Farming out US$1.3 trillion poses significant challenge
'China Development Bank said yesterday it would pay as much as Euro9.8 billion to take a stake in the banking giant expected to emerge from Barclays Bank's takeover of Dutch lender ABN Amro.'
SCMP, July 24
The melkboer, dairy farmer, is a stock character of Dutch society. Travel anywhere in the Netherlands and you soon realise why. Black and white on green - Friesian cow on dairy pasture - these are the real national colours of the country.
The word 'stolid' is often used to describe dairy farmers but it doesn't really fit. Their work gives them time for reflection and they can be very perceptive people. I speak of my own forebears, you understand. The pace of life, however, is slower, the income relatively steady, the hours regular and the work repetitive.
ABN Amro is a melkboer. People may call it a bank but I recognise the underlying character. It tends the herd of the Dutch deposit base, keeps these docile cows fenced in on its pasture and milks them regularly to provide a steady diet for the bank's management ... and, oh yes, mustn't forget, ... for the shareholders too.
But the world of this particular form of dairy farming has been changing of late. The fences are steadily being torn from the pastures, the herds allowed to roam and other farmers allowed to milk these herds.
Oh, what to do, said ABN Amro some years back and came up with the obvious answer - if other dairy farmers are allowed on our pasture then we are allowed on theirs and that's where we shall go. We are as good at dairy farming as they are, aren't we?
Unfortunately, it isn't dairy farming. It's banking and some banks have proved better than others in a banking world in which borders are coming down. They are mostly those banks with earlier and longer experience of competition in their home markets.
I have had some acquaintance with ABN Amro. I was research director of a reasonably-sized stockbroking firm, HG Asia, which ABN Amro acquired in 1993 and I worked under an ABN Amro umbrella for five years thereafter.
Let me say first of all that they always treated me very well and I have no complaints against them. I also have to say, however, that I thought the bank was increasingly directionless in its forays outside the Netherlands. It would go one way and then change and go another and the board never seemed to know quite what it wanted to do.
The melkboer does not make a good deer hunter. This indecision was reflected in a lacklustre share price performance and as often happens in these matters, it came to the attention of others in the market. The outcome was a takeover proposal, actually more of a merger proposal, by Barclays Bank.
It was something that ABN Amro directors and senior executives could accept as a solution to their difficulties as, for one thing, it could leave them with their jobs and reputations intact.
What they could not easily stomach, however, was that someone should make an outright takeover bid with the intention of asset-stripping the bank and selling the component parts to different bidders across the world. Yet it was what came their way from an international consortium headed by Royal Bank of Scotland.
This said to them, as through a megaphone to the whole world: 'Hey, you, we don't think you were up to the job of running your bank and we intend to give your job to others. So be warned. If we come along, you collect your pension cheques and it's bye-bye, out the door with you.'
The big problem for the ABN Amro brass in all this is that RBS has bid more than Barclays and Barclays' shareholders have loudly opposed matching the RBS bid.
What this suggests to me is that the RBS view of the circumstances is the correct one. ABN Amro has not done a good job of expanding abroad and its foreign acquisitions would be worth more if hived off and run by others.
If I am wrong about this and the whole is still greater than the sum of the parts, then Barclays must still have room to outbid RBS. It seems, however, that Barclays does not. That's how decisions are made in markets and it's surprising how often hindsight shows those decisions to have been exactly right.
But why should China Development Bank want into this, and particularly on Barclays' side?
I think this is part of a Beijing strategy to give a greater emphasis to equity positions in the portfolio allocation of US$1.3 trillion of foreign reserves rather than put all the money into George Bush's war bonds.
But making a portfolio shift to equities is much harder to do with US$1.3 trillion than it is with US$1.3 million. Buying big stakes in companies pretty much requires taking advantage of big strategic opportunities such as ABN Amro being ripe for takeover.
Barclays for its part is enabled to raise its bid price for ABN Amro (although still to less than the RBS bid) and it gets an immediate green light for some smaller strategic mainland investments.
None of this, however, makes ABN Amro a better investment. It's a plodder and the market apparently leans to the view that it should be broken up. I think China Development Bank will find that it has done itself no service by taking a different view with its money.