A possible merger between Barclays Capital and ABN Amro is the fixed-income investment banking relationship that everyone is talking about, mainly because of the debt capital markets growth that the latter has achieved in the last decade. ABN Amro is now the type of firm that Barclays strove to evolve away from, observers said, which means a merger could present a case of turnaround deja vu for the English bank.
Last week, the two investment banks' parent companies confirmed exclusive preliminary discussions about a potential merger. Market participants said there is little overlap between the two banks' term ABS businesses. Barclays Capital finished 2006 as the top lead manager on auto and credit card ABS debt, and placed sixth among lead underwriters for home equity loan issuance, said Alistair Smith, a spokesman for Barclays. New York-based managing director Michael Wade leads the bank's term ABS business.
For its part, ABN Amro has one of the most extensive ABCP sponsorship and management programs, following closely behind Citibank. It certainly was unwilling to significantly build up its mortgage-backed securities business, as one source recalled. In hindsight, that might play to ABN Amro's advantage, because the bank is not saddled with exposure to problematic subprime loans, that market source said.
"Everyone said that ABN could have made so much money when the street was making so much money on mortgages," he said. "ABN wasn't doing anything at all. As a result, this makes them look good."
Under a frame work for preliminary merger discussions, the first chairman and CEO would be nominated by ABN Amro and Barclays PLC, respectively, according to a statement from the former. Although press reports cast the situation as an acquisition by Barclays PLC, the new entity could be based in Amsterdam and fall under the Dutch Central Bank's regulatory oversight. The companies did not specify the value of the transaction, although estimates in press reports have ranged from $70 billion to $80 billion.
Market participants lauded Barclays Capital's achievements under Robert Diamond, president and head of investment banking. The present Barclays Capital got started in the very late 1990s after Barclays broke up the BZW business and retained its debt business.
"Robert Diamond pulled the whole thing apart and ... focused on debt products," said Antony Broadbent, an equity analyst for Sanford Bernstein, in London. At the time, the European bond market was strikingly different from that of the U.S. Instead of bonds as debt, many European companies relied heavily on bank loans.
"Diamond recognized that that was shifting, and that shift would be supported and stimulated by the emergence of the euro," Broadbent said.
ABN Amro, on the other hand, is radically different. Its overall investment banking business is still in what Sanford's Broadbent said was Barclays' BZW phase, when it tried to be a full-service investment bank. ABN Amro retains its equity capital markets, cash equities and advisory businesses, among others, Broadbent said, adding that those are areas "where Barclays simply chooses not to compete." Compared to its peers in Europe, it does not have a lot of entrenched, long-term relationships to guarantee it lots and lots of revenue and business. The bank managed to halve profits in its global client business recently, reaping 291 million ($388 million) in 2006, compared with 633 million in 2005, Broadbent said.
ABN Amro did remarkably well, however, in its global markets business, through which it offers investment banking and trading services to other banks. There, it grew profits to 933 million in 2006, from 410 million a year before.
"It is not a basket case all over," Broadbent said.
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