BBVA is Spain’s second-largest bank and wants to get bigger. Management thought a good way to do that would be to buy its rival Sabadell, Spain’s fourth-largest bank. The resulting firm would be Spain’s second-largest bank, with a roughly US$70 billion market cap, 100 million customers around the world, and US$1 trillion in assets. Sabadell’s management, however, was not so taken with the idea, and rejected the offer.
After being rebuffed on its US$12.9 billion “friendly” offer at the beginning of May—a 30% premium to Sabadell’s market cap at the time—BBVA came back with a US$13.1 billion offer that it plans to present directly to Sabadell shareholders, bypassing management. This kind of hostile merger is a rarity among banks. Mergers are risky enough on their own. Hostile mergers amplify those risks, and hostile mergers in the highly regulated world of banking amplify them even further.
Analyst Isaac May presents a few of the biggest reasons why hostile mergers for banks can be risky, and portfolio manager Moon Surana presents counterarguments for why BBVA might be able to overcome those risks.
The Regulators
May
The challenge: Spain’s stock-market supervisor, the National Securities Market Commission, began its review of the proposal in June. BBVA will have to convince regulators of the deal’s merits before it can bring it to Sabadell’s shareholders. That could be tough. The Spanish government has already come out against the deal, and an acquisition would also require the approval of Spain’s antitrust watchdog, the CNMC, as well as the European Central Bank and even regulators in the UK and Mexico, where the banks have operations.
Those hurdles illustrate the first problem with a bank trying to orchestrate a hostile merger. Every industry is regulated, but banking is more regulated than most, and those government overseers have a lot of leverage. The regulator can block the deal outright or add conditions that make the deal very expensive. Regulators have a lot of power that they can use to discourage actions they don’t strictly have control over.
Surana
The answer: BBVA needs regulatory approval before it can take the tender offer to Sabadell shareholders (its own shareholders have already approved the offer). The offer has been authorized by the ECB and several other countries, but not yet by Spanish regulators. And there is a chance that it gets approval from both companies’ shareholders and regulators, but is still blocked by the Spanish government. In that scenario, the parent company would own two banks but couldn’t combine them, leaving them to nominally compete against each other.
BBVA management claimed the deal would be worth doing even if it has to operate the banks separately, though it would be a very unusual construction that makes it harder to realize the originally expected cost savings. Ultimately, though, the downside risk seems limited. If Sabadell shareholders reject the offer, or if regulators block it, BBVA moves on. There is little damage for BBVA at this point in making one last attempt to get a deal done. Even in the worst-case scenario the upside—BBVA gets bigger in its home market—still outweighs the downside.
The Employees
May
The challenge: One of the common reasons to merge companies is so managements can cut costs, which generally means employees. Therefore, every merger affects the staff at both the acquirer and the target to some degree. Hostile mergers by their nature can amplify the very natural resentment some employees might feel after an acquisition. But within the world of banking, issues with a company’s employees can have a more pronounced effect.
In a bank, many employees are important contacts with the customers, and in some cases they can leave and take the customers with them. Think of wealth managers who generate fee income and have personal relationships with clients. If senior managers leave, normal business may get disrupted. Loans stop getting processed, new sales leads go quiet. Even tellers leaving can be a problem that helps push customers to a competitor.
Many of these kinds of problems can be partially solved with money, but it can cost a lot, and isn’t sustainable. A takeover’s economics often depend on layoffs or branch closures, so employees know that their job security is under threat. If the acquirer has to give some employees a big raise to keep them at the job and happy, it likely exacerbates whatever the company had to overpay by going hostile in the first place.
Surana
The answer: The deal is actually less hostile than it seems. In its announcement of the offer, BBVA pledged to keep “the best talent and culture of both entities.” And BBVA made “friendly” offers, such as having an integration committee with members from both banks, keeping the management team at Sabadell’s SME (small and medium enterprises) business, and maintaining the Sabadell brand. BBVA also has a track record of successfully integrating companies through mergers across geographies. That experience should help here.
The Loan Book
May
The challenge: When two banks negotiate a friendly merger, at some point the acquiring bank will get to look at the loan book of the target bank. If not the entire book, they will at least see some of the bigger loans. This is critical, because it tells the acquirer if there are problems looming that wouldn’t be visible to an outside party. In a hostile merger, the acquiring bank is an outside party. It will not get that inside look at the bank’s true balance sheet. If there are any problematic loans or brewing issues, the acquirer will find out about them only after it has bought the company.
Surana
The answer: These companies are already very familiar with each other. BBVA held merger talks with Sabadell in 2020 and has long mulled the benefits of integrating the two companies. They were close to a friendly deal in 2020, and close this year, too, until the merger talks leaked.
Taking a merger offer hostile adds extra risks to what is already an inherently risky maneuver. Add up all the extra costs that come with a hostile transaction and the odds of it adding value for shareholders get very long. BBVA has enough levers and cushions to offset those risks and still make this deal work, if it can maintain its discipline on price and focus on execution.
