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If history is anything to go by, Lloyds TSB Group plc's £12.2 billion
($21.8 billion) purchase of HBOS plc will be a roaring success.
Certainly the acquisition announced Thursday is a shotgun marriage. Of
course, it's taking place against a miserable financial disaster. And
yes, I'm assuming Lloyds TSB's balance sheet is strong enough to
support the HBOS mortgage book. But Lloyds TSB is conducting a pure
domestic bank merger, and when British banks have bought their peers in
the past two decades they have consistently hit pay dirt.
Just take Lloyds TSB as an example. London-based Lloyds Bank plc created Lloyds TSB in 1995 when it purchased TSB Group plc of Scotland and mortgage lender Cheltenham & Gloucester Building Society almost simultaneously. Within two years, the shares more than doubled, and the bank had a return on equity of 39%. Banks as a rule are pleased with an ROE of more than 15%. The Lloyds move in 1995 was undoubtedly the best bank-on-bank deal in the U.K, but there has never been a bad one. Probably the worst was the deal that created HBOS via the merger of mortgage giant Halifax plc and commercial bank Bank of Scotland in May 2001. Two years later, HBOS shares were down about 10%, but the bank was producing an impressive 17% ROE. There have only been three other examples of U.K. bank mergers since 1988, and each has been a success: Barclays plc bought another mortgage lender, Woolwich plc, in 2000, and its shares rose 40% within two years, with ROE in the 16% to 17% region. HSBC Holdings plc bought Midland Bank plc in 1992 (HSBC was domiciled in Britain even though its headquarters was in Hong Kong). The purchaser's stock virtually doubled in the 10 months it took to close the deal, then added 40% in the two years after that. The ROE was 20% two years after the deal. And Royal Bank of Scotland Group plc bought National Westminster Bank plc in early 2000, and its share rose 25% in the next two years while its return on equity improved to 24%. The fact is Britain is a small, unified market, and its bankers are good at combining organizations with minimal customer attrition and gradually cutting out costs. These banks get into trouble when they buy something other than their peers, like life insurers, U.S. banks, investment banks or fund managers. Lloyds shares fell 15% to 237.5 pence after the deal was announced Thursday. There may be a few fund managers who need a lesson in history. - Peter Moreira See story from The Daily Deal See related story from Bloomberg See Lloyds TSB's offer for HBOS Categories Deal Video
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