Monday, July 23, 2007

Subtle Valuations in ABN AMRO Takeover Battle

Barclays (NYSE:BCS) launched another salvo attempting to capture the ABN Amro (NYSE:ABN) prize. Most commentators continue to favor the Royal Bank of Scotland (LON:RBS) offer as the superior deal. They point out that something like 40% of outstanding shares are in the hands of the arbs who will go for the highest prize.

Barclays still comes to the table with something supposedly inferior. So why bother? Banks are highly political creatures. Central Banks, Bank Regulators and politicians all have their finger in the pie. What an arb may be screaming about does not count behind the closed doors of backroom power.

Barclays has shown up with the ultimate in political support. Namely the Chinese with a supporting role from Singapore. The whole world is after China to devalue its currency. Complaints about Chinese economic dominance are plentiful. Therefore they have many attractive cards with which to negotiate. Royal Bank of Scotland will merely slice and dice ABN like a common private equity fund and then return to their previous business plan. Somewhat unimaginative when you ponder it some.

While this level of state sponsored equity infusion is troublesome it is the way China operates. If you want access to their huge foreign (Read US) currency reserves as well as access to the Chinese market I would be looking at what Barclays may be able to do in the medium to long term future.

Bank investors typically do not exit this asset category. They will adjust their holdings from one financial institution to another depending on how well current management team seems to be performing. So when you exit ABN AMRO where will you redeploy. Barclays gives you a more than viable solution for re-investment problems.

Share prices supposedly reflect the value of all future earnings. Barclays may yet be offering the best long term value.