Analysis of the CIBC and Barclays Caribbean operations merger in 2006

CIBC - Barclays

The Caribbean operations of CIBC and Barclay's were merged in 2002, but in 2006 Barclay's exercised an option to exit the union, resulting in CIBC's takeover of the operation, which is known as FirstCaribbean International Bank (No author, 2002). At the time of the merger, the two companies believed that there was an opportunity in the market to build a Caribbean bank -- in this case with operations in 15 countries and aggregated assets of $9.9 USD (Ibid).

Most Caribbean economies are small, with limited natural resources. Such economies are frequently dependant on tourism and the agriculture sectors. Economic growth in the Caribbean is tied to the state of the economy in United States (Singh, 2004) as well as countries with strong ties to the region, like Canada and the UK. In 2002, the American economy was sluggish and by 2006 it was robust. This indicates that Barclays entered the deal in a down market and exited when prospects for the Caribbean economies looked especially strong. Many Caribbean countries were at this point becoming involved in globalization, in particular opening their borders to international capital markets (Singh, 2004).

The banking industry is dominated by Canadian banks -- Scotiabank and the Royal Bank also being major players in the region along with CIBC. These banks have come to dominate the market, with perhaps a handful of regional banks as distant competitors. For CIBC, the merger was a means to strengthen its presence in the region, and this was expected to put it squarely in competition with the other two Canadian banks for the Caribbean market. For Barclay's, the initial merger probably offered an out as much as anything. The company had been active in the region since the early 19th century, but was losing ground competitively. The two companies were around the same size in the Caribbean, and Barclays had a notably strong operation. However, while the Canadian banks view their Caribbean presence as an extension of their domestic business, Barclays viewed the business as relatively minor in the scope of its global operations, and not a key point of focus. This perhaps is what motivated Barclay's to exit the partnership in 2006, leaving the business in CIBC's hands entirely.

For CIBC, there was considerable motivation to build out its presence in the region. The Caribbean has been a good source of income for Canadian banks for decades, and the CIBC was a fourth-place player prior to the creation of FirstCaribbean. The opportunity to become a stronger player in the region surely motivated the company, as CIBC was able to challenge its rivals after buying out Barclays. Removing Barclays from the equation was also essential for two other things -- allowing CIBC to manage the bank the way it wanted and to eventually apply the CIBC brand to the bank, building CIBC's global banking profile.

2. The deal was for $1.62 USD per share in FirstCaribbean, the total deal being $1.08 billion USD. This left CIBC with 87.4% of the total shares in the bank, with regional investors holding the minority ownership (Canadian NewsWire, 2006). The deal does not appear to have been at a premium. When the deal was announced, the market cap of FirstCaribbean was $3.3billion, which would give the 43.7% stake purchase a value of $1.4421 billion. The deal was for $1.08 billion, less than the market value of the shares. That appears to be a good deal for the CIBC, to make this deal at this price. CIBC was able to use shares for part of the deal, even though Barclay's had no intentions towards long-term ownership of these shares.

On the 30th, shares of Barclays improved by 3.5p, a minor improvement in the midst of a long-term upward trend. CIBC shares jumped on the 29th, but then fell slightly on the 30th. At that point, Barclays was beginning to struggle while the CIBC had seen steady improvement in its performance in the previous years. Barclay's is a larger institution than CIBC and the Caribbean was not a major part of its business, so the lack of impact on the value of the firm is not surprising. CIBC gained benefit from the deal. This is unusual for a buyer, but the strategic implications of the deal were such that CIBC would bolster its position in the Caribbean market and continue to build out its brand internationally as a result. Thus, the market reacted favorably to CIBC taking over FirstCaribbean entirely.