The ill-fated acquisition of ABN Amro by Royal Bank of
Scotland
In 2007, the Royal Bank of Scotland and two other European banks paid more than €71bn for part
of the Dutch lender ABN Amro, which RBS's arch-rival Barclays had agreed to buy.
The consortium – RBS, the Belgian-Dutch bank Fortis and Banco Santander of Spain – paid three
times the book value for the Amsterdam-based bank, which at the time was already expensive for
a bank based in a mature European country.
By the time that RBS, then led by its chief executive Sir Fred Goodwin, had secured the ABN Amro
deal, the Dutch bank had sold on to Bank of America the asset which was most prized by RBS – its
Chicago-based LaSalle unit.
This left the Edinburgh-based RBS with only an underperforming London-based investment
banking franchise (with what turned out to be a few dubious loans on its books) and some small
Asian operations.
Even worse, RBS went ahead with the buyout without trying to amend its terms once the credit
crunch started to hit in the summer of 2007 and it became apparent that ABN would not deliver the
earnings RBS expected.
By the time the deal was closed, many banks were trading at around book value, making the initial
price paid by RBS looking even more of a folly. Now struggling under the cost of the acquisition,
and with toxic assets it acquired with ABN, RBS is into its second government bailout. The first
rescue package in October 2008 had to be so radical that it saw the UK Treasury take a 58 per
cent stake in the bank.
The RBS-ABN Amro deal is also unusual in that it led to the fall of not just one buyer but two: the
Belgian-Dutch bank Fortis was eventually nationalised by the Dutch government to avert a liquidity
crisis.
The following quote is an excerpt from the letter to the shareholders written by the freshlyappointed Group Executive Officer, Stephen Hester, and included in the 2008 RBS Annual Report:
In 2008 the Group’s overall results were bad, with net attributable
losses, before goodwill impairments, of £7.9 billion. This is
particularly disappointing since many parts of our business did
well, serving customers and generating high quality profitability.
All our Divisions were profitable except Global Banking &
Markets (‘GBM’) and Asia Retail & Commercial Banking. Even in
GBM, underlying income reached £10.2 billion on the back of
many strong business performances. Unfortunately, these profits
were more than wiped out by credit and market losses in
concentrated areas around proprietary trading, structured credit
and counterparty exposures. Over 50% of these losses pertained
to ABN AMRO-originated portfolios.
In addition, the change in market outlook and our vulnerability
thereto has required a £16.2 billion accounting write-down of
goodwill and other intangibles relating to prior year acquisitions,
most notably of ABN AMRO in 2007 and Charter One in the US
in 2004. This non-cash item has minimal impact on capital but
does highlight the risk of acquisitions if economic conditions
change adversely.