by Perman, Ray
Yet not everything was going Bank of Scotland’s way. Since the bid had been announced the Bank’s share price had been rising, but NatWest’s price had been rising faster. The stock market signals its intentions through share price movements and the soothsayers who read the entrails declared that this meant one, or possibly, two things: Bank of Scotland would have to raise its bid; and/or another bidder would enter the contest.
With its collective minds telepathically united, the City now tried to will these events to happen. Reuters reported that investors were salivating at the prospect of a counter-bid emerging and the newspapers started to speculate on who the bidder might be. LloydsTSB, HSBC and Barclays were ruled out on competition grounds – they would surely be blocked by the Monopolies and Mergers Commission – but the former building societies Halifax, Alliance & Leicester and Abbey National were possibilities, as were foreign banks wanting to enter the UK market. And it emerged that the Royal Bank of Scotland had put down a marker with the Takeover Panel on the day George Mathewson had arrived back in London. It did not mean they would bid but it did mean they were not excluded.
Takeover Panel rules are clear but careful wording can stay on the right side of them. Peter Burt had declared the Bank’s bid ‘full and fair’. He had not said it was ‘final’. NatWest’s share price had stayed irritatingly ahead of the value of the Bank bid and at the end of November the Bank bowed to the inevitable. Jack Shaw again telephoned David Rowland before dawn to tell him that Bank of Scotland had made an improved offer, there was to be more cash, meaning higher borrowing for the Bank, there was to be a special dividend of £2 billion for shareholders as an extra inducement and, crucially, NatWest shareholders were to get more of the combined group; now they would own 70 per cent as against 68 per cent under the first offer. ‘Peter Burt, BoS’ chief executive, insisted that his original offer was “full and fair”, implying he would not open his sporran again,’ reported The Economist.4 Rather sheepishly, he described the new bid as ‘fuller and fairer’.
The whole package now valued NatWest at £24.3 billion – a colossal sum – but it was not enough. NatWest’s share price continued to rise and by the end of the day was above even the value of this increased offer. The market was expecting even more and the Bank would be stretched to breaking point to provide it.
10
‘The next thing he does has got to work, otherwise he’s toast’
The Royal Bank launched its attack on NatWest on Monday 29 November. This time Sir David Rowland received his pre-dawn call from Sir George Younger, the urbane and genial former Cabinet minister who was chairman of the Royal Bank. It hardly came as a surprise to Rowland or to anyone else. The weekend papers had been full of stories of talks between George Mathewson and Rowland, with the Royal trying to win approval from the NatWest board so that its offer would be friendly and recommended, rather than a second hostile attack. The talks had broken up on the previous Friday and Rowland had gathered his board together on Saturday for a brief meeting, but there was not much to discuss. NatWest had decided it wanted to remain independent, there was to be no deal. The fight would now be a three-cornered contest.
The Royal Bank’s team, which had been working on the detail of their offer for weeks, had had to do some last-minute tweaking when Bank of Scotland announced its increased offer; nevertheless, the new bid had a very familiar shape. The headline value was slightly higher than that offered by the Bank and the promised cost savings were £165 million more, but otherwise the recipe was the same. Non-core subsidiaries were to be sold, there was to be a closer focus on the core business. The Royal contrasted its financial performance against the record of NatWest and compared NatWest’s management to its top team – chairman Sir George Younger, chief executive George Mathewson and Fred Goodwin, who was designated as the man who would run the bank. One of the factors which may have discouraged Rowland from endorsing the bid was that the Royal Bank had made it clear that if it won there was to be no place for Rowland or Sandler in the merged group. George Younger had announced the date of his retirement and the Royal Bank’s board had agreed that Mathewson would succeed him as chairman, with Goodwin becoming chief executive.
Mathewson’s caution in not rushing into a bid had given him a number of advantages. He had seen how the City had greeted the Bank’s bid, he knew the size and structure of the competing offer and, crucially he had waited until the Office of Fair Trading had ruled that a takeover by the Bank would not produce a monopoly and would not have to be referred to the Competition Commission. The Royal Bank would have to get similar clearance, but it could use the Bank of Scotland decision to bolster its own case. Although the Royal Bank team had been working intensively on their bid before going public, they were now coming fresh to the fight, whereas the Bank management had already been at full stretch for more than two months. Also the delay had given the Royal’s PR team time to leak out favourable news, such as the decision by the Spanish banking giant BSCH (now Santander), which was a shareholder in the Royal Bank, to back the bid and contribute cash.
In public Peter Burt was philosophical: ‘I would prefer not to enter into a pitched battle with a company so close to home, but the Royal will do what it believes is in the best interests of its shareholders and so will we.’ But the Royal’s move was a bitter blow. At one time the team from The Mound might have hoped to have declared victory before Christmas and gone home to their families; now it would continue at least until February and they would be fighting on two fronts. Even for a man of Burt’s prodigious energy, this was a sapping experience and it was tying up around 150 senior employees in the company. It is a tribute to the depth of management that the Bank was still able to turn out double-digit growth and announce new ventures, but it was a big distraction.
The bid would now also run through the end of the millennium, which was supposed to be a time for celebration but was overshadowed by the ‘millennium bug’ or Y2K – possible flaws in computer programmes which it was feared could cause everything from the controls on nuclear power stations to aircraft guidance systems to crash. The problem was taken seriously enough for the United Nations to establish a taskforce and individual governments around the world to formulate action plans. The Scottish banks had redesigned their computer systems relatively recently and were well advanced in checking millions of lines of code for parts of programmes which had to be rewritten, but there was always the chance that some other part of the financial system would fail, bringing down the whole network. In the event there were no serious difficulties and opinion was divided between those who said the expensive remedial work had averted catastrophe and those who said the whole issue was just hype to bring work to IT consultants.
Meanwhile the confrontation ground on. NatWest responded to the Bank’s improved offer (‘still inadequate, shareholders will not be hoodwinked by an illusion’) and were answered in kind (‘painfully lame, repeating the same weary rhetoric, NatWest management has thrown in the towel’). For the first time Burt had to acknowledge publicly the possibility of defeat when he was asked whether failure would lay the Bank itself open to takeover. He dismissed the question, adding that if the price of NatWest rose too high, Bank of Scotland would walk away ‘without a backward glance’.
But the tension was obviously getting to him and, against the advice of his public relations managers, he succumbed to the temptation to attack the Royal Bank’s management, recalling Fred Goodwin’s nicknames of ‘Fred the Shred’, and ‘Fred the Impaler’ and drawing attention to the fact that many of the Royal’s top executives had been brought in from outside, without much banking experience. ‘I’m struggling to think of an executive of RBS who came up through the ranks. If Fred Goodwin falls under a bus, who is going to run the bank?’ George Mathewson briefly replied in the same negative style, drawing attention to the age of Burt’s number two, Gavin Masterton (58, less than two years from normal bank retirement age) and Fred Goodwin’s 41. It was left to Goodwin to bring the tem
perature down. ‘We think logic and fact will win this. It needs to be done on a more professional footing, rather than slagging each other off.’
The long drawn-out fight was also producing tensions within the Bank of Scotland board as some directors began to question the wisdom of having made the bid in the first place and spoke among themselves of having been railroaded into it by the executives. Counter to this was the feeling among the executives that they had not had strong enough leadership from the board. Was Sir Jack Shaw, who had been propelled into the post by the illness of Sir Alistair Grant, the right man for the job? He was able and committed but he lacked the guile of a practised City operator or the personal connections which might have swayed investors. The man who should have filled Sir Alistair’s shoes, some argued, was Sir Robert Smith, who as chairman of Deutsche Bank Asset Management, was well-known and respected in the Square Mile and as a former corporate financier was a veteran of bids and deals, but he had only been on the board a short time.
As the contest ran its course, both bidders added refinements to their offers in the hope of making them more attractive to shareholders, and NatWest announced that it had poached Gordon Pell, a senior executive at LloydsTSB, to join them. This went part way to answering the criticism that, however able Rowland and Sandler might be, they lacked banking experience. Pell had it in spades.
Rowland’s defence tactics, which had previously looked piecemeal and borrowed from his tormentors, now began to look plausible. By adopting virtually the same programmes as the Bank and the Royal – sell peripheral businesses, concentrate on core banking and reduce costs – he had removed strategy as a basis for deciding the bid. If all three banks – the Royal, Bank of Scotland and NatWest – had the same strategy and were roughly offering to return the same value to shareholders, it was a question of which management team could best deliver. His argument was that the incumbents had the best chance, since they knew the business best.
As the bid moved into its final days in mid-February opinion swung between the three possible outcomes. One or two analysts now suggested that NatWest might – or indeed should – remain independent and it began to look possible that both bidders might fail. There was a fillip for Bank of Scotland as the influential Financial Times Lex column recommended that shareholders accept its bid, but slowly large institutional shareholders began to declare themselves for the Royal Bank. Now the peculiar logic of the stock market began to show itself. As the Royal Bank began to look the likely winner, its share price fell, whereas the price of Bank of Scotland shares rose on the prospect of it being the loser. By the Thursday of the last week the Royal Bank’s shares had fallen 18 per cent from the level at which it had made the offer, meaning that its bid was now worth less than the Bank’s bid and less than the value at which NatWest shares were trading on the stock market.
At lunchtime on Friday there was enough good news to convince Peter Burt that he had won, but the afternoon was still taken up with a hectic round of investor meetings. In the evening the Bank’s team, Burt, Masterton and George Mitchell, head of corporate banking, were invited for champagne by Richard Lambert, editor of the Financial Times, which had been a consistent supporter. As they filed into his office Burt asked Lambert what was it to be: congratulations, or commiserations? The latter, replied Lambert, enough institutional shareholders had now declared for the Royal Bank to guarantee it at least 51 per cent of NatWest shares. The three men drained their glasses, cancelled their remaining scheduled meetings with investors and caught the last flight to Scotland. Burt put on a brave face: ‘We saw NatWest as an opportunity, pure and simple. Someone was on the other side of the street holding up a £100 note, we crossed over and offered them £90 for it, but someone else made a better offer.’
In the following week NatWest gave up the fight and the Royal Bank mopped up the remaining shares. George Mathewson felt strangely deflated after his stunning victory. A decade before, his bank had been on the edge of falling into loss, now he had tripled its size and made it a major force in UK banking. He had fought a short, but extremely hard campaign, tirelessly presenting to investors, not only in London and Scotland, but flying to New York to woo NatWest’s American shareholders. He’d taken the supersonic service on Concorde to save time, but had to spend frustrating hours at Heathrow Airport when the flight was delayed. After months of lack of sleep and living on adrenalin, fatigue and depression overcame him. ‘It took me weeks to recover,’ he told friends, ‘and I won!’
The loser succumbed to ’flu and had to take a week off work – an almost unheard-of event for Burt – but he knew he could not afford to give way to exhaustion. A week after conceding defeat, and after numerous post-mortems, he admitted to being bitterly disappointed, but determined to carry on. ‘We must do something. We don’t necessarily have to acquire something, but we must drive the business forward because if we don’t we will not only be seen to be vulnerable, we will be vulnerable and deservedly so.’ It was a sentiment widely shared. Despite the Bank continuing to report sparkling profits growth, in the harsh judgement of the City Burt was now seen as having had two failures in a row, the Pat Robertson affair and NatWest. ‘The next thing he does has got to work, otherwise he’s toast,’ one unnamed banker told the Financial Times.1
The feeling of despondency in the Bank extended from the boardroom to the branches. Six months’ work had crumbled in 24 hours and there was no alternative to swallowing hard and carrying on, but the concern that the Bank could now become a victim persisted. Takeover speculation swirled around for the following six months, with newspapers vying with each other to produce more names of banks said to be running their avaricious eyes over Bank of Scotland. The rumours had been enough to keep its share price at a premium level but they were baseless and when Burt reported a 14 per cent rise in profits for the half-year he commented that despite the stories, there had been a ‘distinct lack of bids’. Slowly the speculation died down and the share price subsided.
The old problem, however, would not go away. Bank of Scotland’s growth was being propelled by its success at lending, which was growing at 20 per cent a year, but it was only generating new capital at 13 per cent a year.2 To fill the gap it was increasingly being thrown back on the wholesale funding market. It badly needed access to a larger deposit base. Burt had received a tentative approach from National Australia Bank and had spent some weeks talking to them but the discussions had come to nothing.
Another opportunity was not long in coming. A call came from Abbey National, a former building society which had demutualised and turned itself into a bank. The fit looked reasonable. In contrast to Bank of Scotland, Abbey had deep roots in the north and south of England, with only a small branch presence north of the border. It was predominantly a deposit taker and a mortgage lender, with only a modest corporate or small-business lending book, although it had moved into pensions and life assurance. Abbey was headed by another Scot, Ian Harley, whose insistence that he be the chief executive had scuppered previous deals, according to press reports. He was not an easy man to talk to – even Abbey’s own chairman, the former Tory politician Lord Tugendhat, described him as ‘a bit dour’, before adding, ‘but he does deliver’. But Burt got on quite well with him and did not feel he was an obstacle to a merger.
Talks continued with Tugendhat enthusiastically urging them on: ‘Bank of Scotland has been extolling the virtues of this for some time – it is self-evidently a good deal.’ But more than personalities were getting in the way. Peter Burt favoured a merger of equals – Abbey was bigger, but Bank of Scotland was better, a more comprehensive organisation with a broader range of skills and superior performance. Abbey, however, was unimpressed and saw it as a straight takeover: ‘We will be acquiring and we will decide how it goes forward,’ its spokesman told the press. Recognising that a takeover by an English company, of a bank which had been part of the Scottish firmament for 300 years, might not go down too well north of the border, Abbey’s PR department tried to ma
ke some conciliatory noises, promising extra shareholder gatherings and board meetings in Scotland. There would also be Scottish directors – ‘It will be a pretty tartan board.’
Despite this patronising tone, the negotiations progressed, with Tugendhat and his deputy Charles Villiers meeting Sir Jack Shaw and Sir Bob Reid for the Bank. Advisers also met, but in the way of mercenary armies some had now switched sides. Morgan Stanley, which had been on the Bank’s side in the NatWest struggle, was now aiding Abbey National. A deal looked do-able. Bank of Scotland thought it could generate £400 million more in profit from Abbey National’s branch network and estimated that £350 million could be taken out of costs. Abbey began to talk enthusiastically about becoming a fifth force to challenge the hegemony of the Big Four London banks, but the Bank team began to have doubts. Abbey’s corporate lending book did not look good but the Bank of Scotland team was not allowed to see the figures.
The Bank was on the verge of walking away when, almost on the anniversary of the date on which the Royal Bank had launched the bid which had snatched NatWest away, LloydsTSB announced an offer for Abbey. The predator was now the prey and although there was a certain referral of the bid to the Competition Commission on monopolies grounds, meaning a six-month delay, investors put pressure on the Abbey board to end its ambitions to tie up with Bank of Scotland and support the LloydsTSB bid. Lloyds’ branch network had considerable overlap with Abbey. If it could hold on to the customers while closing branches it would be able to make massive cost savings. It was a trick it had pulled off twice before with its acquisition of TSB (the Trustee Savings Bank) and the former building society Cheltenham & Gloucester.
In the spring of 2001 Gavin Masterton retired as group managing director and was succeeded by George Mitchell, who like Masterston was a Bank lifer, having joined straight from school. A quick learner and a safe pair of hands, he had led the Bank’s operations in Hong Kong and New York before being given a mess to sort out in the international treasury department and then heading corporate banking. Life had to go on and the Bank pressed ahead with an acquisition in Ireland and a deal with insurance company Zurich to offer loans and credit cards to its customers.
