09 Apr Banco Santander: A Case Study in Buy-Side Mergers and Acquisitions
At times when organic growth is sluggish, acquisitions represent a viable means through which firms can outpace the market. An acquisitions-based strategy can be particularly effective in industries which are fragmented, allowing the acquiring firm to build market share and reap the benefits of the resulting economies of scale.
Scale matters more in some industries than others. Retail banking is one such industry. The number of countries with a so-called ‘big four’ banks reflects this reality; in 2018, the retail banking sector in around 40 countries across the globe is dominated by a small clutch of banks – many of whom achieved their dominant position through a series of mergers and acquisitions.
There is arguably no better example of a bank achieving scale through M&A than Banco Santander, Spain’s largest bank. It used a transaction-based approach to achieve its current position as one of the world’s largest banks, despite not coming from a traditional European banking hub such as London, Amsterdam, Zurich or Frankfurt.
A Regional Bank with Global Ambitions
Before deregulation in the Spanish banking industry in the late 1980s, Banco Santander was a regional bank in Spain with an estimated domestic market share of 5.4% in 1985. The deregulation in Spanish banking, in preparation for the country’s EU entry, paved the way for an acquisition spree in the early 1990s which has continued to the present day.
In early 1994, it seized an opportunity to acquire the fourth largest bank in Spain, Banco Espanol de Credito (Banesto), which had collapsed and was being auctioned off by the government. The acquisition, which many said Santander had significantly overpriced, catapulted it to the position of being the biggest bank in Spain by branch numbers.
Now with the leading domestic position in retail banking and a strong revenue base, Santander looked to outside its national borders. The 1990s were characterised by bolt-on acquisitions for the firm outside of Spain in Argentina, Brazil, Colombia, Mexico, Peru and Venezuela.
It didn’t stop there. In 1999, it merged with BCH, a Latin-American bank, to create a leader in South American banking. One year later in 2000, it acquired Banco Totta, one of the largest banks in Portugal, making it the largest bank on the Iberian peninsula. With each new acquisition, Santander became more adept at making transactions successful.
As one set of authors of an article on the bank’s success put it:
“Banco Santander would repeatedly demonstrate over the following years the same ability in selecting and appraising acquisition targets – and speed and agility of acquisition decision making – that it had employed so successfully in the Banesto acquisition.”
The acquisitions continued; since 2000, Santander has acquired retail banking chains in Latin America and all over Europe. In 2005, it entered the United States through its acquisition of 19.8% of Sovereign Bancorp, followed by a Chinese acquisition in 2013. Through a string of acquisitions, a provincial Spanish bank had now become a global player.
The figures generated by these acquisitions speak for themselves. In 1985, Banco Santander had 750,000 customers, net profit of €133m and market capitalisation of €85bn. By the end of 2017, it had grown to 133m customers, net profit in excess of €6.6bn and a market cap of approximately $80bn, making it the 9th largest bank in the world.
According to the authors of “The Internationalisation of Retail Banking: Banco Santander’s Journey towards Globalisation”, there are two keys to the acquisition strategy employed by Santander since 1985: The first they call ‘exploration’ – creating strategic options in overseas markets; the second they term ‘exploitation,’ – building a dominant position in those markets.
The ‘exploration’ step was achieved through acquiring small, bolt-on acquisitions in banks or even through strategic partnerships. These allowed the firm to gain a fuller understanding of the market before committing further resources to acquire more banking assets in the same market and in doing so, secure a dominant position, or ‘exploitation’ as the authors termed it.
The second lesson learned is that acquirers should be opportunistic in their acquisitions: value-creating targets don’t present themselves to buyers every day, so when they do, it forces the buyer to be opportunistic, lest they lose out on the opportunity. This opportunism was crucial in Santander’s 1994 acquisition of Banesto, when it outbid (and some would say paid an M&A premium) all other banks by at least 10%.
As Mauro Guillén, author of a book on Santander, puts it:
“No matter what they have had to pay, they have taken advantage of all the business opportunities presented to them. They have been very quick to make decisions, and are very audacious. Santander has known how to face the future.”
The third lesson has been to accumulate knowledge from each deal. M&A has become an integral part of the company’s growth strategy partly because it has become so good at the process. This is exemplified by the fact that its acquisition of Abbey National in the UK became the subject of a Harvard Business Review article.
Anyone who doubts the value-creating potential of an active M&A strategy (and there are plenty of those individuals out there), need look no further than the example of Banco Santander. Its success is proof of the power of buy-side M&A transactions to generate value for firms when the conditions for organic growth aren’t present.