful BEN’s approach to banking.
The B of Q offered 0.748 of its shares plus $5.50 cash for each Bendigo share. BEN shares fell just $1 on Tuesday after the rejection to $17. It is still in play and so far saying no hasn’t wiped out all the $6 or so in premium the B of Q bid built into the BEN price.
Bendigo helped by upgrading its 2007 earnings guidance to a cash net profit of $117 million, or cash earnings per share (EPS) growth of 12 per cent compared to a previous forecast of 10 per cent for the year.
It says it is also looking for cash EPS growth of 12 per cent and more for the 2008 financial year.
And some commentators have all but said the BEN shareholders were ungrateful: after all they would have almost owned half the new bank.
Seeing BEN is a bigger bank in all important respects (earnings etc) it was a bit rich for the Brisbane bank to offer terms which gave BEN shareholders a 48 per cent stake when it should have been just over 50 per cent. A wiser board and management would have done that and offered an extra board seat or two to make it seem more like a merger.
BEN shareholders got it right: the terms were on the skinny side, despite the hefty premium. It’s the banking analysts and others w
