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On Nov. 14, Britain's HSBC Holdings (HBC
) announced a $14.2 billion all-stock takeover of U.S. consumer-finance giant Household International (HI-H
. The move by the traditionally conservative HSCB surprised some, partly because Household has been accused of predatory lending practices.
BusinessWeek London Correspondent Kerry Capell spoke with HSBC Chairman Sir John Bond, who explained why he sees the move as a logical next step for the financial institution. Edited excerpts of their conversation follow:
Q: Why Household?
A: It starts [with] geography and client diversification. Competition concerns stop us from doing anything in Britain and Hong Kong, so the logical place to expand is the U.S. The American economy is the largest, most successful in the world, and consumer spending there is the engine of growth for the world economy.
If you look at the U.S. market, the people who have a national franchise aren't the commercial banks. It's the consumer-finance houses. Consumer finance is a mainstream business for GE (GE
), Citigroup (C
), and Wells Fargo(WFC
), among others. Household is the largest and most premier of these businesses. When we conclude this deal, we'll have a unique banking franchise. We'll have approximately 30% of our business in the U.S., 30% in Europe, and another 30% in Asia. I don't think any another financial institution has that breadth of diversification.
Q: How does this acquisition fit in with the rest of your business?
A: We're seen as a bank with a strong balance sheet, and right now, there's a flight to quality. We're bringing in more deposits faster than we can redeploy them. What we need on the asset side of our balance sheet is a generator. Household generates $40 billion of new assets every year.
On the deposit side, we deal with people from all walks of life. Before [the acquisition], we hadn't been able to lend to people on this lower end of the ladder. With Household, we now have the credit-scoring facility to do so.
Q: Isn't it a risky business to get into in the current environment?
A: Household's average client is 40 to 50 years old, with an income between $45,000 and $60,000 and a home valued between $120,000 and $175,000. This is a more durable part of the consumer market, and it tends to be less volatile than the wealthier part of the market.
Household's business is stronger than many people realize. Just under 40% of the whole American market is categorized as below prime. But 63% of Household's customer base is prime, and only 20% is subprime. Household does business with one in five members of the U.S. population, and its database includes every household in the country.
Q: Considering the falloff in Household's share price recently [it has been trading at a seven-year low,] how would you characterize the price you paid?
A: Share prices have come off around the world, but we paid a good premium when we struck the deal. Over the last weekend, the value of our offer was $30 a share, and the stock was a little below $23, so we were giving Household a 30% premium to market. It's an all-stock deal, so 13.4% of our stock would be issued to cover it.
Q: How has HSBC's share price been holding up? [It closed at $58.20 on Nov. 15. Its 52-week high was $64.55.]
A: In the past 18 months, it has held up extremely well. We measure ourselves against a peer group of nine leading banks, and over the past 36 months, we've been the top-performing bank. And in the last year, we've been the second-best performing.
Q: How long has the deal been in the works?
A: We've been looking seriously at Household for the last three months. We've known Bill Aldinger, Household's chairman, as he worked with a former director of ours, Carl Reichardt, when he was chairman of Wells Fargo.
We started by chatting on the basis that we were looking for assets, and they were looking for funding. The more we looked at it, the more we realized the complementary nature of our assets.... Our conversations naturally progressed.
Q: HSBC is known for its caution, but Household has several lawsuits against it over predatory lending. How big a risk are you taking on?
A: We would not have proceeded if we didn't believe that they're in the final stages of reaching a settlement. Household has changed its lending practices, improved risk controls, and put in place an oversight committee led by Senator Orrin Hatch and other well-regarded people who have a track record in consumer affairs.
Q: In August, you bid $1.14 billion for one of Mexico's biggest banks, Grupo Financiero Bital. Are there any synergies with Household?
A: Household will fit in with Bital's 1,400 branches in Mexico and 6 million customers. Household told us that many of their clients are Hispanic who regularly need to transmit money to Mexico. Household couldn't do that for them, but together we can. We will know by Nov. 22 if we're successful [in acquiring Bital].... We're hopeful.
Q: How are you weathering the current economic slowdown?
A: Our first-half results were received quite well, given all that's going on in economies around the world. We have a strong cash position, and...we're far more liquid than most of our competitors. We're funded almost entirely by consumer deposits around the world. Moreover, only 46% of our total assets are in loans, which is why Household is such a strong proposition.
Edited by Patricia O'Connell
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