Santander / Abbey: acquisition uncertainties and complexities

:: The Santander / Abbey Deal ::
- acquisition uncertainties and complexities -
Uncertainties | Complexities | Santander's experience

The fact that the Santander-Abbey deal was the first pan European deal between two major banks surrounds it with significant complexities and uncertainties which will pose a challenge to the merger’s success.

i. Uncertainties

Given that retail banking is an established business, product uncertainty is low. On the market side the main uncertainties causing concern are:

  • Mortgage Exposure – Due to the high household leverage in the UK, rising interest rates and the maturity stage of the UK housing market Santander faces the risk of having paid a higher than average premium to acquire a mortgage lender, at a time of increasing concerns about the housing market in the country. Therefore, there are questions about the realistic achievement of growth and of revenue synergies.
  • Reaction of Competition – Although Abbey National has been an under-performing bank in the last few years in terms of growth and market share, this is likely going to change with the new management team. In the short term, Santander hope was to stabilize Abbey’s market share, while it planned to diversify and expand its product lines in the medium term. During this time, other UK competitors will be working towards strengthening their respective franchises. UK competitors such as Northern Rock and HBOS have advantages in efficiency and product branding respectively.
  • Outside Views: Santander had to deal with an hostile UK press which didn’t welcome a cross border deal and it also had to reassure Abbey investors concerns regarding owning shares of a Spanish bank (due to the all-share nature of the deal).
ii. Complexities

The biggest challenge, however, are the technical and organizational complexities surrounding the cross-border deal:

  • Organisational - Cultural clash: complexity arises from merging not only different organizational cultures and business styles, but also different national cultures: the “Spanish-Latino” vs the “British” culture. A key to the operation’s success will be Abbey employees’ buy-in in order to smooth the implementation of new processes and best practices. Management has the complex task of being sensitive to cultural issues without losing track of the planned efficiency objectives.
  • Technical - Implementation of IT-systems: The realization of projected cost synergies heavily depends on the implementation of Santander’s IT-processes at Abbey. However, the implementation of Partenon by 2007 may prove a challenge and may have to be delayed due to unexpected technological complexities surrounding it.

iii. Santander’s experience in acquisitions: a key to success as well as a challenge

Prior to Abbey’s acquisition, Santander already had a long experience in mergers and acquisitions which allowed it to become one of the largest financial institutions in the world by successfully  merging and acquiring different Spanish and Latin-American banks. The challenge for Santander is now to deliver to its promises to grow and exploit revenue synergies in a more mature market where it has no operating expertise and retail margins are thinner.

 “It is a substantial challenge for Santander to be successful in a market like the UK where banks are sophisticated, the mortgage market is expected to decelerate and Abbey’s franchise has been severely diminished,” says Jesús Martínez, director at Standard & Poor’s in Madrid. “Santander has shown it can be a good manager in Spain and Latin America, but it has now made a big acquisition in a market where it will not be easy to grow.”

The Abbey deal’s uncertainties and complexities were partly new for Santander and different from all its previous acquisitions, posing a challenge for its integration strategy. Santander modified its integration approach with respect to previous acquisitions and decided not to appoint a British CEO at Abbey, but rather previous Santander CFO Francisco Gómez Roldán in the hope that he would smooth the transfer of Santander’s best practices and rapidly execute the changes that Santander had planned to improve Abbey’s profitability.

This involves a trade-off which forces Santander to give up the contribution a British CEO would provide in terms of a local network of contacts and local knowledge of the UK market. Additionally, it may determine a lower degree of cooperation that local staff might have when faced with decisions made by a foreign CEO.

“Global kings continue to reign”, The Banker, June 6, 2005.

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