Comment: Lloyds' merger mystery party

5th Jun 2009 17:13

The Lloyds Banking Group AGM on Friday was no party for directors as shareholders took the opportunity to vent their spleen at the company's hasty takeover of the toxic debt receptacle that is HBOS, with one shareholder at the AGM declaring the acquisition a 'disaster'.Many shareholders bought into Lloyds because it had a justified reputation for being a conservative, staid, risk averse bank and are justifiably angry that the Lloyds management took a leap in the dark in buying HBOS without, the board has admitted, doing the requisite amount of due diligence.Some shareholders have even gone so far as to suggest that the HBOS takeover is the most ill-advised in British banking history, though as long suffering shareholders of fellow part-nationalised bank Royal Bank of Scotland (RBS) would acknowledge, there is a lot of competition for the accolade of most boneheaded banking takeover.RBS got involved in a bidding war with British rival Barclays for control of Dutch investment bank ABN-Amro, a war which, with the benefit of hindsight, Barclays' shareholders are glad their bank lost.Since paying top dollar, in partnership with Spanish bank Santander and Belgium-based bank Fortis, for control of ABN Amro, RBS has had to go cap in hand to the British taxpayer seeking funds to ensure its continued existence, having had to add ABN Amro's exposure to collapsing collarteralised debt obligations to its own. after winning,In contrast, Barclays has managed to avoid becoming beholden to the UK government, albeit at the expense of giving Middle East sovereign investment funds major stakes in the company.What will irk RBS shareholders even more is that Barclays was paid a €200m break fee by ABN Amro when the Dutch bank withdrew its recommendation for the Barclays bid and reluctanlty succumbed to the cash-heavy offer from the RBS consortium.The RBS bid for ABN Amro proved a bid too far for wealthy pensioner Sir Fred Goodwin, who earned his nickname of "Fred the Shred" from the successful takeover and integration of National Westminster Bank, historically one of the big four British banks.Another former member of the big four was Midland Bank, now subsumed into HSBC, but once the largest deposit taking bank in the world. Having grown to be number one in the UK through mergers with a number of local and national rivals, the bank turned its eyes towards international expansion. Some of these overseas acquisitions worked fairly well but the purchase of Crocker National Bank, the twelfth largest bank in the US at the time, was, by common consent, an unmitigated disaster which ultimately left Midland vulnerable to a takeover approach by HSBC.Crocker collapsed in 1983, having over extended itself in with mortgage loans (stop me if any of this is starting to sound familiar) and a massive exposure to Latin American debt at a time when Latin American countries were seemingly rebasing their currencies on an almost monthly basis.HSBC itself has not been immune to bad purchasing decisions. While the acquisition of Midland Bank is generally regarded as a sound one that gave the Hong Kong and Shanghai Bank (as it used to be known) a major foothold in the UK market, its $15bn acquisition of US sub-prime lender Household in 2002 was not its finest hour.HSBC finally recognised as much in March 2009 when it wrote off the remaining $10.6bn of goodwill relating to its acquisition of Household, a decision which prompted the company to raise £12.5bn through a rights issue to shore up its balance sheet.There are not many good things one can say about HSBC's takeover of Household, though it did, at least, act as an early warning to management about the tsunami of toxic debt that would eventually wash over the global banking system and bring down some of its most storied names, such as Bear Stearns and Lehman Brothers.HSBC was, arguably, the first major bank to warn of a deterioration in the sub-prime loans market when it said back in February 2007 that the rush to offer low-introductory rates to low income groups was about to become a case of 'lend in haste, repent at leisure.' The bank shocked the market when it said that bad-debt charges for 2006 would be 20% higher at $10.56bn than consensus estimates of $8.8bn. At the time $10.56bn was seen as a seriously large number; HBOS lost that amount in a single year last year and since its merger with Lloyds, the combined group has moved to put £260bn of toxic assets into the government's asset protection scheme.