BY ANTONY CURRIE, GEORGE HAY
Last decade’s financial crisis mostly put the “D” in dealmaking. Cratering markets created plenty of opportunities for less-afflicted banks to try to snap up, or take a stake in, rivals on the cheap. Many of those investments and takeovers, though, brought as much pain as progress to the instigators. Breakingviews looks back at those few that turned out to be the best – as well as some of the worst.
What so often turned deals into duds was the hope that a relatively stable lender could buy a troubled peer and turn it around. Buyers essentially bet they were facing a more or less conventional recession, rather than an epochal U.S. housing collapse that spawned a global financial crisis. In Europe, Lloyds TSB’s acquisition of HBOS in September 2008 and Commerzbank’s digestion of Dresdner Bank a few weeks earlier fall into this camp.
The Lloyds deal initially looked like a winner. The UK bank paid below book value to bump its domestic mortgage market share way above 20 percent, while the merger seemed to allow HBOS to put a recent failed rights issue and rapidly disappearing wholesale funding behind it. But a month later the combined group still wound up requiring a bailout from the government, which took a 43 percent stake. And in early 2009 HBOS announced a 10 billion pound pre-tax loss, miles above expectations. Lloyds only escaped Whitehall’s embrace in 2017.
Commerz, meanwhile, paid Allianz roughly the face value of Dresdner’s assets to become Germany’s leading retail bank. Within months Berlin had injected over 18 billion euros to prop it up. The German government still owns some 15 percent – and the bank trades at just 40 percent of book value.
Bank of America can lay claim to the worst example across the pond. In January 2008 it paid $4 billion for Countrywide, one of the largest U.S. mortgage lenders. It paid only a third of book value, so had what seemed like a decent buffer against losses. These and legal fines, though, ultimately cost BofA some $40 billion.
The wrath of regulators upended other deals, too. JPMorgan picked up Bear Stearns and Washington Mutual for around $2 billion apiece, each with assistance from the government. Bear boosted JPMorgan’s trading and prime brokerage units – and came with a new building at the time worth perhaps $1.4 billion. WaMu got the retail bank into lucrative markets in California and Florida. But the two acquired firms accounted for the majority of the $44 billion in crisis-related fines later levied on JPMorgan.
A couple of institutions stand out from the pack. Santander, then under wily Chairman Emilio Botin, struck two deals in the UK that were the essence of canny opportunism. It picked up Alliance & Leicester in July 2008 for 1.3 billion pounds. And two months later it spent 600 million pounds for Bradford & Bingley’s better assets, offloading problem loans onto UK taxpayers. At a stroke, Botin took the bank’s UK market share from 6 percent to 10 percent. The profit from its UK outpost proved more than handy when the euro zone crisis came knocking a couple of years later.
The Breakingviews pick for deal of the crisis, though, involves Morgan Stanley. It’s not the obvious one – its gradual acquisition of Smith Barney from Citi, for a total of $9.3 billion, starting in 2009. That has worked out well enough: Wealth management’s pre-tax profit over the past 12 months was almost two-thirds higher than what the two companies’ divisions managed in 2008.
But it’s Mitsubishi UFJ’s investment in the Wall Street bank that gets the accolade. It got off to an inauspicious start: The Japanese lender announced it had agreed to buy $9 billion of preferred and convertible stock on Sept. 29, 2008 – the day the U.S. Congress voted against a bank bailout, condemning the Dow Jones Industrial Average to a record one-day drop of 777 points.
The investment, though, has paid off handsomely in three ways for MUFG, which converted most of its holdings into a roughly 20 percent ownership stake. First, by ensuring Morgan Stanley’s survival in a drastically consolidated investment banking sector, the Japanese firm was able to roughly triple its money, including dividends, over the past decade, Breakingviews calculates. Second, MUFG now reaps almost a fifth of its earnings from the business arrangements the two struck – a joint-venture investment bank in Japan, access to MUFG’s balance sheet for Morgan Stanley, and access to Morgan Stanley’s global network for MUFG.
Third, the successful business partnership allowed MUFG to avoid having to spend billions of dollars trying to compete with bulge-bracket investment banks from scratch. Corporate Japan’s history of bad overseas deals – Nomura’s crisis-era acquisition of some Lehman assets, for example, makes MUFG’s success all the more notable.
First published Sept. 18, 2018
(Image: REUTERS/Gary Hershorn)