ANGLIA RUSKIN UNIVERSITY

Poor Decision MakingResults in Huge Business

FailuresEvidenced from ABN AMRO acquisition by

RBS.

Haseeb Ayaz Word Count: 2450

Poor decision making and failure of defined spectrum to follow in risky transactions often results in huge business failures. The case study of ABN AMRO acquisition by the Royal Bank of Scotland is one ofthe examples of poor decision taken by RBS management which has resulted in business failure by making the transaction one of the biggest bail-out in banking history.

Table of ContentsIntroduction to Decision Making and Problem Solving 3

Case Study 3

Acquisition of ABN AMRO by RBS 3Critical Appraisal of RBS approach to acquire ABN AMRO 6

Other Approaches Available For ABN AMRO Acquisition 8

Appropriate Decision Making and Problem Solving Techniques for ABN AMRO Acquisition 10

Implementation Method 11

2

Introduction to Decision Making and Problem Solving

A company senior’s competences and capabilities in strategic decision-

making results in competitive advantage over their competitors in fast

changing environment. Cautious management analyzes the situation

confronting them before coming to the final decision or action.

Decisions about investments or mergers and acquisitions require

vigilant consideration. Decision making demands abilities to

investigate deeper under constraints such as due-diligence reviews

which stresses expediency and quick adequate solutions to the problems

(Reinmoeller, 2013). Due diligence reviews promise to deliver trustworthy

support for strategic decision making by generating information that

can thwart mistakes by providing in-depth analysis. Regrettably, few

managers are vigilant to a fault and take costly steps to guard

against doubtful results whereas others are overconfident, and

misjudge the choice of potential consequences. Some seniors are highly

vulnerable as they allow memorable past events to explain their view

of what could have happened now. Most of the times the problem is in

the decision makers mind rather than the decision making process

(Hammond, Keeney and Raiffa, 2006).

Decision making is highly imperative and risky task as poor decisions

are often the major cause of business failures. Bad decisions are not

clearly defined, commenced with wrong information, pros and cons after

implementation of the decision are not considered appropriately.

Solutions exist on how to overcome these issues for example how you

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consider a problem, reframing the options in different ways and try to

analyze how decision maker’s thinking might differ for each

alternative. Building these kinds of tests into our decision making

processes helps us to analyze once again about the quality of options

under consideration before it is too late to recover from the losses

as a result of bad decision (Hammond, Keeney and Raiffa, 2006).

Case Study on Poor Decision Making and Problem Solving Strategy

Acquisition of ABN AMRO by Royal Bank of Scotland

One of the leading banks in the world by assets of more than $3.5

trillion and fifth largest global market share, the Royal Bank of

Scotland, failure at the end of 2008 has elaborated as “the biggest bail-out

in history” by HM Treasury Committee UK in the Financial Service Authority

Report into the Failure of RBS, 2012-13. Blames imposed upon several

factors for the failure of RBS; acquisition of the Dutch Bank ABN AMRO

with inappropriate attention towards the risks involved and inadequate

due-diligence reviews before the acquisition was one of the

highlighted concerns among all. Over-Valued offer price at the wrong

time was not the only reason of RBS collapse, but the offer price for

acquiring ABN AMRO was one of the poor decisions taken by RBS board of

directors which substantiates failures of the effectiveness of RBS

management board (Lambert, 2011). One of the largest take over in the

banking history (J.R, 2011) in October 2007, Royal Bank of Scotland led by

a consortium with Santander of Spain and Fortis of Belgian Banking

Group has acquired ABN AMRO for £50bn with around 79% cash based which

was more than 50% over valued bid price during the time of European

Crises whereas 20%-30% premium are considered as normal in offer for

acquisitions (Robinson, 2012).

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Earlier, Barclays of Britain offered $91bn in shares to acquire ABN

AMRO (latimes, 2007) which was initially agreed by ABN AMRO (Werdigier, 2007).

In the desire to thwart the hostile bid offered by RBS Consortium and

continue to be acquired by Barclays in order to maintain existing

friendly relations, ABN AMRO purportedly disposed off one of its North

American subsidiary, LaSalle Bank Corporation which Bank of America

agreed to buy for $21bn. Later RBS led consortium increases the cash

proportion to 93% followed by Barclay’s withdrawal from the battle and

approval of more than 86% of ABN AMRO’s shareholders (The Guardian, 2011);

RBS have won the bid after a contentious battle to acquire ABN AMRO

between Barclays and RBS for €72.27bn which was €10bn higher than bid

price offered by Barclays.

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RBS decision making approach to acquire ABN AMRO

RBS management decided to follow a quick magical approach to acquire

ABN AMRO by considering the acquisition as an opportunity to avail at

any cost by challenging their assumptions. Management believed that

the assets of ABN AMRO will outweigh its acquisition costs and has

followed a holistic approach for the acquisition. Sir Fred Godwin, RBS

Chairman being dominant in his decision was committed to acquire ABN

AMRO at any cost which forced the bank to its knees (Wilson, 2011). Using

mind games, Sir Fred Godwin tried to continue with the acquisition by

being ambitious in the transaction that it will increase the market

share of RBS globally and will bring extraordinary business and profit

margins similar as the takeover of NATWEST which has brought huge

benefits to the bank (Pratley, 2011).

RBS decided to go for mergers and acquisitions using a hostile

takeover approach by using short-term debt strategy as it was facing

substantial credit risk and leverage problems (Leak, 2011). It has

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followed an ambitious strategy to acquire ABN AMRO based on just two

lever arch folders and a CD. They considered the high asset valuation

and followed high risk high returns strategy where in fact the value

of ABN AMRO’s assets was toxic (Varma, 2011). Positive past experience of

National Bank of Westminster take over by RBS lead the management to

believe that the new acquisition will result in extraordinary growth

of the business and due diligence can be ignored (Pratley, 2011).

Critical Appraisal of RBS approach to acquire ABN AMRO

RBS followed a hostile takeover approach to acquire ABN AMRO. Not

always this approach proves to be successful, according to some

analysts, hostile takeover approach has severe effects on the economy

as they fail often. It sluggish growth due to the debt created by

takeover and results in layoffs upon consolidation (Grabianowski, n.d). In

order to thwart the potential takeover, ABN AMRO by taking ‘Crown

Jewels Defense’ approach sold off its one of the major business unit

LaSalle Bank to Bank of America for $21bn cash (Werdigier, 2007). This was

an early indication which triggers the potential acquisition deal may

turn out to be unsuccessful for RBS.

RBS Board decision to proceed with raising debt finance mainly short-

term rather than equity finance for ABN AMRO’s acquisition was unsafe

financing strategy which has reduced already lower Capital Ratio. Debt

finance approach was not indeed helpful as short term debt needs to be

paid within a short time period, expose the company as highly risky

for investors; increases vulnerability in tough times and the high

costs of loan repayment which includes principal and interest make it

complex for the growth of business (NFIB, 2013). RBS Short term debt

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strategy was in fact poor decision by the management as its total

funding comprised of €22.6bn Cash Consideration and only €4.3bn RBS

Shares and the mass of the cash consideration around €12.3bn was

financed by short term debt with the maturity period of less than or

equal to 12 months (FSA Board Report, 2011).

Finance raised by RBS to fund ABN AMRO acquisition, as at 26 September 2007

€m %

Issue of new ordinary shares 4,281Total Equity Component 4,281

Preference shares 4,567 19%Other tier 1 securities 1,557 7%Senior funding 9,941 42%Bridge funding 7,400 32%

Total Cash Component 23,465 100%Cash funding required 22,600Cash funding surplus as at 26 September 2007 865

(Source: FSA Report, 2011)

Short term debt strategy has increased RBS reliance on Short term

wholesale funding (Treanor and Bowers, 2011). RBS use of non-sterling

wholesale finance has made it more vulnerable to disintegrate in

confidence and significant run on its finance (Leake, 2011).

Limited due diligence approach was not enough to consider the

potential acquisition in light of the level of acquisition and

ignoring all of the risks involved in cross jurisdictional

acquisition. RBS management doesn’t seems to be susceptible to the

customer’s importance and investor’s confidence and decided to proceed

with over optimistic strategy by acquiring ABN AMRO based on the

information provided in two lever arch folders and a CD (Monk, 2011). RBS

followed the investment advice given by Merrill Lynch which was highly

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remunerated on the successful completion of the acquisition which

anyone can believe that it will not be independent due to the high

contingent fee attached to the transaction (Bowers and Treanor, 2011). Due

diligence helps the companies to classify and pick those options that

will bring real benefit to the company. Companies should refrain from

investing in a project without constructive due diligence results. Due

diligence is not a child’s play but it is fundamental. It assures to

deliver trustworthy assistance for decision making by conveying

information that can help to thwart mistakes or assist the company in

strategic move (Reinmoeller, 2013).

RBS decided to lead the consortium for the acquisition of ABN AMRO by

consolidating the whole of the target company in its financial

statements before any asset transfers to other partners. This decision

established vulnerabilities and doubts that were crucial to maintain

market confidence and these later introduced complications in RBS’s

liquidity status (FSA Report, 2011). Leading the consortium was a bad

decision as RBS already had high leverage and poor credit control and

this has exposed RBS to severe risks as anything that would go wrong

will first target towards RBS.

RBS over optimistic decision to follow past trends of hostile takeover

of NatWest in 2000 which present the company with extraordinary

surprises and huge market exposure was not proved to be a constructive

decision to acquire ABN AMRO. Management should have spotted flaws in

their judgment and have learned from past and industry examples where

hostile takeovers are not always successful (Pratley, 2011). Even rejecting

a hostile takeover has serious effects on the share prices for example

Yahoo’s opposition to Microsoft’s hostile takeovers has severely

reduces Yahoo’s share price from $118.75 to $6.78 after which no one

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was interested in buying its stocks anymore due to the huge dropdown

in the share prices of Yahoo (FINWEB, 2013). Forward looking approach

would have helped RBS to analyze that following past trends doesn’t

deliver same results or the results might be obsolete in the upcoming

future.

Other Approaches Available For ABN AMRO Acquisition

RBS had several opportunities to finance ABN AMRO acquisition. As said

by Fekkes, a Senior Broker in Nashville, every lender has different

criteria for financing; buyer must pool ample time to analyze and

investigate all of the available options to make sure that the

proposed approach for financing is in fact appropriate for the

particular acquisition opportunity (Brown, 2011). RBS could have followed

an effective strategy or process of raising finance for the potential

acquisition by evaluating the pros and cons of several funding options

and taking into consideration a proper due diligence for the

prospective acquisition as to make sure that it will not lose its

investors and shareholders confidence in the later run and in fact the

transaction would come out to be a successful deal.

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One of the options to finance acquisition was by raising equity

finance than debt finance. The acquisition time was heavily under the

economic crises where every step was risky for any business. Equity

finance is less risky than debt finance as it doesn’t need to pay back

to the investor. It enhances goodwill of the business and the ability

of the business to engage within investor’s network increases the

credibility of the business enterprise. Even equity finance ends up in

generating excess cash for the business which the company can later

invest in a lucrative project. The investors don’t expect their

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Source: Mercantile Mergers and Acquisitions

returns in short term and perceive long term approach which would not

be the case in debt finance where investor demands the principal and

interest according to the contractual terms (The Seattle Small Business Lawyer,

2012). Raising equity can be a better option for the company if it is

not able to bear additional debt which was the case in RBS. The

company already had low capital ratio and high leverage; any

additional debt was a riskier option.

Acquisition brings considerable risks to the company that needs to be

identified and managed properly which could be avoided with pre-

acquisition due diligence of the target company. Over-estimation of

synergies and deals based on impractical development target often led

acquirers to continue with acquisitions despite of incomplete

information. Due diligence assists in identifying financial analysis,

challenge synergy and evaluate risks attached with the acquisition. A

proper due diligence review discovers prospective operational

improvements, maximizing revenue, savings in costs, restructuring

opportunities, optimizations of capital and effective utilization of

assets. Therefore, a pre-acquisition due diligence review uncover

unknown values and other issues that may encourage the acquirer to

follow more aggressive approach towards acquisition (PWC, 2013). RBS

relies on improper due diligence of ABN AMRO acquisition and proceed

with the transaction by shut eyes which has resulted in business

failure of RBS (J. R, 2011).

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Appropriate Decision Making and Problem Solving Techniques for ABN AMRO Acquisition

RBS could have followed logical approach to decision making instead of

magical approach. This approach is historically tested and even now

majority of the companies follow this approach in order to analyze all

of the risks and rewards attached to the transaction. There are a

number of analyses under logical approach which RBS could have used

before making final acquisition decision for ABN AMRO.

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Logical approaches are process based and comprised of steps which

facilitate the decision makers at every step closer towards the

transaction in order to reassure the decision maker about the

decision. For example, RBS management would have considered decision

tree analysis, Value for money analysis to make sure that the funds

invested for the acquisition will outweigh its benefits, gearing

analysis as RBS was already in leverage.

Implementation Method

Companies struggle to convert the implementation theory into action

strategy that will facilitate the plan to be effectively executed and

continued. Many organizations have strategies but very few of them

actually achieve it. According to Times 1000 study, only 14% out of

80% directors who have right plans believed that they were

implementing it (Cobbold and Lawrie, 2001).

RBS management should have followed a proper decision making process

from first identifying the problem than to evaluate the decision

criteria than to implement the decision and finally evaluate the

decision after implementing it.

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Rational Decision Making Model

Identifying the Problem RBS management need to examine why

they wants to acquire ABN AMRO and

analyze RBS current business

problems (i.e. leverage problems,

lower capital ratio, etc).Establish Decision Criteria RBS management must decide on what

basis they will progress with the

takeover of ABN AMRO? RBS board

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would consider Due Diligence

Reviews, Cost Benefit Analysis and

Value for Money Analysis to

support their decision. Whether to

raise debt or equity finance? Weigh Decision Criteria Leadership of RBS Chairman and

decision evaluation by other board

members and shareholders would

have examined the benefits to go

ahead with the transaction. Will

the acquisition costs of ABN AMRO

outweigh its benefits? Results of

logical approach to decision

making will be the best proof to

weigh the decision. Generate Alternatives What other options are available

to RBS to acquire ABN AMRO? Equity

finance then debt finance would

have been ideal as it doesn’t

needs to pay back within a short

period of time. Private equity

finance or public equity finance?Evaluate the Alternatives Due to the circumstances

surrounding at the time of ABN

AMRO takeover, such as economic

crises, alternatives to finance

the acquisition would have

supported to go ahead with raising

public equity instead of short

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term debt finance as RBS had

liquidity problems and any

increase in debt will threaten

going concern problems at the time

of crises. Choose the Best Alternatives By selecting to fund the takeover

by public equity, RBS would have

arranged to proceed further with

acquiring ABN AMRO. Implement the Decision RBS finally acquire ABN AMRO by

evaluating the risks and rewards

of the transaction at the earlier

stage. Evaluate the Decision After completing the transaction,

RBS board must evaluate how

effective their decision was in

the acquisition as it will

facilitate in future mergers and

acquisitions.

By following a logical approach to decision making; though being rigid

and time consuming, RBS would have analyzed the pros and cons of

acquiring ABN AMRO before acquisition as it would have saved the bank

to face a huge business failure. It was the biggest mistake for a huge

bank to go ahead with a magical approach for takeover without clear

understanding of the risks attached to the transaction. As RBS failure

was one of the biggest shocks for the banking industry, Andrew Tyrie,

Conservative Chairman of the FSA Committee Report into the collapse of

RBS said, city’s culture is altering in a way that another tragedy 17

like RBS is least probable, banks have learned a lesson and the frame

of mind is changing deeply (Treanor, 2012).

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