Are break-ups the answer for troubled banks?
Whilst the merger wave hasn't broken yet, there has been an interesting development in the financial sector: the suggested break-up of banks such as Merrill Lynch, Citi and, of course, Northern Rock.
There's been a major market shift. Of course there's still new deals being announced, as the current merger wave is most definitely NOT over. Note the record-breaking BHP Billiton (BLT) £67 billion bid on 8 November 2007 for Rio Tinto (RIO) (see FT Alphaville's announcement of this deal), a deal that is likely to be front-page news for a while as the deal is likely to go hostile and it has significant competition / monopolies / anti-trust concerns. We haven't had a good fight on the front pages of the business news since RBS beat Barclays to the ABN AMRO prize.
And if there are any other doubters about the continued progress of the current merger wave, then note that the volume of deals in the 'slow' third quarter of this year for EMEA was just about the same as the average volume of deals in all of 2006 at just over $400 billion the record year of this merger wave thus far; and thanks to Credit Suisse for this analysis. October was the third strongest month globally this year for announced deals, too.
But the most interesting development recently is the suggested breakup of various banks that have gotten into trouble with the recent credit and liquidity crisis.
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Readers of this blog will have noticed that we first suggested the possible break-up of Merrill Lynch (see No Merger: Just Split up Merrill Lynch). There have been many suggestions to do the same with Citi (for just one typical example, see Here is the City yesterday with its article Rivals Lick Lips at Prospect that Big Firm is Broken Up).
Even stranger is the lack of logic as to the firms rumoured to be break-up candidates and those who could be the purchasers of big pieces of those targets: Morgan Stanley just announced large losses on the order of $3.7 billion, but is suggested to be a buyer of the retail side of Citi (a prospect that this writer finds just too far out, as the management of Morgan Stanley is more likely to be comfortable with added capability in the institutional side of the business than the retail side that would bring back memories of the frustrations with the Dean Witter merger of the late 1990's).
There's also the farce known as Northern Rock. Will it be purchased (and possibly by those outside the industry such as Richard Branson's Virgin, although recently the focus has been on Asian purchasers)? Will it survive independently? (Many people think that the smart money seems to be on this option now.) Or should it be broken up as well? The problem here is that the natural domestic UK buyers for its assets would face competition concerns (unless the Richard Branson option really does have legs or there is someone else who thinks the UK mortgage market is an attractive long-term strategic business.)
My own thoughts would see Northern Rock broken up, after a restructuring firm (or hedge fund, private equity fund or other similar organisation) cleans it up. We haven't changed our opinion from what we've noted before on this blog back in mid-September (What price Northern Rock?) and also in an article we wrote for the BBC (Why would anyone buy Northern Rock?). We understand that there are several firms poking around the bank and seriously considering such a purchase but quietly, as they do not want to push the price up. Stay tuned.
Posted by Scott Moeller on his Intelligent Mergers blog, Friday 9th November
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