March 22, 2014
BRITNIG INSIGHTS Strategy and Corporate Development Practice
Mergers & Acquisitions Contextual Factors By Yakubu Olawale, PhD
Mergers and acquisition do not occur in a vacuum, they are usually engendered by the prevailing context.
We articulate the impact of context on
asset size of Chelsea at £22.7billion and
mergers and acquisitions (M&A) through
£13.4billion respectively2. Yorkshire also
the analysis of Yorkshire Building Society’s
possessed 143 branches while Chelsea only
acquisition of Chelsea Building Society.
had 35 branches3.
The Prevailing Contextual Issues That
Yorkshire Building Society (Yorkshire) and Chelsea announced
Could Have Motivated the Deal Motives for M&A do not occur in a
vacuum, they are usually affected by a
December 2, 2009 and completed the deal
number of contextual issues. The specific
in April 2010. The deal was a friendly deal as
contextual factors surrounding this deal
it was recommended to Members by the
(Exhibit 1) are discussed below.
board of both companies. The deal was completed on the 1st of April 2010 to create an enlarged organisation with assets of £33billion making it the second largest building society in the UK. It was a cash free
conversion of Chelsea’s £200million debt to a new financial instrument with a reduced face value of just £100million1. At the time of the deal Yorkshire had nearly twice the
Macro-economic Conditions The deal was interestingly announced in the midst of the credit and financial crisis of 2008 to 2009. Building Societies were hit hard by the credit crunch. A consequence of the financial crises was the recession of 2008 to 2010 and the outcome of this was
125% from 2008 â€“ 2009)4, and the
repossession and more bad debts. This can
be considered a big contextual factor that
provisions was one of the attributable
might have had an effect on any motivation
reasons for this. This indicated that the
for the deal.
Most building societies
building society sector was in a precarious
reported significant reductions in their
situation, necessitating actions by individual
overall profitability (down an average of
organisations to ensure survival.
Exhibit 1 â€“ Mergers and acquisitions contextual factors
of building societies had fallen from 59 in
Industry Consolidation The consolidation of the sector is also a contextual
confirmation of the
consolidation of the sector.
motivation for the deal. An analysis of industry data revealed that from the autumn of 2008 there was a flurry of takeovers such as Nationwide taking over Cheshire and
Derbyshire building society, then Yorkshire
The ailing health of Chelsea is also a
taking over Barnsley, Skipton acquiring
contextual issue that motivated the deal.
Scarborough building society and Britannia
Many commentators at the time noted â€œthe
being acquired by Cooperative Financial
current talks are believed to have been
Services5, 6. By 2011 the number of number
provoked by Chelsea's exposure to the 2008 2
banking collapse in Iceland”. Consequently, eating dip into Chelsea’s cash reserves. The ailing heath of Chelsea was also not hidden by Yorkshire as the merger document clearly noted this, but reassured members that proper due diligence had been conducted and that Yorkshire will not be distressed by Chelsea’s financial liabilities.
Future Direction The future direction of the UK building society sector would appear to be more consolidation with small players being swallowed
their bigger rivals.
Evidence also suggests growth in the sector for example, overall share of mortgage lending increased from 11% in 2010 to 16% in 2011 and 21% in 20128. Consequently, it
Financial Strength of the Acquirer
would not be a surprise if Yorkshire Building Society Group acquires more
Finally, despite Chelsea’s poor financial state
building societies in a bid to further increase
and the financial crisis at the time, another
its size and capture more market share.
contextual factor was the fact that Yorkshire
was in a relatively good financial position. Yorkshire fared better than Chelsea during
the credit and financial crisis as it did not have exposure to riskier buy-to-let lending.
Furthermore, at the time of the deal, Yorkshire had one of the strongest core
capital positions of any financial institution
in the UK with a high level of good quality and low risk liquid assets7. This would have been
background issue impacting any motivation
Yorkshire Building Society (2009) Yorkshire Building Society Proposed Merger with Chelsea Building Society Merger Booklet KPMG Building Societies Database 2010 Chelsea Building Society (2010) Yorkshire and Chelsea Building Societies Merger Press Release http://www.thechelsea.co.uk/about/press_releases.ht ml KPMG(2009) Building Societies Database for 2009 Building Societies Association (BSA)(2009) Building Societies – Key Statistics: Extract from the Building Societies Year Book 2008/2009, BSA. Building Societies Association (BSA) (2010) Building Societies – Key Statistics: Extract from the Building Societies Year Book 2009/2010, BSA. Yorkshire Building Society (2009) News Release “Yorkshire and Chelsea Building Societies to Merge creating a second major force in the building society sector”, 2 December, available online http://www.lexiconpartners.com/uploads/Yorkshirea ndChelseaBuildingSocietiestomergecreatingasecondmaj orforceinthebuildingsocietysector.pdf Thompson, J. (2012) Mutuals Increase their Mortgage Market Share, Building Society Association (BSA), 31 August.
for the deal. Dr. Yakubu Olawale is a Director at Britnig, UK. He holds an MBA from the Warwick Business School. He has worked for various organisations in the UK including FTSE 100 companies, with experience across various industries including financial services and consulting. www.britnig.com
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