Barclays and RBS fight over who can waste the most money

Royal Bank of Scotland has just come out with an offer of Eur38.40 a share for ABN Amro, trumping its rival Barclays by about 10%. But the higher the bids climb, the greater the risk that the winner overpays.

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Ah. Bid battles. Don't you just love them?

Royal Bank of Scotland has just come out with an offer of Eur38.40 a share for ABN Amro, trumping its rival Barclays by about 10%.

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Even though it's a higher bid, there are still plenty of obstacles in the way. Regulatory issues are one hurdle; and meanwhile, Bank of America wants ABN's US banking business LaSalle, and reckons it has a binding contract to do so. RBS and Bank of America have yet to come to an agreement over this little problem.

So there's still a good chance that ABN could easily fall to Barclays. But will Barclays' chief executive John Varley be willing to sit on his hands until then?

As James Harding says in The Times, both Barclays and RBS have been quick to declare that they have no intentions of overpaying for ABN Amro. But "when a chief executive says that he is not going to overpay in a deal, you can't help thinking that ambition and ego are going to inflate the bid price."

If Barclays "believe in the strategic logic of combining Barclays and ABN, they will have to eke out more synergies, explore the idea of selling assets such as the Brazilian business and up their offer."

But of course, the higher the price goes, the more likely it becomes that the eventual winner will overpay. And as Mike Verdin pointed out on Breakingviews recently, "selling Latin America would make the Barclays ABN group less interesting. Its growth rate would be far slower."

The truth, as James Ferguson recently pointed out, is that the real winner from this bid will be whichever company fails to land ABN (you can read more from James here: Model Investor ( But unfortunately, in the heat of the moment, when two chief executives get caught up in a bit of arm wrestling, this kind of logic tends to go out of the window. We wouldn't be surprised if the ante gets upped again from here.

Talking of paying too much, more news from the housing market. Yesterday's survey from the Royal Institution of Chartered Surveyors found that in the three months to April 16th, a balance of 16% of its members reported rental demand rising rather than falling. Sounds OK - but that was down sharply from 28% a year ago, and is below the long-run average of 18%.

The drop was blamed on rising rents, slower employment growth and recent growth in housing sales. The fact that demand has dropped off so sharply, despite the shortage of properties that the bulls keep going on about is yet more evidence that the whole supply and demand argument is nonsense.

As - coincidentally enough - bid target ABN Amro pointed out in a comprehensive report on UK housing last month, if there truly was a housing shortage driving prices higher, then rents should have risen substantially as well. And yet, "rents have remained subdued relative to house prices." In fact, the investment bank reckons that by this measure, UK property is nearly 50% overvalued.

The group also points out that if supply and demand was really such an issue, then property prices should have risen most in those parts of the country with the greatest population density. But in fact, price growth has been "quite uniform" across the UK.

It pins the blame partly on the Monetary Policy Committee for cutting interest rates by a quarter point in August 2005, and thus creating the impression that it would always defend house prices. It reckons the solution now - which the bank seems likely to do - is to have "a series of rate hikes in the short term" which "could provide the shock to expectations needed to cool the housing market". That might be painful, but at least it would indicate that the Bank of England still has some control over the economy.

Let's hope the Bank is paying attention.

Turning to the stock markets

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In London, the FTSE 100 added 36 points to close at 6,606 yesterday, with the broader FTSE indices also higher. Mobile telecoms firm Vodafone gained over 5% after posting in-line results for 2006/7 and revising guidance upwards for the current year. British Airways also made strong gains on vague bid speculation. For a full market report, see: London market close.

On the Continent, the Paris CAC-40 ended the day 23 points lower, at 6,056. In Frankfurt, Deutsche Boerse led blue-chip stocks higher on speculation of a merger with the London Stock Exchange. The DAX-30 index was 41 points higher, at 7,781, at the close.

Across the Atlantic, US stocks closed higher on a day of light trading as investors were cheered by takeover activity. The Dow Jones Industrial Average ended the day at 13,521, a 14-point gain. The tech-heavy Nasdaq added 14 points to close at 2,572. However, the S&P 500 was 2 points weaker, at 1,518.

In Asia today, a decision by the Beijing government to increase tax on share trading sparked concerns of a slump in Chinese markets. The Nikkei fell 84 points to end the session at 17,588 and the Hang Seng was down 240 points to 20,218.

Crude oil was fractionally higher, at $63.26, this morning, whilst Brent spot was almost 1% higher in London, at $68.83.

Spot gold had risen to $657.15 this morning, up from $655.95 in New York late last night. Meanwhile, silver had fallen to $13.14.

Turning to currencies, the pound was last trading at 1.9777 against the dollar and 1.4719 against the euro. And the dollar was at 0.7440 against the euro and 121.59 against the Japanese yen.

And in London this morning, electricity supplier British Energy announced a 8.1% rise in full-year profit, with net income of £465m. Higher energy prices offset a drop in output prompted by the discovery of cracks at two of the company's eight power stations. Shares in British Energy had fallen by as much as 1% in early trading.

And our two recommended articles for today...

Two signs the market's reached a turning point

- It's often said that bear markets happen immediately the last bear becomes a bull. Not only have two such bears suddenly come all over optimistic, attitudes in the mainstream media are also starting to shift. To find out why it looks as though time is fast running out, read: Two signs the market's about to turn bearish

What the investment sheep are buying now

- It looks as though the market is giving up on gold, says Adrian Ash, just as it was revealed that US homebuyers flocked back into property in April. For the investment lambs, gold is out and property is still in. But remember - the best gains are rarely to be found by following the crowd. For more on why investors have got it wrong, click here: What the investment sheep are buying now

John Stepek

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.