Review the history of the Abbey National Building Society and its entry into the deregulated financial services sector. Consider whether its corporate strategy is appropriate. Discuss its cha Essay

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Abbey Nationals roots date back to 1849 when National Freehold Land and Building Society was formed. Its name, Abbey National, was adopted in 1944 when it merged with Abbey Road Building Society. Abbey National was the first building society to float on the London Stock Exchange (1989).

Historically building societies date back to the 18th century. Their main purpose was to provide housing for the workers. Workers contributed a certain amount per year to the society and that money was used to provide housing in a form of a lottery. Once all of the members had houses the society was terminated and any surplus money was redistributed between the members. However, over time building societies became permanent and held savings for their members. Post-1950s the number of building societies have substantially decreased due to a high number of mergers and acquisitions within the sector, e.g. in 1900 there were 2,200 building societies, by 1988 the number had decreased to 130 (Cook J et al., 2001).

The biggest change to the building society sector has occurred following the Building Societies Act 1986. Before this Act was imposed in the UK the building societies were strict on the institutional features. These included strict limitation of corporate objects (the straightjacket), the practice of one-member, one-vote, and the persistence of complex rules for winding up a society or transferring its business. The effect was to minimise internal divergencies of interest and to lock away the surplus or residual from the organisations activities in such a way as to preclude predatory strategies for gaining access to it by a particular generation of members (Cook J et al., 2001). The Act allowed building societies to compete directly with commercial banks. A lot of building societies went through a demutualisation process whereby they were converted into investor-owned commercial companies. The managers of the building societies were able to gain windfall profits from the demutualisation process on their initial investments while the identity of interest was lost between lenders and borrowers. For example, according to Graham Taylor (2003), Peter Birch (Chief Executive of Abbey National) was receiving 173,000 per annum before the 1989 conversion, however by 1996 his salary had risen to 400,000 per annum while the value of his shares within Abbey National was 1.8 million.

The Act allowed building societies to diversify their activities into different financial sectors. Although some believed that building societies will not take up this deregulation opportunity too far (Bpleat, 1987 cited by Cook J et al., 2001) the demutualisations have proved to be a phenomenon. Abbey National was the first building society to demutualise in 1989.

Post-demutualisation Abbey National started to expand aggressively through mergers and acquisitions. Prior to 2002 it bought Scottish Mutual (1992), First National (1995), Wagon Finance (1996), Cater Allen Holdings (1997), Lombard businesses (1998), Porterbrook (2000), Fleming Premier (2001) and Scottish Provident (2001). In 1996 it also merged with National and Provincial Building Society. Today it serves over 18 million UK customers and is pronounced to be the leading personal financial service company. Abbey National was able to acquire businesses in different financial sectors due to the deregulation process. Previously financial services have been strictly regulated over the world. The conducts and structure of the institutions were controlled, limiting them to certain operation markets and information flow. Around the world banking and insurance were provided by separate enterprises, and the banking system was divided between commercial and saving banks. Since the 1970s the financial markets have undergone substantial changes triggered by increasing privatisation and deregulation. Major structural change occurred in the 1980s, whereby deregulation was encouraged in the EU. Further need for deregulation has resulted from the introduction of the single currency in Europe, which encouraged countries to open their markets further to foreign competition.

These deregulation procedures have resulted in some major structural changes within the financial markets. The strict boundaries between insurance and banking sectors have been broken down, therefore allowing sectors to merge and operate within both previously restricted markets. A lot of banks undertook this opportunity. Now Abbey National performs both functions: insurance and banking. Deregulation also stemmed from increasing privatisation in the EU. As more state-owned firms were transferred into private hands, the competition within the markets increased. In many instances the 1990s were seen as the years of size, whereby companies preferred to expand through mergers and acquisitions in order to secure a certain market share. As has been outlined above, Abbey National also adopted this strategy in the 1990s. Financial deregulation also stimulated the presence of once national institutions in international markets. Moreover, increased competition and the struggle for the market share led to restructuring of the levels of competition between the players. The enterprises are under significant pressure to sustain their market shares on the international level, remain competitive and create a significant reputation worldwide.

While being considered as a pioneer of the deregulation process, the UK can restrict some mergers and acquisitions if it predicts a decrease in the competitiveness in the future. For example Lloyds TSB was not allowed to take over Abbey National in 2001 as this acquisition would have given Lloyds TSB a 29% stake in the current account market in the UK, and increased the overall ownership of the four major banks (NatWest, Lloyds TSB, Barclays and HSBC) from 72% to 77% (Webster J, 2001). The authorities concluded that the market ownership between the four major banks would become too high, leading to a decrease in the competitiveness. Large banks developed a reputation of the acquirers over the years, whereby medium-sized mortgage banks were the targets. These kinds of acquisitions are believed to provide enterprises with higher growth rate compared to the natural growth of the company. Acquisitions were also used as the means to enter international markets. For example Abbey National entered the US markets though the purchase of Fleming Premier in 2001.

As has been mentioned above Abbey Nationals corporate strategy was to expand aggressively into different financial services through mergers and acquisitions following its demutualisation. Therefore the appropriateness of the demutualisation should be considered first.

Cook et al. (2001) argued that demutualisation harms societys members in the long run, while providing windfall opportunities to the managers. The windfall gains to building society borrowers, in common with investors, might enjoy as a result of demutualization, have been calculated to fall short of the overall increases in the margins between interest charged on mortgages and interest earned on savings: the typical period after which demutualization would be seen to be a disadvantage was four years for a mortgage payer. (Cook et al., 2001). Abbey National and building societies in general, enjoyed lower cost of capital as it was not required to pay out dividends to the shareholders or service external capital. The lower cost of capital was usually transferred into the efficiency of running the business. Moreover, the capital was used to increase reserves or decrease the difference in the interest margin between investment and mortgage repayments. Favourable rates provided proved to be beneficial to the members in the long run. Therefore it can be argued that the demutualisation strategy adopted by Abbey National was not appropriate, as it did not benefit its members in the long run. Moreover, as has been shown above, the managers benefited from the demutualisation process though high windfalls, therefore they may not have acted in the best interests of the members but rather pursued the policy for their own personal gain. Also, the fundamental policies and values of the society were erased following the demututalisation. As a commercial bank Abbey National was not focused on providing housing to the low-income workers, therefore resulting in the closure of over one thousand branches around the UK (Cook et al., 2001). There are also other reasons why demutualisation of Abbey National can be seen as a poor strategy, such as loss of trust by its members, lower confidence of safe investment, development of arm-length relationships (rather then personal), less direct benefits to the existing members, and change of incentives (as a building society the aim of the organisation was to benefit its members, as a plc the bank aims to increase its profits in order to benefit the shareholders).

However, Abbey National benefited from the demutualisation process in a few ways. Building societies had limited access to capital markets therefore relying heavily on the retained profits and subordinated debt. Access to capital markets allowed Abbey National to gain capital in order to grow further, support existing operations and compete successfully within the market. Moreover, following deregulation the players in the financial markets become bigger and stronger, forcing other participants to grow at the same pace and be able to compete on the same level. The competition is also enhanced through the availability of the information within the financial markets. Most of the investors can easily find the most competitive rates either through individual investigation, e.g. internet or through independent financial advisors, therefore forcing the participants to stay competitive. Moreover, it can be argued that with the fast pace of growth of the financial markets the building societies were becoming too old-fashioned.

Abbey Nationals corporate strategy has been profitable in most of the years. From 1996 to 2000 the retained profit has grown from 327m to 522m respectively. It has also grown substantially in its assets: 124,011m in 1996 to 204,391 in 2000. In 2000 the bank was still acquiring 8% of new mortgages in the UK and accounted for 13% of the existing mortgages. However, Abbey National made its first loss in 2003 of 984m. It has been argued (BBC News, 2003), that Abbey National has expanded into too many fields that it was not familiar with. By 2003 Abbey National provided mortgages, insurance, investments and acquired a lot of businesses that were able to give customers a variety of different financial products. Some of the more surprising businesses included a train leasing company, 5% in Sydney airport and a car credit business. Critics have also blamed the group’s foray into corporate banking for its woes (BBC News). In the early 1990s Abbey National provided loans to companies with low credit ratings while charging high interest rates in return. This allowed the bank to make big windfall gains in the 1990s, however, it resulted in large bad debts in the 21st century once the global economy took a turn for the worse. As Abbey National acquired more and more businesses its operational, integration and maintenance costs had grown. “Abbey is a mess, the results are awful but it had been well trailed that they were going to be awful and the shares had been marked down in the run up” (cited by BBC News). BBC News also argued that Abbey National would need to sell around 2bn of its assets in order to return to banking activities. Abbey National stated that it expected a loss due to higher than expected banking provisions, fast depreciation of the value of its acquisitions and changes within the stock market. In 2003 it also planned to decrease its corporate loans business and return to its roots the mortgage business. The weakness of Abbey Nationals position was first spotted by Lloyds TBS in 2001, when it placed an offer for the bank. The bid for Abbey National was renewed again in 2004, but this time by a foreign bank.

At the moment Abbey National is in the process of being taken over by a Spanish bank, Santander Central Hispano, which is the second biggest bank in the euro zone. At the date of writing Abbey National is the sixth largest bank (by assets) in the UK and the second largest provider of mortgages and savings. Santander offered 8.2bn for the bank, and if this deal goes ahead, it will be the biggest cross-border banking takeover in the history. If this deal is successful Santander will become the tenth biggest bank in the world. Unlike the Lloyds TSB offer (2001), which was likely to result in a large market share ownership within the UK by one bank, this bid raised no competition concerns as the banks operate in different markets. However, Santander had strong ties with the Royal Bank of Scotland Plc and was forced to sell a 2.5% stake in the RBS in order to place a bid for Abbey National (Forbes, 2004). After two years of losses Abbey National adopted a different corporate strategy. The bank started cutting jobs, reorganising its operations and selling some of its businesses. However, Santander is planning to take this reorganisation even further by cutting another 4,500 jobs if its offer is successful. Santander sees Abbey National as a safe investment compared to its Latin American banks that have been losing money for the last two years. Moreover, this acquisition can be seen as a new interest in retail banking, which is Abbey Nationals strength. However, the benefits to Abbey Nationals shareholders are not clear. The offer includes shares and cash. However, as the details were reviled the shareholders found out that they will be getting 1 Santander share for each Abbey share. The only cash they will see will be in the form of a dividend 31p. The news was not seen as beneficial because Santanders share value has been falling recently. Moreover, British investors may not want to swap their British shares for Spanish ones. If Santanders share price continues to fall, the bid value will decrease over time.

Abbey National has gone through a big transformation in the last century from a building society, to successful bank and finally to a bid on the market. Its demutualisation corporate strategy was appropriate at the time due to changing financial conditions, deregulation and competitive markets. However, it can be argued that, due to the above changes, the strategy was not so much appropriate as necessary in order to stay in a leading position within the UK. Abbey National proceeded to expand through mergers and acquisition in order to maintain its market position, however, diversification of its core businesses and a lack of focus resulted in large losses for the group. Abbey National was forced to sell some of its businesses and restructure. Other larger players in the market such as Lloyds TSB tried to take advantage of poor Abbey Nationals corporate strategy by placing bids for the group. Although Abbey National was not taken over in 2001, a new stronger player, Santander, is likely to succeed in its offer. Despite poor corporate strategies adopted by Abbey National in the past, if the bid will not take place, the group will have good chances to succeed in the future. Abbey National has a well-established domestic name in the UK, it has been a successful business in the past and in the last two years it has undergone major restructuring. The restructuring has resulted in a 350m profit in six months to June, which shows that the bank is on the right track. Moreover, favourable conditions on the market will further strengthen Abbeys ability to succeed in the future.


BBC News (2003) “ Abbey National slumps into losses” Forbes (2004) “Abbey National Shareholders OK Takeover” Taylor. G (2003) “UK Building Society demutualization motives” Business Ethics, Volume 12 Issue 4 Page 394
Webster. J (2001) “Final Thematic Report – Retail Financial Services”

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