Mega mergers are almost always fuelled by three things: egos, conceit and a deep-seated need for power.So when a chief executive slaps down a premium of 50 per cent or more, shareholders can often find the rationale for pursuing an acquisition puzzling.
When the premium reaches 70 per cent or more, arguments about scale and synergy are difficult to back up, and M&A starts to look plain unhinged.
But that is the premium that Sir Fred Goodwin, chief executive of Royal Bank of Scotland, and his consortium pals, seem willing to pay to win control of ABN Amro. The Dutch banking group’s share price on January 1 - before its share register was populated by speculative hedge funds - was €24.35.
Since then, however, the DJ Stoxx Banks Index has fallen approximately 10 per cent. This suggests that ABN Amro’s share price would be about €21.95.
The RBS offer for ABN Amro is roughly €38 a share - equivalent to a premium of more than 70 per cent.
Vodafone’s bid for AirTouch was pitched at 70 per cent in 1999, while one year later, AOL bought Time Warner also at a 70 per cent premium, according to data from Thomson Financial.
There are no comparable banking deals where such a premium has been paid.
Even more worrying is that Sir Fred et al are willing to pay 70 per cent for a new and untested model: the complex break-up of a bank across several countries
RBS argues that it is an unrepeatable deal and that the cost synergies alone justify the premium.
But the numbers are dizzying and RBS is risking its track record as being a successful acquirer of other banks. ABN, dragged down by the credit squeeze, is no longer worth what it was six months ago and making the numbers work is not going to be easy.
In the same way AOL’s deal came to symbolise the irrational exuberance of the dotcom era, the ABN transaction could well epitomise all that has gone wrong during this debt-fuelled boom.