Section A   Academic Essay 

(50% of Marks; 1,800 words)

On 7^th of June 2017 Banco Santander (Santander Bank) agreed to buy rival Banco Popular (Popular Bank) for the symbolic price of one Euro. This deal may have come as a surprise to Santander shareholders as just 24 hours earlier European regulators had given over 30 potential suitors the option of buying the highly troubled Banco Popular. Banco Santander’s share price leapt 5% at the release of the takeover news.

“Santander worked through the night, lining up underwriters for a €7bn share issue to fund the deal and securing approval from the US Federal Reserve because Popular has a small business in Florida. Santander was told shortly before 6am on Wednesday that its offer to buy the bank for only €1 had been accepted.

The deal was signed an hour later. A crucial factor in Santander’s bid succeeding was that, unlike rival bidders, it did not ask for any state guarantees against hidden losses lurking inside Popular’s books. One executive who worked on the deal said: “It was one of the nights to remember. I did not sleep at all and just went home a few hours ago to shower.”

Spain’s Santander saves Banco (not so) Popular, Financial Times (2017)

Banco Popular was a very troubled banking institution, with over 37bn euros of highly toxic loans on its balance sheet and rapidly evaporating liquidity as bank depositors started a bank-run on deposits. In an astonishing single night’s work Banco Santander had made the decision to buy the company, about how to fund the acquisition, how much the acquisition would add to their shareholders value and  believed they had done sufficient due diligence to protect the interests of their existing shareholders.

In an academic essay format, you are to consider the Banco Santander acquisition of Banco Popular. Financial Times news articles regarding the acquisition can be found below to support students:

• https://www.ft.com/content/9d6dfaee-4bd1-11e7-a3f4-c742b9791d43
• https://www.ft.com/content/5d13302e-4b5c-11e7-919a-1e14ce4af89b

You are expected to use this articles and your access to FT resources as the starting point in your wider investigation and research into the deal. You should be using further resources beyond this initial starting point.

Specifically, you are to choose two of the following three tasks (25 marks each) and write a single academic essay that addresses both of the tasks selected.

1. You are required to critically evaluate the literature regarding the success or failure of merger and acquisition activity and conclude with an informed judgement as to whether the evidence would suggest that shareholders of Banco Santander should welcome or be wary of M&A activity generally (i.e. for all M&A), and specifically the purchase of Banco Popular. Your answer should specifically include reference to the timescale in which this deal was completed, and address whether or not this should factor into shareholders evaluation.

2. You are required to come to a judgement regarding the ability of managers to judge the value of another company when engaging in acquisition activity. Your answer should specifically show an engagement with the academic literature regarding both the efficiency of the stock market and share valuation. Your answer should conclude with an evaluation of the decision by Banco Santander to buy Banco Popular, and conclude whether or not you feel a symbolic single euro valuation was appropriate.

3. You are required to critically discuss the impact of cost of capital & capital structure on the ability of companies to generate acceptable returns for shareholders. Your answer should display a thorough and extensive engagement with appropriate academic literature and come to an informed judgement regarding the overall impact of capital structure on the ability to generate wealth. Your answer should specifically examine the Banco Santander acquisition of Banco Popular deal which involved a 7bn Euro rights issue of shares, and the assumption of 37bn Euros of (mostly “toxic”) loans as part of the deal.

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