The biggest banking deals of 2008 were the numerous
state bail-outs, capital injections, loan guarantees and
nationalisations that have radically altered the industry in the
wake of the credit crunch. Many of the biggest non-state mergers
and acquisitions seemed driven more by politics than strategy too,
writes Douglas Blakey.
Against a backdrop of gummed up funding markets, capital
constraints, increased regulatory attention and in particular a
substantial deterioration in asset quality, 2008 was never going to
provide a healthy environment for banking M&As.But in a far
from classic year for bank deal-making, despite the sector trading
at multi-decade lows by nearly all standard valuation metrics,
there was certainly quantity if not quality.
The biggest deal of 2008, Bank of America’s (BofA)
hastily-arranged acquisition of investment bank Merrill Lynch, was
valued at a mighty $50 billion when it was announced on 15
September just hours before the collapse of Lehman Brothers. But
the deal, now criticised as overblown (see Citi falls apart
with $19bn annual loss), was valued by BofA at around $24
billion when it finally closed on 1 January.
Other significant deals of 2008 serve to emphasise, that by any
definition, the years banking sector M&A table paints an
overall grim picture of the current climate.
The consortium led by private investment firm TPG Capital
invested $7 billion in Washington Mutual (WaMu) on 7 April only to
see their stake wiped out by 25 September, when the Federal Deposit
Insurance Corporation seized WaMu. But TPG had competition for the
year’s worst deal.
The Government of Singapore’s $6.88 billion stake in Citi,
announced on 15 January 2008, when Citi stock traded at $27.42, was
worth almost $6 billion less exactly a year later, with Citi shares
hitting new lows at around $3.80.
The economic crisis offered a number of potential fire sale
bargains, such as Commonwealth Bank of Australia snapping up the
beleaguered HBOS’s Australian arm BankWest for $1.8 billion, around
0.8 times book value. Other ‘bargains’ include PNC’s acquisition of
National City, to create the fifth-largest US bank, while JPMorgan
Chase’s $1.9 billion paid for WaMu may yet be the deal of the year
if and when market conditions improve.
Nevertheless, what will define 2008 more than anything else will
be the unprecedented level of state intervention in banking
markets, with sums pumped into banks that dwarf the more
traditional merger and acquisition numbers. Starting with the
collapse of US mortgage giants Fannie Mae and Freddie Mac, billions
have been spent by governments across the world to stabilise
domestic banking industries and recapitalise individual banks.
Some 30 percent of UK banking assets are now state-owned for
instance (see Barclays raises its game in home market). By
mid-January, the UK government had suffered paper losses of around
£10 billion arising from its £15 billion investment in Royal Bank
of Scotland, announced on 13 October, and a potential loss of
around £5 billion from its Lloyds TSB-HBOS investment, disclosed on
the same date.
Other notable public sector deals during 2008 included the Dutch
government’s October investment of $13.4 billion in bancassurer ING
and Bavaria’s $12.9 billion bailout of BayernLB in November.
Citigroup in the US has been supported by a $300 billion state
guarantee on bad loans for the past two months.