Time to Seize the Moment?

There's no time like the present

Time to Seize the Moment?

Dear Reader,

With business confidence at a new low, the temptation is to put off strategic decisions. However your competitors may have been studying the market for a while and may be poised to move. The Virgin Money acquisition of Northern Rock looks to be just such a move. This newsletter reviews the strategic logic behind the headlines.

The Idea

Expectations of the economy and markets are now realistic, meaning that business valuations are at historic lows.  In fact the BDO Private Company Index has declined by 25% since 2005, and arguably smaller companies values have fallen by more.  From a Virgin Money perspective, Northern Rock has also declined in value from the first time Virgin looked at the deal in 2008 before it was nationalised when it could have cost them £1.4Bn rather than the £747m Virgin is paying now.  Our earlier newsletter covered Valuation Methods.

Game Plan

So what would be the key aspects to the Virgin Money / Northern Rock deal?

  • Product Fit – Do the products overlap or complement each other?  Virgin Money is strong in Credit Cards and Insurance while Northern Rock majors on Savings and Mortgages.  This appears to indicate good potential for ‘sales synergies’ or the ability to cross sell products to the enlarged customer base.
  • Customers – Do both companies serve the same type of customer?  Both Virgin and Northern Rock serve retail customers, with Northern Rock claiming 1m and Virgin 3m customers.  Some may be customers of both but that has not stopped Virgin claiming 4m customers post acquisition.
  • Geographical – Do the locations of businesses (branches) compliment or compete?  Virgin Money is an online solution while Northern Rock has 75 high street branches; this fit appears good.
  • Competition – What advantages / disadvantages would the new combined business have in the market?  The established high street Banks have strong brand awareness and customer acceptance.  Virgin has an enviable Brand reputation and the combined Virgin Money and Northern Rock is projected to start well capitalised with a 15% ‘Tier 1 Capital ratio’.  This compares with 10% that the Independent Commission on Banking recommended.  Virgin is also perceived as having a good customer reputation.  Virgin have avoided calling themselves a ‘Bank’ due to recent poor headlines.
  • Funding – Here the Virgin Money consortium has put a smart package together, utilising excess cash in Northern Rock and attracting equity funding from Wilbur Ross.  Wilbur Ross appears to have invested based on the discount to asset value this represents, together with backing the Virgin different market approach; in addition investors already have a proposed exit via a stock market float in about 3 years time.  To achieve deals in the current climate requires the review of all potential sources – see Where to hunt for Funding and Alternative Funding sources.
  • People – How well will the different teams fit together?  The cultural fit can be critical in an acquisition or Merger.  So what about the Virgin & Northern Rock fit?  Virgin has a culture of doing things differently whereas Northern Rock is a former building society which has experienced a ‘bank run’ and had to be nationalised.  However Northern Rock employees should be used to change – it was originally created through a merger of 53 different building societies!

The End Result

Time will tell whether the Virgin / Northern Rock deal will achieve the stakeholder’s objectives; however it is clear that some business owners and entrepreneurs are thinking strategically and are prepared to act.  Are you ready to make a strategic move?   Could a merger help your strategy?

As Virtual Finance Directors we enjoy facilitating strategic workshops to help Management teams and business owners formulate their strategy.  If you would like a chat about organising such a workshop please contact us.