The intensity of the takeover battle is a time when far-reaching and critical questions will be asked of management. As Barclays did its utmost to gain control of ABN AMRO in the middle of last year, a director threw an interesting question at president Bob Diamond: “If you had to choose between acquiring ABN and the strategic partnership with China Development Bank (CDB), which would you pick?”
The relationship between Barclays and CDB was strengthened and upgraded when – as part of the assault of ABN – the Chinese policy bank, together with Singapore investment fund Temasek, took a 5.2% stake in Barclays worth €3.6bn. An additional €9.8bn investment was conditional upon Barclays’ completion of the ABN acquisition, which subsequently failed.
With ABN going to the Royal Bank of Scotland/ Santander/Fortis consortium (see interview with Fortis CEO Jean-Paul Votron, page 64), suddenly the markets had made the CDB partnership/ABN choice for Barclays.
Nevertheless, as the consortium members start going through the inevitable pain and trauma of a major merger, it is easy to understand why Mr Diamond is upbeat about Barclays’ long-term strategy and especially its position in Asia.
“We have strategic investments from Temasek and CDB, two highly prestigious and influential Asian organisations,” says Mr Diamond, in reviewing the post-deal environment in an interview held during last October’s IMF/World Bank annual meetings in Washington. “Most importantly, we have a strategic partnership in China that puts us in a completely different space in terms of our African business, in terms of our commodity business and in terms of our brand recognition in Asia and China.
“Already there is a buzz about Barclays and China, which is palpably different than before this deal,” he says.
Driving force
As well as Barclays’ position post-ABN, Mr Diamond discussed the impact of the subprime crisis and the role of credit rating agencies, plus innovation in the financial sector. He was speaking ahead of last November’s trading statement that the investment banking arm, Barclays Capital (BarCap), was writing off £1.3bn ($2.65bn) as a result of the credit crisis but still made record profits of £1.9bn in the first 10 months of 2007. Mr Diamond is also the CEO of investment banking and investment management, and has been the main driving force behind BarCap’s positioning as a key player in top-league investment banking.
Some analysts, however, are sceptical about whether BarCap has made a sufficient write-down to put the crisis firmly behind it. “Bears may question whether this is enough, given just 65% cover against collaterlaised debt obligation subprime collateral, a £5.4bn subprime trading book and a £7.3bn leveraged finance book,” wrote financial services specialists Keefe, Bruyette & Woods in a November 15 research note.
Mr Diamond accepts that it will take between six and 24 months for banks to restructure after the subprime crisis, but he remains confident that the impact will not be felt in the real economy and that Barclays will steer its way through the crisis better than most of its peers. He is highly optimistic about the bank’s post-ABN situation.
“The post-ABN situation is not complex for us. We are very disappointed, of course, and we would not have pursued a deal as complex or as important as this if we did not expect to complete it. But John Varley [Barclays’ group chief executive] and Marcus [Agius, the chairman] both stated at the beginning that there would be no compromise on complete management control and no compromise on financial discipline, which means doing the right thing for all of our shareholders,” he says.
“On July 23, when we announced the strategic investments by Temasek and CDB, our share price was £7.60 and heading towards £8, and we felt very confident. But the turmoil in the summer sent share prices of all major financial stocks down 10% to 20%. The good news was that our financial obligation was hedged because we proposed doing the majority of it as a share exchange; the bad news was that it meant we probably weren’t going to win.
“How do we feel? We feel disappointed but remarkably resilient,” says Mr Diamond. He describes the suggestion that Barclays could have put itself into play from the failed bid – a common feature when proposed acquisitions fall through – as “silly”. “We have been driving the strongest rate of organic growth for four years. Barclays Global Investors (BGI) and BarCap have been highly successful, as are the retail and commercial sides. This is a very confident management team and to think that we would hesitate [to make the ABN bid] because it might put us in play is silly.
“Why are we as resilient as we are? I think our clients, our shareholders and our employees, all 130,000 of them, are happy we didn’t lose our financial discipline. They would not have wanted us in this market environment to bid up the price. Second, we had a seat, a serious seat, at the table of the biggest financial transaction in history. The Barclays of five or 10 years ago – which was predominantly a UK retail bank with 80% of its income from within the UK – could never have been in that position. We have earned that and we feel good about it,” says Mr Diamond.
On the growth path
As Barclays executives have made clear all along, the ABN purchase was designed to accelerate a growth path that the bank was already on, not to take it in a new direction. The purchase of South Africa’s Absa two years ago showed the commitment to emerging markets, and the ABN acquisition would have given Barclays strong positions in Brazil and India, where it will now have to build organically.
The failed deal did, however, fully crystallise the relationship with CDB and provide Barclays with a much stronger hand in China. “We approached CDB and Temasek in May and June because of the deal. We had strong relationships with them and we had already been discussing aspects of a strategic partnership with CDB, mostly around Africa, but clearly the visits in May and June were regarding ABN and would they like to be strategic investors so we could raise the cash portion of the deal,” says Mr Diamond.
“What we were excited about was that in both cases they said first, ‘yes’ and second, ‘we would like to do it unconditionally of the ABN deal. We support you and we like the deal’. And so $5bn was unconditional and $13.5bn was conditional.
“The strategic partnership was CDB’s idea; it brought it up and said ‘by the way we would like to do this and you are the perfect bank to help us build our commodities risk management business, our relationship with the corporates in Africa and our asset management business’. All that was also unconditional.”
A critical aspect of the CDB tie up is that the Chinese bank has a mandate to help commercialise 270,000 state companies in China, many of which are in the commodities business that is a BarCap speciality. The first memorandum of understanding signed between Barclays and CDB was about Africa, bringing together the burgeoning $40bn China-Africa trade and Barclays’ leading banking role across the continent, while the second agreement concerns commodities.
The Temasek shareholding is not strategic for Barclays in itself but it does reflect the bank’s strong position in Singapore, where it has a major high-end financial technology outsourcing operation as well solid roles for BGI and BarCap. John Varley sits on the international advisory panel of the Monetary Authority of Singapore.
Freedom of a failed deal
One advantage of not getting ABN is that Barclays has its hands free to engage in the inevitable sorting out that will involve all banks in the wake of the subprime crisis.
“The expectation is that we, as an industry, have some sorting out to do in the asset-backed markets as we try to understand how to price the different tranches. With [the future of] off-balance-sheet structures, you can’t throw them all into one bucket. Standalone structured investment vehicles (SIVs) that rely on short-term funding are probably not viable going forward but bank-sponsored conduits for the right asset class continue to have a very strong position,” says Mr Diamond.
“[With the macroeconomy] the central banks have a good understanding of the situation and are ready and willing to address the issues of liquidity. If we [as an industry] are able to address the issues of liquidity and of getting some structure back into the short end of the curve, and getting some confidence back, then this doesn’t need to spill over into the real economy, with steeply higher Libor rates, or into credit. The optimist in me says that we don’t need to create a credit contraction, we don’t need to create an economic slowdown because of the ending of the liquidity bubble and the repricing of risk,” he says.
But Mr Diamond does think there are questions to be asked about the role of the credit rating agencies in the crisis. “I don’t know where we are going with the rating agencies,” he says. “I have never accepted people in my asset management or investment banking business saying we did it because the rating agencies said it was OK. We still have to be accountable but it is not easy to find the right solution. This business model doesn’t seem to work, however, and you can’t regulate the rating agencies.”
Reasons for optimism
But rating agencies and subprime aside, Mr Diamond is optimistic about the future of financial innovation. “The innovation in our business has been a huge success and is one of the reasons why we have seen a longer period of economic growth [in the global economy] than we have ever had before. The ability to transfer risk around the world, and between industries and between banks is making the cycles longer and less volatile and has played a large part in why we have seen developments outside the Organisation for Economic Co-operation and Development countries.
“With financial innovation from time to time comes correction but we are not going to step back from innovation.”
