Why would anyone buy Northern Rock?

Analysis Professor Scott Moeller Mergers & Acquisitions expert at the Cass Business School in London

There is a lot of speculation now about Northern Rock, the beleaguered UK mortgage bank. That is not surprising, of course, now that it has been knocked down by the market and bailed out by the Bank of England.

Its share price has plummeted, too.

But that lower share price begins to make it more attractive to the vultures that invariably circle when a company is in distress.

Carve up?

A potential buyer does not have to purchase all of Northern Rock.

Northern Rock retains some attractive assets

In fact, even if someone did buy it “lock, stock and barrel”, it would probably be with the intention of selling off some pieces.

That was the case when Morrisons sold off some of Safeway’s stores after its acquisition.

Royal Bank of Scotland intends to carve ABN Amro into at least three pieces, sharing some with Santander of Spain (the buyer in 2004 of Abbey National) and Fortis of Belgium.

Also, the hedge funds and private equity firms – recently in the press and still awash in uninvested funds – do a lot of business buying distressed assets.

They find the good bits and sell those off for a profit after they have cleaned them up and repackaged them.

Good assets

Northern Rock retains some attractive assets, even if its own formerly good name is not one of them.

As of early on Monday, it was reported that less than 10% of deposits had been withdrawn.

And even if you withdraw most or even all of your money, your relationship with the bank may remain.

Northern Rock’s mortgage portfolio is largely unchanged by the events of the last week, although the firm is clearly not writing new mortgages at the same pace as previously.

A buyer of Northern Rock could rebrand the assets, and Northern Rock has never been the strongest brand anyway.

Bank acquirers have not hesitated in the past at discarding excellent brands: look at what HSBC did to the very well-known Midland Bank in the last decade.

Few customers apparently left Midland because their bank cards no longer had a picture of the Midland’s phoenix and instead showed the very impersonal HSBC two-triangles logo.

Foreign bidders

From a strategic perspective, a foreign buyer is the most likely at this time, especially a bank with little current exposure to the UK retail banking market.

Inherently, the UK mortgage market is attractive

This would probably be the preferred route from the perspective of the Bank of England, too, despite the obvious disadvantages of having a foreigner buy a UK bank currently being propped up by the British taxpayers.

A continental European bank might be keen, especially a one-country bank in the Eurozone.

Dutch bank ING has already done wonders with its purchase of Barings, which it got for £1 after Nick Leeson’s $1.6 billion fraud in 1995.

Would it like a UK retail and mortgage presence as well?

But the list of potential buyers need not be limited to those in this time zone.

This is the era of Asian purchases, so it could be someone even further afield.

Conventional wisdom

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.

Not that it would be that easy for any buyer right now.

The conventional wisdom about acquisitions bears repeating: historically, two-thirds or more of acquisitions have been failures.

They have not provided good return to shareholders nor met their strategic or financial goals.

Employee redundancies are high, often as much as 10% of the target company’s workforce.

There is some evidence from our own research at Cass Business School, together with Towers Perrin, that deals since 2003 have reversed this trend, but still it is hard work to make any acquisition successful.

And this is even more difficult with a tainted company where many customers are leaving.

Any buyer had best tread very carefully into this mess.