Lloyds and Trustee Savings Bank Merger - Case Study Example

 Lloyds and TSB merger. Executive summary This report examines the merger between Lloyds Bank and the Trustee Savings Bank (TSB) in 1995 that resulted in Lloyds TSB Plc (Matthews et al, 2007, pp. 2031-2032). It also looks at the present day circumstances and situation of Lloyds TSB. It has been uncovered that the merger between Lloyds Bank and TSB has served the interests of both the Lloyds Banking Group and shareholders. Evidence of the above is contained in the fact that Lloyds is the market leader in the retail banking sector in the UK (John Gilbert Financial Research, 2012, p. 1) its share price has increased steadily over the past year (London Stock Exchange, 2014a, p. 1), and investor confidence is at an all-time high (Lloyds TSB, 2013, p. 1).   Company profile Founded in 1765 as Lloyds Bank, it served as a clearing bank with the merger resulting in Lloyds TSB Plc, a retail bank which offers savings, mortgages, personal loans, credit cards and transaction accounts (Holland and Westwood, 2011, p. 54). The TSB Group (Trustee Savings Bank) resulted from the amalgamation of various trustee savings banks that occurred between 1970 and 1995 (Gardener et al, 1997, pp. 246-247). The Lloyds Bank merger with the TSB Group resulted in the formation of Lloyds TSB (Matthews et al, 2007, pp. 2033-2033). The bank has 1,300 branches which are located throughout the UK along with branches in Guernsey, the Isle of Man, Jersey and 30 other countries (Lloyds Banking Group, 2013, p. 9). In terms of size, it is the third largest behind HSBC (1) and the Royal Bank of Scotland (2), ranking ahead of Halifax (4) and the Bank of Scotland (5), both of which are subsidiaries of the Lloyds Banking Group (Economics Help, 2013, p. 1).   Industry current accounts, mortgages, market share and market price ‘Current account’ refers to a bank account that is non-interest bearing and where the holder can write checks based on the funds available (Zineldin, 2005, pp. 329-330). Current accounts are used by large as well as small firms, and public entities that conduct a considerable number of transaction daily, along with individual account holders (Vardhaman, 2012, p. 1). More than a convenience, current accounts provide a service that when properly managed can be marketed to lure customers or clients to a bank (Vardhaman, 2012, p. 1). Value-added services such as offering interest rates that are competitive, overdraft services with low-interest rates, and preferential offers concerning savings accounts and loans are examples of this (Vardhaman, 2012, p. 1). In the UK banking sector Lloyds TSB uses current accounts as a means to lure and retain customers by offering 5 percent credit interest on balances of £5,000 or higher (Lloyds TSB, 2008, p. 1).   Lloyds is the largest mortgage lender in the UK (Finch and Mustoe, 2013, p. 1), providing over 80,000 mortgages to first time buyers in 2013 (Lloyds Banking Group, 2013, p. 2). In terms of competitiveness, the UK banking sector is dominated by five institutions, “HSBC, Barclays, Royal Bank of Scotland, Santander and Lloyds” that account for 90% of the market (BBC News, 2014, p. 1). Lloyds is the leading bank in the UK with a 16.7% market share (John Gilbert Financial Research, 2012, p. 1). Table 1 - Market Share of UK Banks (John Gilbert Financial Research, 2012, p. 1)   In terms of share prices Lloyds Bank TSB has risen constantly over the past year.   Figure 1 - Lloyds Banking Group (LLOY) (London Stock Exchange, 2014a, p. 1)   In comparison to Barclays, Lloyds Bank TSB has had a strong price performance record over the past year, indicating stability in its policies which has also inspired investor confidence (Barr, 1995, p. 1).   Figure 2 - Barclays PLC (London Stock Exchange, 2014b, p. 1)   When compared to the performance of the FTSE 100 for the same period, the share price performance of the Lloyds Banking Group has been steady and consistent.   Figure 3 - FTSE 100 Performance (London Stock Exchange, 2014c, p. 1)       Acquisition timeline The merger of Lloyds and TSB was a reverse takeover (Practical Law, 2014, p. 1). This represents when a private company, which in this case was TSB, takes over a public company (Makamson, 2010, pp. 117-118). The 5 billion pound merger in 1995 created the largest retail bank in the UK and third largest bank at the time after National Westminster Bank and Barclays (The New York Times, 1995, p. 7). The merger announcement came on the 10th of October 1995 and the transaction was completed before the end of that year (Neills et al, 2000, pp. 53). What the merger means to us? The merger resulted in 2.704 shares of the newly created bank being issued for each Lloyds’ share that was cancelled as part of the transaction (Practical Law, 2014, p. 1). The reserve that was created as a result of the cancellation was capitalised and applied to pay up the new shares (Practical Law, 2014, p. 1). TSB shareholders were paid a dividend representing 68.3 pence per share as a premium (Practical Law, 2014, p. 1). The savings in consolidated operations represented $550 million a year by 1997 due to increased efficiency in operations (Barr, 1995, p. 1).   How customers were effect by the merger? The customers of both banks benefited from the merger in terms of the share price conversion and the resulting larger bank that could service their savings, personal loans and mortgages (Zack Equity Research, 2013, p. 1). Lloyds Bank’s operations at the time were strong in the southeastern part of the UK whilst TSB’s operational strength was in the north of the UK and Scotland (Barr, 1995, p. 1). The merger created more branches which increased convenience for customers and marketing aspects that could be used to lure new customers (Barr, 1995, p. 1). The consolidated operations meant that marketing, promotional and administrative costs were reduced thus offering shareholders the benefit of lower operational expenses (Barr, 1995, p. 1).   Why Lloyds TSB is selling off? The £17 billion government bank bailout of Lloyds in 2009 meant it acquired a 43.4% stake (Acharya and Sundaram, 2008, p. 3). Under the conditions of the above, 4.3 billion of the government’s 27.6 billion shares were sold off in September of 2013 that generated £3.21 billion (Zack Equity Research, 2013, p. 1). As a result of this, the shares of Lloyd’s retreated by more than 2% on the exchange (Zack Equity Research, 2013, p. 1). The costs of the government bailout have caused Lloyds to restructure its operations with the results of that activity revealed in the past 12 months that has seen its share price rise 93% (Zack Equity Research, 2013, p. 1).   What will happen? The above background facts have been included because the restructuring efforts announced by the bank needed to be conducted in order for shareholders to believe in management’s plans. Lloyds announced on the 19th of July of 2012 that it had entered into an agreement with Co-op to sell 632 of its branches for £750 million and included transferring 4.8 million Lloyds’ customers (7%) as part of the deal (BBC News, 2012, p. 1).   What effect on shareholders? In terms of the impact on shareholders, Lloyds announced by selling off branches to Co-operative shareholders and customers will benefit in reduced operational expenses (BBC News, 2012, p. 1). The share price under figure 1 reveals that the strategy has been successful as the bank has enjoyed consistent upward price movement and has risen by 62% in share value between August 2012 and February 2013 (Jones, 2013, p. 1). However, the overall share price performance is still significantly below the 1995 trading level (Yahoo Finance, 2014, p. 1). Figure 4 - Lloyds TSB Stock Price (1995 to 2014) (Yahoo Finance, 2014, p. 1)   Aims and Methodology The aim of this report is to explore and understand the impact of the Lloyds Bank TSB merger concerning its value to shareholders and the current situation of the bank that has resulted from this merger due to restructuring. The methodology employed in delving into the above employed quantitative fact-finding (Newman and Benz, 1998, p. 5) along with qualitative research to seek an understanding of the events that transpired (Myburgh and Poggenpoet, 2005, p. 1).   Three methods of valuation TSB’s stock floatation is not ready at this time, thus calculating its stock market valuation cannot be determined (Flanagan and Scuffham, 2014, p. 7). This being the case, the stock market valuation and other areas can only be calculated for the Lloyds Banking Group. The manner for calculating the stock market valuation entails taking the price times the number of outstanding tradable shares (Chan et al, 2011, pp. 2435-2436). With 71,368,488 shares issued and the company’s stock trading at £81.87 on 7 March (London Stock Exchange, 2014, p. 1), the stock market valuation is £58,429,381,681.49.   To arrive at the net asset value, the company’s 71,368,488 ordinary shares (Lloyds Banking Group, 2013, p. 381) were divided by its net tangible assets (meaning minus the liabilities) that resulted in a figure of £2,279 million (Lloyds Banking Group, 2013, p. 52). This was used to arrive at a net value per share of £31.32. Ohlson and Juettner-Nauroth (2005, p. 351) explain that the net asset value represents what could be realised based on the sale of assets. This is calculated by taking the accounts receivable or funding and liquidity, and subtracting the accounts receivable allowance that has not been collected that is also called risk-weighted assets (Ohlson and Juettner-Nauroth, 2005, p. 351).   Table 2 - Lloyds Banking Group Net Asset Value (net realisable value/selling value) (Lloyds Banking Group, 2013, pp. 50-51)     Current situation The current situation facing Lloyds TSB is the repayment of the outstanding government bailout stake that totals at estimated £18.4 billion, or 33 percent of the outstanding shares (Wilson, 2013, p. 5). The launching of TSB as a standalone bank is a part of the restructuring plan that Lloyds’ has agreed to which will enable it to focus on core business and reduce its operational size for a higher degree of efficiency (Hopkins, 2014, p. 1). This is a result of the EU rules on state aid which contain provisions that “The terms are likely to include the obligation to reduce significantly the size of the group's balance sheet” (Arnott, 2009, p. 5). The divestment of the non-core business interests enacted by selling the branches and spinning off TSB represents the restructuring plan Lloyds crafted to satisfy this EU requirement (Arnott, 2009, p. 5).   The Future Lloyds TSB heavy immersion in the mortgage lending area represented one of the major contributing reasons to the need for a government bailout. In looking into the bank’s operations it was not possible to separate Lloyds and TSB as they are both subsidiaries of the Lloyds Banking Group, thus their financial results were combined. The spinoff of TSM as a separate bank has seen negative feedback from long time Lloyds customers who will now be banking with TSB (Arnott, 2009, p. 5). It remains to be seen how this will impact its operations in the future. In terms of Lloyds, the surge in its stock price after this announcement seems to indicate the general public and shareholders see this as a positive development.    Conclusion  In reviewing the merger between Lloyds Bank and TSB in 1995, the process resulted in the third largest bank in the UK at the time. The determination of the success of a merger can be found in the post-acquisition stock performance which has not yielded the expected returns to shareholders as the trading price today is significantly lower than it was in 1995. The union of Lloyds Bank and TSB did not yield the synergies expected by management and anticipated by shareholders. The currently proposed divestiture of TSB by Lloyds represents a move by management to allow a further concentration on its operations and satisfy the requirements of EU rules concerning state aid. Whether this will benefit these two banks, their shareholders and customers is a forecast that is difficult to make. 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(2005) Quality and customer relationship management (CRM) as competitive strategy in the Swedish banking industry. The TQM Magazine. 17(4). pp. 329 - 344   Read More