Material Adverse Change,
Learn why common-sense errors are repeated over and over again The M&A market has grown to become a major factor in the global economy, yet many buyers do less investigation than consumers making everyday purchases. Material Adverse Change shows you how to slash risk and improve your chances of completing better deals.
Material Adverse Change,
Introduction: The Risks and Opportunities of Doing a Deal
Did any board member suggest that Bank of America should go ahead and invoke the MAC?
No, not at that point...most people thought the severity of the reaction meant that they (i.e., U.S. Federal Reserve and Treasury) firmly believed it was systemic risk.
-Ken Lewis, former chairman and CEO of Bank of America during U.S. Attorney Deposition on Executive Compensation February 26, 2009 1
On October 8, 2002, Fred Goodwin, then CEO of Royal Bank of Scotland (RBS), outbid Bob Diamond, the head of Barclays Capital, to conclude his long quest to purchase ABN AMRO Bank for $96.5 billion. Goodwin had built RBS from a small regional bank to a global powerhouse that was one of the largest banks in the world. For his efforts, Goodwin was voted "Businessman of the Year" by Forbes magazine in 2002. He had earned the name "Fred the Shred" for his ability to ruthlessly take out people while reducing the cost of operating the companies he acquired. Forbes proclaimed, "In a tough era for lenders, Fred Goodwin has built his bank into the world's fifth largest with a market cap of $70 billion." 2 Goodwin had a pragmatic approach to acquisitions, leveraging his instinct and experience running businesses to buy and transform companies.
Five years later, this jewel of an acquisition did not live up to expectations. Credit losses in the ABN loan book, key employee departures, an inability to integrate the complex ABN AMRO computer systems, and an overall downturn in the economy drove RBS's stock price from a high of over Pds. 7.00 per share ($4.2 per share) to a low of less than 50 pence per share (31 cents per share). Material adverse events in the company proved that a purchase price of close to $100 billion was more than ABN AMRO was truly worth.
With the continued deterioration of the economy and the rising of a Great Recession, the issues surrounding this deal became more and more apparent. Indeed, by the time of the depths of the recession in December 2007, for the same $100 billion that RBS used to buy ABN AMRO, an investor could have purchased 100 percent of Goldman Sachs, RBS, General Motors, Citibank, Deutsche Bank, and Merrill Lynch all together. 3
What Can You Get for $100 Billion?
General Motors $ 1 billion Deutsche Bank $25 billion Goldman Sachs $36 billion Citibank $8 billion RBS $12 billion Total $82 billion
Despite his best intentions and a desire to enhance the value to RBS shareholders by purchasing an exciting new business, this unfortunate acquisition cost Fred Goodwin his job. Thousands of shareholders who had invested in RBS stock lost all of their value. Goodwin was summarily dismissed from RBS, villainized by the press, and received threats on his personal safety. He was forced to leave his home and retreat to a friend's Majorcan Villa to avoid the press and an angry public. It was not until May 2016, over eight years after the fateful acquisition, that Goodwin was finally cleared of all criminal charges relative to the RBS deal.
This book is not intended to cast blame on CEOs, investment bankers, or other advisors unfortunate enough to be involved in failed transactions. I have found these constituencies to be hardworking and largely interested in the success of the companies they work for. Rather, it is to probe why deals don't work and the risks implicit in major transactions such as RBS paying close to $100 billion to purchase ABN AMRO. Through a review of past failures and the reasons behind these failures, we can better anticipate the