by Perman, Ray
At 6.30 a.m. Shaw dialled Rowland’s home, only to be told that Rowland had gone out for an early morning run and would call back. The Financial Times later reported that in fact Rowland was still in bed, trying to decide whether to go for a run or not, but in any case a few minutes later he returned the call and Shaw delivered his bombshell.1
By 6.45 a.m. Rowland had called Wanless, who called his senior executives and summoned them into the office for an urgent meeting. For most it was merely an early commute, but for Bernard Horn, NatWest’s head of group operations, it meant a scrambled return from Lake Como, where he was celebrating his wife’s birthday. Also called was Terry Eccles, the senior executive of the investment bank J.P. Morgan, which was advising NatWest on the Legal & General deal.
At 7.15 a.m. first news of the bid hit dealers’ screens.
At 9 a.m. there was a hastily arranged meeting between Bank of Scotland’s senior team and their NatWest counterparts. The Scots outlined their proposal, the English listened politely, but were noncommittal and the meeting ended quickly. Another part of the ritual over.
Peter Burt then hurried to a meeting of stockbrokers’ analysts. These were key people, experts in banking and finance who followed every major company in the sector, dissecting figures and trends, assessing strengths and weaknesses, predicting future performance. They would all write notes to their clients on the merits of the bid and eventually, when the campaign was nearing its end, would make recommendations to accept or reject. They were not decision-makers, but they were key influencers and their reaction on this morning could determine the course of the battle. One of the requirements for their job is that they take nothing at face value and they tend to cultivate a professional cynicism. They are not often given to collective enthusiasm.
The Bank of Scotland chief executive gave a presentation which was characteristic: it was detailed, thorough, dense with facts and evidence and driven by a remorseless logic, spiced with occasional touches of humour. Afterwards the analysts asked questions and then, unexpectedly, at the close of the meeting they rose to their feet and gave Burt a standing ovation. In his haste to get on to the next event he had already left the room, didn’t notice and had to be told about it afterwards, but the campaign could not have had a better start than this.
9
Morituri te salutant2
The City loves big hostile takeovers. Contrary to the impression given by films such as Wall Street and Margin Call, much of the daily grind in the financial sector is routine, predictable, boring and repetitive – relieved by a long Friday evening session in the wine bar. Unsolicited bid battles, which can run for months, bring a period of unpredictability and excitement and everyone can join in. Some will be closely and directly involved. The companies on either side will have one or perhaps two principal advisory firms from among the handful of investment banks which comprise the global elite. The team directing the campaign may be fairly small, but everyone on the staff will feel they have a part in it, down to the receptionist at the door. Bids mean fees and fees mean bonuses. Then there will be one or two stockbrokers, big City firms of lawyers and accountants and, of course, public relations companies. The battle will be fought at many levels. These days the skirmishes take place on computer screens, but in the late 1990s they still happened in the financial pages of the newspapers and magazines which carried stories every day.
At any one time there can be dozens or perhaps hundreds of people working full-time on each side of a bid. And this is only in London. If the bidder or the target company has interests abroad or its shares are traded on markets in New York, Paris, Frankfurt or Tokyo, there may have to be teams in those cities too.
The fees are huge. In 1999 Bank of Scotland was budgeting for £82.5 million, with a further £105 million on top to go to the Government in stamp duty should it be successful. The money goes to boost corporate profits and annual bonuses for the City’s stars, but it also trickles down a long way. Specialist financial printers get extra for rush jobs done under strict security, newspapers get an unexpected surge in advertising revenue, courier companies have cyclists and motorbike riders on standby, even contract caterers benefit from the sandwich meals brought in to be consumed in overheated rooms in the middle of the night. These events are so essential to the well-being of a major financial centre like London that the top advisory firms try to stimulate them into happening whenever possible by sliding a list of possible bid targets across the desks of their clients. Not for nothing are the most successful corporate financiers known as ‘Rainmakers’.
There were ironies in the teams lined up on either side in this bid. Schroders, who had advised the Bank on its earlier approaches to NatWest, was now in the opposite camp, as was Cazenove, whom the Bank had backed when it decided to stay independent. The firm had told the Bank then ‘We will never go against you.’ Now they were. On the Bank’s team, advising in the US, was the Wall Street investment boutique Gleacher, run by Peter Burt’s old golfing partner Eric Gleacher. The firm had previously been owned by NatWest and Gleacher himself still had a large personal holding in the London bank.
When a bid happens everybody tries to get aboard the bandwagon. The advisers to firms not directly involved will call suggesting that they keep a watching brief – for a modest retainer of course. Other big banks and newly demutalised building societies were consulting their brokers and investment bankers. Analysts and fund managers who are normally reticent and guarded in print are able to let themselves go when called by a journalist for an unattributable quote. Some may be close to the action, but even those who are not feel entitled to an opinion. Those not important enough to be telephoned will find an audience for their views propping up the bar in Balls Brothers, Corney & Barrow or El Vino on Friday evening.
At one level takeover battles are governed by strict rules. The stern watchdogs are the Stock Exchange and the City Takeover Panel, who insist that form is followed, that documents are issued, that statements are supported by evidence, that rigid timetables are adhered to and that there is no mischief-making in the form of companies suggesting they might bid, when they have no intention or lack the wherewithal to do so. The Takeover Panel cannot send anyone to prison, but woe betide any investment banker, stockbroker or lawyer hauled before it for a reprimand. His – or, extremely rarely, her – chances of getting the next lucrative deal will be severely damaged.
Formal documents have to be prepared – at least an offer document from the bidder and a formal response from the target – but perhaps more if the terms of the offer are changed or another bidder enters the battle. These are not ‘easy reads’; comprising multiple A4 pages of dense text unrelieved by colour, illustrations or eye-catching design, they conform to a set format, with information in set places. Every fact and assertion stated has to be checked and supported by evidence. This is policed by a team of lawyers.
I was once on the receiving end of this process. Each executive from my company was summoned in turn into the boardroom where the legal verification team (soon known throughout the building as the ‘Spanish Inquisition’) demanded documentary proof of every fact proposed for the draft document, even down to the three-line biography of each of the directors. The insistence that I support my claim to qualifications resulted in a floor-to-attic search which eventually revealed that the ‘empty’ cardboard tube my wife had thrown into the recycling bin actually contained my degree certificates. For one of my fellow managers it was not so simple. He failed to provide proof of a claimed university degree and was quietly dropped – not only from the document, but also from the board.
This is the formal process and is usually unseen by spectators not actually involved. But the contest also takes place at another level in a series of one-to-one clashes – chairman against chairman, chief executive against chief executive, investment banker against investment banker – and mob struggles of one PR company against another. This is the gladiatorial spectacle the City loves, fought in wordplay rather than
swordplay in the columns of the newspaper financial pages and the one-line flashes on the newswires. The press likes to personalise the process and often reduces it to a macho hand-to-hand struggle between chief executives. For those fronting the bid it can become a time of intense public exposure. They are in the public eye and expected to produce a new accusation or a new rebuttal every day. Some thrive on the experience, others find it extremely stressful.
For those most directly involved it is a long and exhausting process with no let up. Mondays to Fridays will start with early breakfast meetings with advisers to review the progress of the battle and assess the latest move by the other side. Then there will come a relentless round of press conferences, meetings with analysts and endless presentations to shareholders and investors. I went through a similar process a few years before the Bank of Scotland bid and, with two colleagues, made 60 one-hour presentations in two weeks. We started by trying to vary what we said to add some variety and interest, but by the end we were on autopilot, mechanically saying the same words in the same order in the same monotone each time.
In the biggest battles there may have to be teleconferences with the Far East in the early morning and with New York in the evening. On Saturdays PR advisers will be pressing for new lines for the Sunday papers and on Sundays they will be hassling for newer lines for the Monday papers. The principal combatants are sustained throughout the campaign on a cocktail of adrenalin, testosterone (there are still very few women involved, and were even fewer in 1999) and caffeine. Meals are often taken on the move or during meetings. Alcohol dulls the senses and is not taken until the nightcap whisky before a thin, exhausted sleep.
Bank of Scotland’s timing was impeccable. The IMF and World Bank meetings would not start until the Monday, but many senior bankers were either already in the US on Friday 24 September or on their way. The Royal Bank’s Sir George Mathewson had taken a few days off and crossed the Atlantic early to watch the opening of the Ryder Cup, the annual golf tournament between Europe and the United States. That morning he was among the crowd on the edge of the green at the Country Club, Brookline, near Boston. Club rules dictate that all mobile telephones must be switched off during play, but Mathewson had never been one to follow rules and took the call telling him of the Bank’s bid. He cut short his vacation and flew back for a hurriedly arranged meeting with the Royal Bank’s City advisers, Goldman Sachs and Merrill Lynch. They were, he told his colleagues later, ‘gagging for us to make a counter bid’. Mathewson, however, decided to hold his fire. He was not the only one to catch an early plane home. Peter Ellwood, LloydsTSB’s chief abandoned the IMF meetings and flew back that Sunday.
The bid sent a shockwave through the City. An early morning flash from Reuters declared: ‘Bank of Scotland has torn up the handbook on how to achieve a British financial services merger and thrown the pieces to the wind.’ An unnamed analyst was quoted as saying: ‘This is about as hostile as you can get without going up and punching the other side in the face. The law of the jungle now presides.’1
Meanwhile the war of words had started. Bank of Scotland’s team were busy undermining the record of the NatWest management and rubbishing their future strategy. Peter Burt called NatWest’s plan to buy Legal & General an expensive and ill-judged diversion from the urgent work the English bank ought to be undertaking to improve its core banking business and reduce costs. Bank of Scotland would offer shareholders a real choice between its own ‘value adding’ proposals and NatWest’s ‘value destroying’ plans. If successful it would sell NatWest’s peripheral businesses, the fund management group Gartmore, Ulster Bank and the American investment bank Greenwich, and return the proceeds to shareholders. This would enable it to concentrate on the basic banking business.
For NatWest Sir David Rowland hit back, describing the bid as unsolicited, unwelcome, ill-thought-out and undervaluing NatWest. Peter Burt, he declared, was long on rhetoric and short on substance. There was a big difference, Rowland declared patronisingly, between running a corner shop and running Tesco.2
Analysts friendly to NatWest were roped in to say that the bid was opportunistic. ‘I don’t think this is a sincere bid,’ said one anonymous source. ‘It is a spoiling tactic against the Legal & General bid and a PR exercise following the Pat Robertson fiasco.’ A more measured and perceptive comment was given by Justin Urquhart-Stewart of Barclays Stockbrokers, who, as a Scot, knew the Bank pretty well. ‘This move is almost as defensive as it is aggressive and it is a good strategic play by a medium-sized bank. One reason they are doing this is as a pre-emptive action, it moves their share price and it shows they are aggressive and gives out a clear message to anyone who might be thinking of them as a takeover target.’
Most comment, however, favoured the Bank. The financial news service of Reuters said that the bid had ‘stunned and delighted’ the City. ‘A David of British banking has taken on one of its Goliaths and the delighted spectators think it can win.’ The following morning’s newspapers were equally enthusiastic. The Times said the bid had been timed to perfection and the paper contrasted the return shareholders had received from Bank of Scotland over the past decade with that from NatWest. A hundred pounds invested in the Bank at the beginning of 1989 was worth £1,515 a decade later, whereas had it been invested in NatWest it would be worth less than half that at £745.
The Financial Times Lex column said it was hard to feel sympathy for NatWest and when it came to a comparison of the management of both banks it was an easy choice. The Sunday papers were also almost unanimous in being equally complimentary. Only the Glasgow Sunday Mail came up with an original line, first reporting that Gavin Masterton had taken Saturday afternoon off from the bid battle to see the ‘Pars’ (Dunfermline Athletic football team, where he was on the board) get beaten 2:1 by Ayr United, and then warning that if Bank of Scotland succeeded in winning NatWest it would inherit Coutts, the exclusive private bank, and with it the overdrafts of Sarah, Duchess of York, and Elizabeth, the Queen Mother (reputed to be £4 million, said the paper, run up on horse racing and fine wines.)
Over the next few days the Bank gave details of how it would transform the performance of its target. A massive £1 billion a year was to be taken out of costs by eliminating duplication between the two banks and reducing the number of processing centres from 54 to nine. Most of NatWest’s branches were to be moved from Victorian or Edwardian buildings to shopping malls and there was to be a much more aggressive sales policy. Gavin Masterton let his guard slip when he told journalists that Bank staff were trained so that as soon as a customer entered a branch he or she was ‘targeted’. He quickly corrected that to ‘approached’, but the message was clear: under Scottish management NatWest would be driven much harder. The underlying principle of the Bank’s new management style, he added, would be ‘focus, focus, focus’. Brandishing his Scottish credentials, Peter Burt said that NatWest’s bloated and expensive head office would be reduced to a brass plate in London. The combined bank would be run from Edinburgh.
The Bank team attacked the philosophy behind NatWest’s proposed tie-up with Legal & General – the alleged benefits which would come from ‘bancassurance’, a fashionable manufactured word to describe putting banks and insurance companies together. In retaliation NatWest leaked to the newspapers the fact that Peter Burt himself had had dinner with the Legal & General chief executive to discuss some sort of tie-up. It was true, Burt admitted, the two had met, but he had decided that it was not worth pursuing. ‘You don’t have to own a cow in order to sell milk’ – you did not have to own an insurance company in order to sell its products through branches.
When NatWest issued its response to the Bank’s formal bid there was a distinct feeling of déjà vu. It was now promising to sell exactly the same subsidiaries as Bank of Scotland had said it would sell; it would give its branches a makeover, cut costs by freezing recruitment and salary rises; the art gallery in NatWest Tower was to be closed and the bank would end its sponsorship of an annu
al art prize. To answer criticism of its management, it would recruit a number two to chief executive Derek Wanless. Burt described the new strategy as a ‘copycat’ defence and the City was distinctly underwhelmed. NatWest had no answer to the question that if these were such good things to do, why had it waited until Bank of Scotland had suggested them before proposing them itself? It was too little, too late and it left Derek Wanless in charge – a man associated in the City with NatWest’s years of underperformance.
The special meeting of shareholders called by NatWest to approve the Legal & General purchase went ahead on 8 October. It was a mournful affair. Professional investors holding the vast majority of NatWest’s shares did not bother to turn up and the handful of small shareholders who did attend were thanked by Rowland for coming as, he added, it would have been a bleak occasion had the hall been completely empty. They heard the formal announcement of what the City had known since the morning of the bid – the L&G deal was dead. After the meeting the NatWest non-executive directors met with David Mayhew, senior partner of Cazenove. Executive directors were pointedly excluded. Wanless was to be thanked for his service and summarily sacked. He was a nice man but in the gladatorial arena there is no place for sentiment. Rowland assumed the role of chief executive as well as chairman, and as his number two he was to bring in Ron Sandler,3 who had fulfilled the same role in Lloyds of London. The City was again unimpressed. Wanless had gone, but now there were two insurance men running the bank, with not a banking qualification or a year of banking experience between them.
