by Iain Martin
The Scottish nationalist Mathewson was initially invigorated by devolution and pleased by Edinburgh’s reawakening. Already though, his mind was elsewhere. For all the Royal Bank’s growing profits and new assertiveness, he was worried that this success would encourage complacency. If Scotland wanted to have strong banks for more than a few years, the Royal Bank needed another dramatic increase in scale and profitability. There was a realisation that what had been achieved with Project Columbus might not be sufficient to ensure survival. ‘If we don’t do something else, we are going to be taken over,’ he told his executives, echoing what he had said to Sir Michael Herries almost a decade before when he and Younger prepared their initial ‘night of the long knives’.
Institutions which chose to remain small risked being vulnerable to a bid from rivals or foreigners. Even the Halifax – yes, the Halifax, a former building society from England – had toyed in October 1998 with buying a stake in the Royal Bank as a prelude to a potential takeover.3 Mathewson warned his team that to maintain itself as a proud Scottish bank, headquartered in Edinburgh, where many of its senior executives lived, they needed to be ready to get bigger and better. How it would be done exactly, the chief executive didn’t yet know. In spite of Mathewson’s patriotic vision and his desire to create a legacy, he remained at root restless about how he would make the Royal Bank ‘the best in the world’, as he repeatedly intoned. Says one of his management team: ‘George didn’t believe it was his job to lay out a precise vision of the future, because you don’t know what it will look like. He believed it was best to be fighting fit, able and opportunistic, ready to take on whatever the future might throw up.’
Before the arrival of Goodwin, Mathewson had tried a spot of expansion and been rebuffed twice. In the summer of 1997 the Royal Bank had made a bid for the Birmingham and Midshires building society. Mathewson’s team offered £630m and the deal was all set to proceed when in March 1998 the Halifax appeared with a rival offer of £780m.4 Mathewson also flirted with the thought of a bid for the much bigger Barclays, although he backed off. When news of his overtures emerged there was opposition in the City to the idea of a tiny Scottish bank taking over a big English bank. He was frustrated, although he felt the time and effort had not been wasted. The next time an opportunity emerged his team would be ready.
This time what the future threw up was NatWest, a struggling bank two and a half times the size of the Royal Bank. England’s NatWest had for some time been a troubled institution. More than a decade earlier the chairman and three directors had resigned following the notorious Blue Arrow affair. The company’s investment banking arm, County NatWest, was accused of deceiving the Bank of England over an £837m share offering. In 1997 the bank was hit by scandal again when it was left with a £90m trading black hole in its dealing operations. NatWest was fined £320,000 and there were resignations. Profits were disappointing for a bank of its size; its share price lagged; costs were higher than those of its rivals; the management seemed unsure what to do next and City analysts speculated about a possible takeover. Still, the thought of it actually being bought by one of the two relatively small Scottish banks seemed a remote and bizarre notion. By the standards of the day NatWest was huge. It had assets of £186bn, 64,400 staff and 1730 branches. Those profits, deemed disappointing by shareholders, still amounted to £2.1bn before tax in 1998. The Royal Bank was a minnow in comparison, with assets of only £75bn, 22,000 staff and 650 branches. Profits had only recently broken the £1bn barrier. The Bank of Scotland was even smaller, with £60bn in assets, 21,000 staff and just 325 branches, although its profits of £1bn were the equal of the Royal Bank’s. Mathewson’s team whispered that this was because the Bank of Scotland’s procedures were too lax and its property lending, even then, seemed a little racy.
The centuries-long rivalry between the Royal Bank in St Andrew Square and the Bank of Scotland on Edinburgh’s Mound – still intense, with the two managers of the banks tending to measure their institutions against each other rather than against the achievements of outsiders – was about to be resolved. It was extraordinary then that Mathewson and his opposite number at the Bank of Scotland, the golf-obsessed Peter Burt, should begin secret talks in the summer of 1999 on a possible joint bid for NatWest. This was the Scottish business equivalent of Rangers and Celtic, Glasgow’s bitter footballing rivals, combining to plot a joint venture. Burt and Mathewson felt that a battle for control of NatWest could be messy and destructive, when their organisations might more usefully unite against a common enemy, the English banks. He told Burt: ‘If you bid, we’ll have to bid.’ Couldn’t they devise a way of instead jointly capturing NatWest in a cross-border raid and somehow dividing the spoils?
Mathewson’s recently arrived deputy, Fred Goodwin, much preferred the idea of the Royal Bank doing it alone. He was opposed to a joint bid for NatWest, he told Matthew Greenburgh, when the Merrill Lynch investment banker went to visit him in his office in the summer of 1999. Greenburgh was in the process of becoming one of the most influential and best-paid dealmakers of his generation in London. Shortly after Goodwin joined the Royal Bank, Greenburgh had telephoned the new arrival and suggested a meeting. They hit it off immediately. That initial call was to prove a smart investment by Greenburgh, who became a key figure in the Goodwin coterie. Small, tenacious and ultra-competitive, he had a confident manner that did not appeal to Mathewson, who disliked investment bankers on principle. In contrast, Goodwin liked Greenburgh and valued his counsel.
If the Royal Bank was going to do a deal it would need help. When high street banks, or large companies, are trying to buy a rival, or when they are taking a significant step such as raising money, they appoint one or more investment banks to advise. Teams of investment bankers such as Greenburgh then descend to crunch numbers and help dream up ways of making the deal work, all in return for large fees. The potential flaw in this setup is that investment bankers have only one interest: pushing a deal through to earn themselves millions. Merrill Lynch’s Greenburgh was involved in all of the major deals the Royal Bank did subsequently. Much later, in 2007, Merrill Lynch helped Goodwin design the disastrous bid for ABN Amro on the eve of the financial crisis. That year Greenburgh pocketed a £10m bonus. When the British banks went down in the financial crisis of October 2008, Greenburgh was drafted in by Lloyds/HBOS to help to advise it on the terms of the £17bn bailout it needed from the taxpayer.
In August 1999, no one was thinking about systemic collapse. At the Royal Bank the increasingly urgent question was what it would do about the possibility of NatWest that autumn. Mathewson felt affection for Burt and didn’t want a falling-out, so the talks continued for a time. Against the backdrop of that year’s Edinburgh Festival, Burt and his senior colleagues had a meeting with Mathewson. However, the discussions got nowhere. A joint deal seemed excessively complicated and the potential for infighting and resentment on both sides was too great. The talks foundered. If there was going to be a race for NatWest, there would have to be only one winner.
NatWest then made a big mistake. To show that it had a plan for growth, and to make itself too large to take over, the management attempted to buy the insurance and unit trust company Legal & General for £10bn. Investors and the City establishment hated the idea. Within a fortnight NatWest shares were down by a quarter and its bid stood no chance of being successful. It was directionless and suddenly very vulnerable.
Burt at the Bank of Scotland spotted his chance and struck first, in a dawn raid. His timing was designed to create maximum surprise, as most bank chief executives and chairmen were getting ready to travel that weekend to Washington ahead of that year’s IMF and World Bank meetings, which are customarily attended by the world’s top financiers. Before the markets opened on Friday 24 September 1999, Burt announced a bid of more than £21bn. In the shower that morning, Merrill Lynch’s Greenburgh heard it on Radio 4’s Today programme and exclaimed: ‘Oh fuck.’ A furious Mathewson was already in the United States, at the Country
Club in Brookline, Massachusetts, preparing to watch that year’s Ryder Cup, a piquant detail that the even more golf-mad Burt relished. The Royal Bank’s chief executive had to hide behind a bush to call Edinburgh and find out what was going on. While he seethed on a subsequent flight back to the UK, he admired Burt’s panache and nous in getting in first. ‘Clever old Bank of Scotland,’ he told his deputy, Goodwin, when he got off the plane. At NatWest’s headquarters in the City there was incredulity mixed with blind panic. The chairman, Sir David Rowland, a City grandee, was appalled. The bank’s share price rocketed in anticipation of a takeover and the NatWest board met in emergency session to reject the Bank of Scotland offer, calling it ‘unsolicited, unwelcome and ill thought-out’.5
Goodwin was calm, even though the pressure on the Royal Bank to make an immediate offer of its own was soon intense. Investment bankers were desperate for the juicy fees that could result from a contest for NatWest. A race would mean the rivals might have to increase their bids in a rush to persuade shareholders to choose their offer. The City press loves nothing more than the excitement of being able to report on an enormous takeover battle.
That Sunday Mathewson summoned investment bankers, lawyers and his own senior executives to a secret meeting in London at the offices of Freshfields, the City law firm. The deal-hungry Greenburgh’s team from Merrill Lynch was joined by Andy Chisholm, representing Goldman Sachs. Oliver Pawle’s unit from UBS, the Swiss bank, was also on hand. Everyone should calm down, there would be no unseemly rush to a bid, Mathewson said. The Royal Bank would take its time, do its homework and see what the next few weeks brought. To some of those present it seemed as though City-sceptic Mathewson was taking considerable pleasure in telling the investment bankers who was boss. ‘The attitude from them was right, now you Scottish guys are in the big time, move aside and we’ll take it from here,’ says a Mathewson staffer. ‘But George said no, we do it our way. The investment bankers were going bananas because they were hungry for us to bid. They stood to make a lot of money.’
Mathewson was uncertain. ‘Forget the hype afterwards, George wasn’t entirely convinced about bidding. Fred wanted to bid,’ says a then advisor. From members of the board pressure was growing too. Emilio Botín, the president of Spain’s Banco Santander, a friend of Mathewson and a board member of the Royal Bank, was wildly enthusiastic when he flew in from Madrid. Banco Santander and the Royal Bank were allies, each owning shares in the other. As a board meeting discussing NatWest dragged on, the Spanish banker was urgently in need of a cigarette. He declaimed with a flourish that it was imperative to bid. ‘You must do it! I will give you the money!’ Banco Santander did help to fund the bid.
Other board members also liked the idea. Angus Grossart, Scotland’s pre-eminent merchant banker, a founder of Noble Grossart, the boutique outfit stationed in a tastefully decorated town house in New Town around the corner from St Andrew Square, urged Mathewson on. At this point Goodwin’s role became central. Goodwin and Mathewson agreed a clever compromise. The Royal Bank would bid, but it should take its time and create the most detailed, fully thought-through bid document possible, rather than being rushed into a quick counter-offer that might suggest panic. Goodwin would handle the process of preparing the document.
The City, meanwhile, was agog at the raid on an English institution by Scottish bankers who had long been best known for their self-proclaimed prudence and caution. The Economist, the London free-marketeering magazine increasingly becoming the house journal of the rising global business elite, did offer a different perspective. It welcomed the attempted takeover.6 It told its readers: ‘NatWest has been a limping, troubled, formerly great British institution for far too long. Which is why the great British bank auction is such good news.’ Presciently, it warned the City not to be so quick to dismiss the cross-border raiders from Scotland: ‘The London financial establishment has long looked down on its Edinburgh cousins – an attitude epitomised in the dismissive comment by Sir David Rowland that there was a big difference between running a corner shop and running Tesco.’
Rowland tried to get on the front foot against the invaders. On 8 October, with the bid in from Bank of Scotland, the Royal Bank considering a move and the attempted Legal & General purchase unravelling, he appointed himself as executive chairman and fired Derek Wanless, NatWest’s chief executive, who walked away with the rather unkind nickname of ‘Witless’ and a £3m pay-off.7 Wanless was a seemingly old-fashioned banker, a genial Geordie who had started with a Saturday job in the Westminster Bank, studied maths at Cambridge and then risen to the top of his chosen profession. An avowed Labour supporter, he would subsequently write a report on the future of the NHS, commissioned by Gordon Brown. It recommended increased spending funded by higher taxes.
High finance is wonderfully – for those involved – circular. In 2000, after being axed by Rowland, Wanless joined the board of a then small bank in his native North East of England and chaired its audit and risk committees until the crash of 2007. That bank was called Northern Rock. To replace Wanless at NatWest in 1999, Rowland made Ron Sandler chief operating officer. The tough, Zimbabwean-born former boss of Lloyd’s insurance market was charged with helping Rowland fight off Mathewson and Burt. In a much later incarnation, Sandler would follow Wanless once again. He was hired by the Labour government to oversee the nationalised Newcastle-based Northern Rock after Wanless and others were forced to resign following its collapse in 2007.
In October 1999, it was NatWest that Sandler was battling to save. He and Rowland were forced by investors to announce the formal abandonment of the doomed Legal & General bid and on 27 October they revealed a plan to sell off Ulster Bank, and three other parts of the NatWest business. The hope was that this would generate some cash, which would go to shareholders. In this way they might be persuaded to reject the advances of the Scottish banks.
Goodwin’s work was progressing. His job was to come up with a plan which could convince the shareholders who owned NatWest that they stood to make more money if they let the Royal Bank take over their institution, rather than the Bank of Scotland. With teams of advisers and analysts in Edinburgh and London on hand, he buried himself in spreadsheets and papers on synergies, efficiencies, staff numbers, growth patterns and IT systems. Iain Allan, the Royal Bank’s head of strategy, was a key figure helping with the work. This was the kind of painstaking, methodical exercise which Goodwin had already shown he excelled at when he worked for the Clydesdale and Touche Ross. At the Clydesdale he had shown that he could drill a team and marshal the facts to create a coherent plan. Here he could replicate the procedure on a much, much bigger stage. His new colleagues noticed that he was obsessed with the detail. This was the first time many of them had seen him operate properly and they were impressed.
The Bank of Scotland offer for NatWest, Goodwin told Mathewson, was too narrowly concentrated on cost-cutting alone. There were efficiencies to be had, of course. But the real point of doing the deal should be to create growth, a lot of growth. The Royal Bank would endeavour to persuade NatWest shareholders that, thanks to its scale, a merged company could expand a lot more than either could on its own. The Bank of Scotland had moved first, but springing a surprise had come at a cost. Its proposals struck some City analysts as vague. In contrast, Goodwin set about producing an extraordinarily precise plan. The Royal Bank would keep the NatWest brand and concentrate on expansion. Initiative was piled upon initiative, with forty-three in total, all aimed at increasing revenue across the new group. There would be a lot of job losses, 18,000, as the back-room functions were merged with the creation of a giant new ‘manufacturing’ division to provide all of the support services and create the banking products that the group would sell. Thirty-nine ‘efficiency improvement’ schemes were proposed, saving £580m. Another £600m could be saved by ‘de-duplication’ in seventy-two areas. Overall, Goodwin claimed his plan would realise £1420m in increased profits. Within the first thirty days of closing a deal the Royal B
ank committed to implementing an entirely new structure, with all divisions finalising three-year expansion plans. It was immensely ambitious.
It would also mean the promised promotion for Goodwin. If investors were to have confidence in the Royal Bank’s plan for integrating NatWest, then Mathewson and Younger realised they needed to explain that its architect would stick around. On Friday 26 November, just days ahead of bidding, the Royal Bank announced a timetable for Lord Younger stepping down as chairman, with George Mathewson earmarked to take his place and Fred Goodwin ready to become chief executive.8 The transition was scheduled to take a year, with Goodwin busy running the teams that would manage the integration. He was booked to become chief executive in his own right on 18 January 2001.
On Monday 29 November, the Royal Bank finally launched its hostile bid for NatWest, matching the Bank of Scotland and publishing Goodwin’s proposals in full. Sir David Rowland at NatWest was immediately dismissive, in a way that Mathewson found intensely insulting. Rowland was on friendly terms with Lord Younger but possibly being taken over by a small Scottish bank which Younger happened to chair was another matter. Rowland declared that the Royal Bank’s bid was based on overestimates of the benefits of a merger.9 Customers, he warned, would not like the disruption. ‘The more I have thought about it, the more the risks have seemed apparent,’ he told shareholders. ‘What we’re saying is, “Thank you very much, but bye-bye.”’ Goodwin and Mathewson had no intention of waving bye-bye. On 16 December their offer cleared competition concerns and the clock started ticking on a sixty-day period in which the two banks would compete to get the owners of NatWest – the large institutional investors, fund managers and those running pension funds – to vote for them rather than their rival.
