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An Evaluation of Barclays Acquisition of Absa 2005

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Edward Whiteley                Strategy in Banking


An Evaluation of Barclays Acquisition of Absa 2005

01 – June – 2007

Edward Whiteley

The Deal

The acquisition of Absa by Barclays marked Barclays return to South Africa, SA, having left in 1986 due to the political environment and issues concerning apartheid. At the time of the deal Barclays had no presence in SA’s retail banking sector having previously had over 1,000 branches prior to 1986. The deal became SA’s largest inward investment and Barclay’s biggest overseas move.

Announced on the 9th May 2005 Barclays paid Absa shareholders R82.5 per share plus a 2% dividend.

Company Overviews

Barclays Group

Barclays Africa

  • 10th largest banking organisation in the world by market capitalisation
  • 100 years of experience in the sub Sahara region
  • 3rd largest bank in the UK
  • 1,200,000 retail/wholesale customers
  • 2,900 branches and 78,000 employees worldwide
  • 230 branches staffed by 6,200 employees
  • 18 million customers in over 60 countries
  • Barclays SA wholesale/merchant customers and small business customers serviced by 400 staff.There was also a small presence in the issuing of credit cards


  • SA’s largest lender
  • Member of theBig Four that dominated over 70% of retail banking in SA
  • 31 600 employees, 670 branches and 4,500 ATMs
  • 6,900,000 customers in a country with a population of 45,000,000


Their dominant position of the Big Four (Standard Bank, Nedbank, First Rand) had long resulted in high fees being passed on to the customer: an issue that had been raised by SA finance officials. It had been considered by finance officials, that the entry of a better capitalised competitor could bring changes to a sector relatively free from foreign presence.

Once complete the deal involved the merging of Barclays’ current SA operations with those of Absa, who would continue to operate under the Absa brand, and Barclays assuming control of the group’s corporate and wholesale operations from regional head offices. Barclays would hope to use its financial strength and vast credit knowledge to increase Absa’s current product range.

An adaptation of the Ansoff Matrix (1965) shows that this acquisition of Barclays is an example of market development at a corporate level, i.e. the acquisition of Absa by Barclays Group.

From the point of view of the merging of Barclays’ SA wholesale operations with Absa’s established retail presence the move is one of new product diversification.





Market Penetration

Product Development


Market Development


Barclays Group acquisition of Absa                         Barclays SA merger with Absa              

External Factors Driving the Cross Border Acquisition

Barclays’ decision to look for an overseas target was inline with market trends at that time. During the periods of Jan 2004 – Sept 2005, 8 out of the 12 largest bank mergers, where the acquirer was domiciled in Europe, were cross-border transactions, four of which involved target banks outside of Europe[1].

A Pest(e)l Analysis  


Banking in the UK had already undergone significant consolidation by this time, any further consolidations were coming under the close scrutiny of the OFT and the Monopolies Commission who had already blocked a number of moves including a proposed deal between Lloyds and Abby National. Particularly in Europe but also in Africathe political stance towards foreign ownerships of domestic banks has softened: a point born out by the statements made by SA’s finance officials.

Absa’s position in the Big Four of SA banking and the adoption of oligopoly- like behaviour by these banks gave rise to the willingness to local officials to welcome foreign investment into the sector. There was also a push by the SA government to increase the number of people who held bank accounts at this time.

The deal in question required approval from Trevor Manuel, the SA finance minister. Regulation in SA requires regulatory approval from the government before an offer is made to shareholders. Issues such as the majority stake to be acquired and provisions for the retention of jobs and the continued support of Absa's black economic empowerment and a transaction in which the bank sold a 10 per cent stake to a black investor consortium in January all had to be considered[2].


Banking in the UK and Europe was becoming more and more competitive. New entrants to the market, such as the supermarketbanks Tesco and M&S, were offering customers financial products such as loans at a lower cost than the established banks. Banks also had to begin offering customers a one-stop-shop where they could purchase all financial products from one supplier.

This erosion of traditional demarcation lines influenced the wave of consolidation that had occurred in the UK, in particular the mergers between banks and insurance companies and banks and stockbrokers. The competitive pressure brought on by this consolidation had reduced bank margins. Barclays in particular suffered from deterioration in income earned and in May 2005 it warned of a significant rise in bad-debt losses in its credit card business in the first quarter[3].

The diversified nature of African markets would have also been an incentive for foreign investment, with Absa in particular likely to benefit from consolidation of local markets[4]. The banking market in SA was well established and falling interests had fueled growth in the sector. The household debt ratio in SA was also half that of the UK.


An important influence on the choice to acquire an overseas target is the views of consumers towards foreign direct investment, FDI.Customers are becoming more willing to accept foreign ownership for their banks. In 2005 UK customers were paying around £60 a year for their banking services, at the same time Italian customers were paying £250. While it is unlikely that SA customers were paying £250, similarities between the Italian and SA banking industries can be drawn: both were dominated by a small number of large institutions and both had little FDI. This being the case it is little wonder that a YouGov poll found that over 80% of Italian customers were unhappy with their domestic banking system. It follows that SA customers too would have been disappointed by thecurrent state of their domestic banking sector.

Barclays had also recently experienced success in successfully re-branding their Spanish subsidiary bank Banco Zaragozano to Barclays. Whilst this was not going to be the case for the Barclays Absa merger it again highlights the customer’s willingness at the time to accept foreign ownership.


Technological changes in banking have crated much greater competition in the market this has had the effect of driving down margins. The customer, both individual and corporations, now has access to a greater range of products from global providers. Technological advances have also brought down the barriers to entry allowing the ‘Supermarket’ banks to enter the market. Operating with a different cost basis to the established banks these new entrants are able to offer more favourable borrowing rates to customers, this again has the effect of reducing margins for banks.


Deregulation of banking markets has shown to have had a significant impact on cross border merger. In the US Jayaratne and Strahan (1998) found that mergers increase when states joined the interstate banking agreement, similarly Saunders (1999) found the when deregulation allowed banks to increase their financial scope, i.e. UK commercial banks in 1986 being allowed own investment banks, a new wave of mergers can occur. This swell of UK mergers since 1986 had left a saturated market increasing the likelihood of UK banks to search for overseas targets.

Barclays required a court action allowing acquisition of Absa after the bid was delayed due to groups seeking reparations from Barclays for allegedly supporting the former apartheid government.

Other Factors

The information costs of such a deal must also be taken into account. Three elements that can be used to define information costs are: distance, a common language and a comparable legal system[5].

It is often expected that the shorter the distance between the two countries the greater the similarity will be between the two cultures. Most studies report distance variables when making investment decision report a negative coefficient (Ahearne et al 2000, Ghosh and Wolf, 2001, Wei and Wu 2001). The distance between Barclays and Absa was significant but when attributing distance to difference between cultures the variable does not apply to this case. SA being a former colony of Britain and the close ties between the two countries mean that the cultures of the two nations are more similar than perhaps two countries that might be closer, e.g. England and Germany.

In this particular case distance can also be thought of as having a positive impact on the deal. Noting the impact business cycles have on a bank’s profitability and that distance between economies decreases synchronisation between cycles, the distance in this case may be another form of off-setting the systematic risk of each country.

A common language clearly exists between the two countries, although there are over 12 official languages recognised in SA, English is the primary language of both the UK and SA. The sharing of a common language has been found to decrease the costs associated with combing the corporate cultures of the two parties as reducing general costs such as information provision, reporting, etc.

Having been a former colony the legal system in SA bares similarities with that of the UK, often SA has sought to follow or adapt precedentsset in the UK to govern their own corporate environment. Difficulties with the government’s stance on black empowerment and the redistribution of wealth to black people in SA are likely to have arisen but Barclays experience and current presence in the region will have provided an insight to these issues prior to the decision to make the move back to SA.

Internal Factors Driving the Acquisition

A SWOT analysis of each bank will provide a snap shot of their position at the time if the acquisition. This will form a platform from which to analyse the strategic choices of the management.

SWOT Analysis Barclays



Recognised global brand

Pension fund in deficit

Experience of African markets

Falling earnings in the domestic retail market

Wholesale and small business operations in SA

Large presence in global capital markets

Cross selling ability

Credit rating system

Established IT platform



Expansion into international markets

Slowing domestic retail market

Political liberalisation of international mergers

UK interventions towards further domestic consolidation

Changing customer attitude toward foreign bank ownership

European banks looking to enter the UK markets

The rise of the ‘supermarket’ banks

SWOT Analysis Absa



A dominant brand

Small presence in SMB markets

Largest lender in SA

Limited wholesale operations

Customer-focused operating model


Multiple delivery channels

Highly skilled/Expert staff were limited

Established bancassurance model

Poor IT infrastructure

Very strong retail banking arm



Increased demand for asset financing

Take over by foreign banks

Expansion of African operations

Investment from a foreign bank in a major competitor

Growing demand for wholesale banking

Adopting new IT advances


Barclays intention to expand their overseas operations was made public at the start of 2004 in their spring Investor Presentation. In this presentation investors were given details of Barclays’ strategic priorities. These were as follows:

Build presence in international markets

– Developing retail and commercial banking activities outside the UK

• Accelerate development of global product businesses

– Proven track record: Barclays Capital, BGI and Barclaycard

– Developing similar model in wealth management through Private Clients [6]

Both of these statements clearly outline Barclays’ intentions. With the UK experiencing a slow down in economic growth, had having recently reported lower than expected results for the first quarter of 2004 it follows that Barclays would look to offset this position by expanding overseas. Not only would this proposed move to international markets provide another revenue stream but it should also reduce the overall systematic risk faced by the group.

Barclays went on to state:

• Markets outside the UK are growing more rapidly and are less penetrated

• Credit cards with a focus on lending offers Barclaycard significant opportunities in selected global credit card markets

• We will exploit both organic and inorganic growth opportunities in existing countries and new markets [7]

This intention of continuing inorganic growth in overseas markets that are growing more rapidly and that are less penetrated in very much in line with the factors outlined in the PESTL analysis.

Absa announced their strategies for growth and success in a 2003 interim presentation.
Here they declared that interest by foreign banks in the SA market was a positive for the company. Key strategic issues were defined to be:

• Better cross selling of products

• Expansion in to other African markets

• Better knowledge, innovation and process management

• Continued growth of wholesale and capital businesses

The SWOT analysis provides a mirror image of both banks activities in SA. And highlights the congruency of their respective strategies. For example the desire of Absa to increase its wholesale and merchant business matches well with Barclays already established presence in the SA market. Barclays domestic experience in these markets also provides an incentive to merge the operations. Barclays desire to increase the global issuing of their credit cards can build upon Absa’s established retail presence in the region while taking advantage of Barclays credit rating systems and cross selling techniques to enhance the sales revenue of Absa.

Managerial Motives behind the Deal

From the perspective of the two boards of directors the deal would have been welcomed. There are four reasons why managers may pursue an acquisition despite the move perhaps not being in the best interests of the shareholders:

  1. To pursue growth in the size of their firm, their power, status and remuneration is based on the size of the business (the empire-building syndrome).
  2. To deploy their underused managerial talents and skills (the self-fulfilment motive).
  3. To diversify risk and minimise the costs of financial distress and bankruptcy (job security motive).
  4. To avoid being taken over (job security motive).[8]

There may well have been a case of empire building in the thoughts of John Varley who had only that month been appointed new chief executive of Barclays. It would not be inconceivable to believe that having recently been appointed to the role that he should endorse the Barclays biggest acquisition since the purchase of the Woolwichfor £5.6bn in 2000.

From the Absa board perspective the deal too must have been very attractive. The final merger resulted in the Chairman of Absa, Dr Cronje, to remain in his position as well assume the position of non-executive director of Barclays and Barclays PLC. The Group Chief Executiveremained in his post and joinedBarclays Senior Leadership Group and the International Retail and Commercial Banking Executive Committee. With these new positions with the Barclays Group would have come with a larger remuneration package and greater job security.

The McKinsey Matrix


The matrix shows Absa was a very strong candidate as a target for Barclays.

Analysing the factors that make up market attractiveness and competitive strength it is possible to see why Barclays chose Absa. The PEST(E)L analysis highlighted many of these strengths, the growth and size of the SA banking industry, the competitive rivalry in SA is dominated by an oligopoly of four banks of which Absa is one. Although Absa’s competitive strength is very high that applies only to the SA market, in global terms its strength is limited, thus making it a good target for Barclays.

Proposed Revenue and Cost Synergies

Barclays proposed that the strong market position and domestic expertise of Absa combined with their product mix, global presence and financial strength would result in the following synergy benefits.

  • Increase in Absa’s pre-tax profits of R1.4m four years after completion having incurred costs of R1.8m for the first three years
  • Fourth year profits are to be achieved through a 60% uplift in revenue and a 40% cost efficiencies

The revenue increases were to be sought by taking advantage of Barclays’ expertise in relationship management, packaging of products with the Absa retail network. At the same time leveraging Barclays’ credit card experience and business/wholesale activities.

Cost synergies were hoped to be achieved through Absa’s adoption of Barclay’s corporate banking platform in SA, economies of scale synergies, acceleration in IT investment, improved credit risk management for commercial and wholesale banking and the combing of certain back office operations. These synergies once established were intended to have lasting effects on the performance of both companies.

At the time of the acquisition in SA Absa was considered overstaffed and inefficient. A closer look at the performance ratios, however suggest that Absa may have in fact been the more efficient of the two.







Net Interest Margins



Barclays does have a lower level of non-performing loans (around 2% of its portfolio against Absa’s 3.8%) but this probably reflects the greater level of risk in SA.

Despite this the proposed cost and revenue synergies link closely with the strategies and outlined strategic objectives of both Absa and Barclays. The SWOT analysis as well as the strategies and objectives of the two banks have a very high level of congruency and as such the motivation to pursue these objectives as a merged entity, therefore exploiting each others strengths, were well founded. The integration of Barclays IT platform and the merger/removal of overlapping back room activities both give more conviction to the merger motives and the realisation of synergies.

Evaluation of the Acquisition / Merger

There are two factors against which this merger must be analysed. From the group’s perspective, were the synergies achieved? From Absa’s perspective did the merger of their operations with Barclays strengthen their position in the SA market?

The Acquisition

In 2006 Barclays reported that R753m of synergies had been achieved, 453m Rand ahead of the 300m Rand target for that period. The group also reported a pre tax contribution of £769m from Absa to the group’s account. Barclays were also confident on meeting their announced pre tax Revenues of R1.4bn by the fourth year of completion. These figures all suggest that the integration of the two businesses has been a success for Barclays group as a whole.

The Merger

To access whether the merger of Barclays Africa and Absa was successful it will be necessary to compare selected performance ratios against those of other SA banks.

First Rand








Net Interest Margins




Cost Income Ratio




Market Cap(Rbn)












Net Interest Margins




Cost Income Ratio




Market Cap(Rbn)












Net Interest Margins




Cost Income Ratio




Market Cap(Rbn)












Net Interest Margins




Cost Income Ratio




Market Cap (Rbn)





The figures in this table show that Absa’s performance since the takeover/merger of operations has improved dramatically. Cost to income ratio closing in on the top two performers in the market, ROE is still the second best but with the difference at only 0.2% and market capitalization a rise dramatically since 2004. The new Absa has 84,000 corporate and 8.3m retail customers and 749 bank branches. This again shows the success of the takeover/merger of operations when year ending 2004 Absa had only 670 branches and 6.9m customers.

For the first year post take over Absa Corporate and Merchant Bank earnings grew 45.9% to R1.115bn, share in the credit card market grew from 22% to 25.6% and loans advanced to credit card holders rose 61.3% to R11.56bn. Total loans issued also rose by over a quarter, 25.8% to R386.17. Headline earning per share rose 23.8% to R11.82 with the group’s total earnings reaching R7.872bn.[11]

The effects of the proposed synergies have clearly had a positive impact on Absa’s performance. The increased fee income through enhanced cross selling of products, the better interest income, resulting from increased share in retail and large increase in wholesale operations have all contributed to the growth of Absa and the success of Barclays. The strategic choices made to build upon the established Absa brand whilst exploiting the financial capabilities and scope of the Barclays Group where paramount to ensuring the success of this takeover/merger.

Word Count: 2,999

[1] Playing a new field, A Deloitte Research report, By Scott Winslow, 2006

[2]Barclays purchase approval expected,By Jane Croft in London and John Reed in Harare, Financial Times, Published: Apr 04, 2005, http://search.ft.com/ftArticle?sortBy=gadatearticle&queryText=barclays+absa&y=0&aje=true&x=0&id=050404000866&page=15

[3] Corporate lending gets UK banks out of a tight spot, By Gordon Smith, FT.com site, Published: Aug 11, 2005, http://search.ft.com/ftArticle?sortBy=gadatearticle&queryText=barclays%20absa&y=0&aje=true&x=0&id=050811002498&page=8

[4] Diversified African markets beginning to lure investors, By Gary Kleiman senior partner of Kleiman International Consultants, August 2005

[5] Cross Border Bank Mergers: What Lures the Rare Animal? By C Buch and G Delong, August 2001  

[6] Investors Presentation, Spring 2004, Page 3, http://www.investorrelations.barclays.co.uk/INV/A/Content/Files/Barclays_Investor_Pack.pdf

[7] Investors Presentation, Spring 2004, Page 26, http://www.investorrelations.barclays.co.uk/INV/A/Content/Files/Barclays_Investor_Pack.pdf

[8] The Essence of Mergers and Acquisitions, By P. Sudarsanam, Published 1995

[9] http://www.tutor2u.net/business/strategy/ge_matrix.htm

[10] Figures obtained from: Absa Annual Report 2006, Absa Annual Report 2005, Nedbank Annual Report 2006, Nedbank Annual Report 2005, Standard Bank Annual Report 2006, Standard Bank Annual Report 2005, First Rand Annual Report 2006, First Rand Annual Report 2005

[11] Barclays links rake in R753m for Absa , February 21, 2007, By Tonny Mafu, www.businessreport/banking/Business%20Report%20%20Barclays%20links%20rake%20in%20R753m%20for%20Absa.htm

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