Wednesday, October 24, 2012

Do Onto Yourself, Part II -- ABN AMRO vs. CITI

I commented on October 10 that it is better to do onto yourself before others do onto you. The focus was on enacting business model changes before a hostile takeover forces those changes on you. The 2007 ABNAMRO (ABN) breakup was cited as an example. Little did I know that one week later another bank would have change forced upon It. This time it was not from a hostile bidder, but from a hostile board. Vikram Pandit “resigned” on October 16 following a clash with his board -especially its Chairman- over strategy among other items.

Citi’s problem was very similar to ABN’s-its large universal banking model no longer worked. Both banks adhered to a global financial conglomerate strategy. Both banks’ management teams were psychologically committed to the strategy and unable to breakup their respective institutions. This was despite a 90% value decline since Pandit became CEO. Additionally, Citi continued to lag its competitors and traded at 60% of its tangible book value.

Unlike ABN, Citi faced no hostile bidder. Rather Citi’s board decided to take action. It was largely a new board with most members replaced during the crisis. Thus, it had a reduced commitment to management’s existing strategy. Consequently, it was ready to act if management did not act. ABN, however, lacked an independent board. One could argue if ABN’s board was an independent as Citi’s, the ABN hostile bid and breakup would not have occurred.

Again the lesson is clear. The status quo is not an option in a challenging macro and industry environment with lagging performance. Failure to adjust business models will attract either external or internal forces. The golden rule of doing onto yourself before others do onto you remains in full force. The practical implications for firms are twofold. First, examine all business units to see if any of them are past their “sell by” dates. Second make sure your business still makes sense in the post-crisis market.

Hostile takeovers involve a fight over who is the better manager of corporate assets-you or someone else. It is nothing personal-it is strictly business.


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