Royal Bank of Scotland Case Solution

Background

The Royal Bank of Scotland had become one of largest banks in the world, in terms of market capitalization, (the 5th largest bank). In order to improvise its performance, it carried out some major activities. Its market capitalization on April 25, 2003 was £46.8 Billion.

The main reason for going on the top of RBS was acquisition of Nat West Group. The Royal Bank of Scotland was recognized as an expert in integration (Master of Integration). RBS had grown very quickly by merger and acquisitions, initiatives to improve its performance and credibility, and organic growth throughout the time period from1990 to 2003.

The Chief Executive of RBS had become the Businessman of the year. RBS had a multi-brand strategy, it implemented such systems which were effective, adequate and efficient in treating different brands.

Royal Bank of Scotland Case Solution & Answer

            It improved its reputation, credibility, market share by Horizontal Integration that is the quickest way to expand. RBS started to diversify by setting up Innovative Car Insurance Company in 1980s. RBS was the first bank that launched online Banking service over the internet. RBS also gained a presence in the U.S financial Market through acquisitions and in Europe through Joint ventures.

In order to increase revenue growth, RBS implemented project Columbus that divided all RBS’s customers into classes. All segments’ customers were provided with high-class services. RBS moved its business operations into paper less environment. Its cost-income ratio had decreased by implementing project Columbus.

RBS pursued multi-brand strategy. RBS had well-diversified investment, and under different brands sometimes RBS sold similar products.

Description and List of Reasons about Potential Target.  (NET WEST)

Mergers and acquisitions are the fastest way to expand. By organic growth, it takes a time to attain a certain level of market share in a specific place. If the organization makes horizontal integration then means that competition would be relaxed. Since RBS was a bank, it had to obtain additional expertise if it diversifies. No additional expertise is required when an organization moves in the same sector.

Net West was a bank that operated in the same sector where RBS operated. After evaluating all opportunities of alternatives, then best strategic choice for rapid expansion was determined that was the acquistion of Net West.

Acquisition of Net West.  

The purpose of merger and acquistion was to create synergies which are as follows:

  • Revenue synergies
  • Cost synergies
  • Financial Synergies

Revenue synergies are those that increase revenue after combining two businesses’ revenue. After the combination, Net West and RBS could earn more than they would have earned individually.

Cost synergies are those that decrease cost if two businesses are combined; such as same department in both organizations are to be centralized. There is no need to operate two same departments in both businesses.

Financial synergies arise if one entity has surplus cash and other is having opportunities.

All synergies were to exist in the case of Royal Bank. RBS considered that it was better to acquire Net West rather than building societies and insurance companies.

The combination of RBS and Net West could result in very effective cost structure because of economies of scale.

After combining both banks, they could gain presence internationally which was not easy to gain individually.

As RBS had a very strong system for tackling multi-brands, and after combining both banks, it could maintain most famous brands in the U.K. Synergies that are estimated are as follows:

  • Revenue synergies: On the basis of 43 different initiatives that were identified in the plan, the revenue could grow by £390 million.
  • Cost synergies: Through other initiatives cost savings of £600 million was estimated.
  • Additional synergies: On the basis of 39 efficiency improvement initiatives, additional synergies were estimated as £580 million.

 These were the reasons for acquiring Net West since it could generate many synergies. RBS was considered as more efficient in maintaining cost-income ratio whereas, Nat West’s ratio increased over the years. RBS could provide assistance in maintaining cost-income ratio to Net West.

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Royal Bank of Scotland Case Solution
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