Northern Rock as an Acquisition Candidate

Posted on Sunday, 16 September 2007. Filed under: Commentary, Mergers |

Lots of speculation now in the press about Northern Rock, the beleagered mortgage bank in the UK.  Not surprising, of course, now that they’ve been knocked down by the market and bailed out by the Bank of England.  With a corresponding plummeting stock price, too.  

It can be expected that the vultures would begin to circle, and fast:  looking for the parts of Northern Rock that may be available.  Any large UK bank would be remiss if it didn’t have a team looking at Northern Rock’s assets.  The same is true of foreign banks wishing to have a UK presence or wanting to expand an existing UK presence (why does the acquisitive Grupo Santander, the purchaser of Abbey National in 2004, come to mind, and even though they are somewhat distracted by their part in the expected purchase of ABN AMRO?).  

Inherently, the UK mortgage market is attractive:  it will remain highly cyclical (especially with housing prices at a peak), but is fundamentally strong for a buyer willing to invest for the long term.

Banks that have been in trouble can prove to be very attractive to the right purchaser.  Just because a bank is tainted doesn’t mean that there is no value.  In fact, Merrill Lynch posted a ‘buy’ recommendation on Northern Rock’s stock last week AFTER the Bank of England bail-out (but after the share price decline, of course), as reported in FT Alphaville

Remember as well the purchase of Bankers Trust by Deutsche Bank in 1999 for $10.1 billion (after BT had regulatory and legal problems with its derivatives business dating back to 1994), or ING’s purchase of Barings Brothers for £1.00 after Nick Leeson’s $1.6 billion fraud in 1995.  With the benefit of hindsight, both those deals turned out to have been strategically critical to the current competitive positioning of the two acquirers.  Someone can be expected to do the same with Northern Rock.

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