Page 1

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.

Deal Particulars

The Prevailing Contextual Issues That

Yorkshire Building Society (Yorkshire) and Chelsea announced

Building a



(Chelsea) merger

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 – 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 – Mergers and acquisitions contextual factors

of building societies had fallen from 59 in

Industry Consolidation The consolidation of the sector is also a contextual






to 48,


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 “the

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

up by

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

2. 3.

the credit and financial crisis as it did not have exposure to riskier buy-to-let lending.

4. 5.

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 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 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.

Integrated Management Solutions Copyright © 2014 Britnig Limited. All rights reserved. We welcome your comments on this article. Please send them to


Contextual factors of mergers and acquisitions