British banking giant Barclays (NYSE:BCS) has cut off its acquisition talks with U.S. credit card company Providian Financial (NYSE:PVN) after they were unable to agree on the price of the transaction. The cessation of talks with Providian sets back Barclays' strong desire to gain a strong foothold in the North American credit and banking market. But if the rumored rationale for ending discussions is accurate, my respect for Barclays' management has just skyrocketed.
Ever since the company got caught with enormous levels of bad debt on its books in 2001, Providian has been repositioning itself out of the subprime consumer debt market and into the higher credit-quality market. But Providian gave up a substantial presence in one market to move into another where the competition was much more intense, causing many market observers to suggest that Providian's moves were part of a dressing up in order to be an attractive acquisition candidate.
How much dressing up was going on is anyone's guess, however. Barclays objected to the price, and people familiar with the transaction say that Providian's extremely complex securitization structures were the culprit. Under U.S. accounting standards, such derivatives can goose profits and improve balance sheets, but under British standards such transactions are not accounted for in the same way. It immediately brings to mind Warren Buffett's strong warnings about derivatives: Accounting for them is such a sham that it allows companies to mark them not to market but to a model, or what he calls "mark to myth."
Barclays has now shown substantial restraint in its acquisitions, having also walked away recently from a potential European takeover candidate when competing bids grew to be higher than it was willing to pay. It also has begun to repurchase its own stock, a sign that the company is seeking to deploy capital to its most optimal use. Providian has also recently set for itself some high goals for profitability, made all the more challenging since it will not allow goodwill (the excess paid for an acquisition) to be ignored in computing profitability.
Barclays is committed to gaining market share in the U.S., but it isn't about to extend itself and make a bad transaction at a bad price in order to achieve this goal.
Sounds good to me.
Bill Mann holds no shares in companies mentioned in this article.
