After years of absence, ABN Amro is back on the stock market since the 20th of November, 2015. The Dutch bank, nationalized during 2008’s financial crisis, is seemingly getting back on track. The question now lies on whether this is actually the case and if this IPO (Initial Public Offering) was indeed a good step to take.
ABN Amro Group N.V. is the holding company of the Dutch bank ABN Amro and of the Dutch parts of Fortis Bank. The bank has a rich history of mergers and acquisitions which date back to 1824, when King Willem I founded the ‘Nederlandse Handelsmaatschappij’ (NHM). This company merged with the ‘Twentsche Bank’ to become ‘Algemene Bank Nederland’ (ABN) in 1964. In the same year, the ‘Amsterdamsche Bank’ and the ‘Rotterdamsche Bank’ merged to become the ‘Amro Bank’. 1991 has eventually seen the latter two companies merging and giving birth to the ‘ABN Amro Bank’. After some quiet years, ABN Amro repurchased their preferred stocks with the aim to stimulate the prices in 2004. A downfall of such a strategy is that the bank may become a prey of a hostile takeover. Following, the former CEO Rijkman Groenink has been pressured to stow the price of the ABN Amro stock price. The bank could have opted also for a different option. Another strategy to stimulate the stock price is through the theory of synergy. If a bank is bigger, it has more possibilities to create value as compared to two banks operating separately. Therefore, the answer for ABN Amro was to merge with a bank that could create more value. In early 2007, there was a press release saying that Barclays (bank from the United Kingdom) was willing to merge with ABN Amro. A couple months later, the banks Fortis (bank from Belgium), Royal Bank of Scotland (RBS) and Banco Santander (a Spanish bank) also expressed their intentions for a merger. The three banks, operating under the separate firm RFS Holding, planned to divide ABN Amro geographically to create more value by using the expertise in their own regions. Finally, the bid from RFS Holding was higher than the bid of Barclays so the merger was almost finished.
On the 29th of September 2008, Fortis announced that it was suffering from the financial crisis and as a result sold their share in the RFS Holding. A couple days later, Fortis also announced selling their Dutch part of the bank to the government of the Netherlands. The Dutch part of Fortis consisted mainly of ABN Amro and, hence, ABN Amro was nationalized. The only division that was not nationalized was ABN Amro Asset Management and was still part of Fortis, which on their turn was part of BNP Paribas Fortis in a later stage.
After the financial crisis faded away and the business world was able to breathe normally again, plans about recovering ABN Amro and making it a big European bank again were made. On the 9th of April 2009, ABN Amro II N.V. was founded as a subsidiary company of ABN Amro Holding. This ‘second’ ABN Amro consisted of all the parts that the Dutch government owned. The part that was still owned by RBS was fully integrated into it, so the name of ABN Amro II simply changed back to ABN Amro N.V.
In August 2013 the Ministry of Finance of the Netherlands decided that the bank must be put back on the market back by an Initial Public Offering (IPO). At the end of the year 2014, the conditions for an IPO were checked with the hope that during the subsequent year the bank would be going public. In March 2015 there were some rumors about unjustified rises of the salaries of directors and as a result the Minister of Finance, Jeroen Dijsselbloem himself, postponed the IPO.
However, in May 2015, the Dutch government decided to make ABN Amro bank go public but only in tranches. The first tranche would be approximately 20% of the total share capital while the bank gets a protection against takeovers. The reason for offering it in tranches instead of the whole bank, is to get some knowledge about the stock. Another reason is to make more money by offering it in a later stage for a higher price. In case of a hostile takeover, a special independent institution called STAK (Stichting Administratiekantoor Continuiteit ABN Amro Group) is capable of depriving the shareholders of voting rights. In June 2015, the three underwriting banks were announced, namely: Deutsche Bank, Morgan Stanley and ABN Amro itself.
On November 20 2015, ABN Amro went public with an introduction price of €17,75. The amount of share that was sold was €188 million, which amounts for 23% of ABN’s total share capital. The proceeds for the Dutch government were €3,8 billion. It was the biggest IPO of a European bank since the financial crisis.
What exactly is an IPO and what are the exact steps of an IPO?
An IPO is, as already mentioned, an Initial Public Offering. This means a company, in this case ABN Amro, is selling their shares to the public. Normally, firms are doing this only once.
The first step is to select investment banks that escort the whole process in a financial, legal and commercial way. This process is called underwriting. Afterwards, a prospectus must be arranged. In this prospectus potential investors can read important information about the bank to make a judgment about the stock. When the press releases the news about the IPO – which is called the intention to float – and the prospectus is published, the selling process is ready to start. The board of directors has to present the bank to investors with the hope of selling it. Next, an enrollment process collects the orders of institutional investors where investors show how many shares they want to buy for what price. This is called book building. The curiosity of investors as a result of the book building, the valuation of comparable banks and the market circumstances eventually define the introduction price of the stock. Finally, the shares are divided between the enrolled investors and the stock is offered at the Amsterdam Stock Exchange (AEX).
The only difference in the case of ABN Amro’s IPO is that the investors are not getting the common stocks but only certificates of the stocks. These certificates have the same economic rights as common stocks and under normal circumstances they also have voting rights. They differ only when the continuity of ABN Amro is jeopardized, for instance by a hostile takeover. If this is the case, STAK can temporary take away the voting rights and decide about the takeover by itself.
According to trading experts, ABN Amro is a ‘safe’ stock. Obviously, the taxpayers of the Netherlands are willing to get their money back from the big investment from nationalizing the bank. A lot of risk involved with the stock resulting in huge volatility would make the stock unsafe. ABN Amro is taking less risk so it is indeed a ‘safe’ stock. The probability that the share will remain at their introduction price or even rise is quite low. The share has to pay a high dividend, because dividend stocks are popular in this time due to the low interest rate. Drastic measures have to be taken in order to preserve this new stable and safe image of ABN Amro. For instance, speculators such as hedge funds are not allowed to enroll in the IPO. Minister of Finance Jeroen Dijsselbloem also highlights that it is more important to have a stable stock trend rather than maximizing the proceeds.
The stocks were particularly available for private investors and these people gained a nice profit on the first trading day. The stock was initiated at a price of €17,75 and it ended with a price of €18,35, which is an increase of 3,4%.
The financial and banking sector also became quite unpopular in the public eyes, among others because of extremely high bonuses of top executives and unexpected bankruptcy of banks in the financial crisis. This is quite a disadvantage for ABN Amro, because a lot of private investors resigned of buying the stocks. Therefore, a large proportion of private investors is not convinced that the financial sector is cured.
Investors are questioning how ABN Amro will survive this time. One of the answers ABN Amro gave to this question is that they would cut their costs and this can be seen in the fact that they are underwriting the IPO for themselves. Next, the stocks will be provided particularly to private investors to have low agency fees. In addition, ABN Amro is not planning on expanding outside the Netherlands, compared to what they did eight years ago. A disadvantage of the last choice is that the possibility of creating value is much lower.
Concluding, it can be said that many investors will have the ABN Amro share in their portfolio. Reason for this is not the big growth, but the attractive dividend pay out policy of approximately 5,5% that is significantly higher than the current interest rate of 0,7%. Especially for private investors who are willing to have a periodic certainty, the ABN Amro stock is a good additional stock to the portfolio – with emphasis on additional stock.
For the taxpayers it may be a good thing to know that the underwriting banks did not get that big of compensation. This might cause the banking sector to gain a slightly better reputation.
You could state the ABN Amro bank is cured after the financial crisis because it is back on track in the stock exchange markets. The stock price is also slightly rising after the IPO and it is a good addition to a portfolio.