Deal seals NatWest’s fate

By Ian Fraser and Kenny Kemp

Sunday Herald

November 28th, 1999

The English clearer has no escape as two banking rivals move in for the kill. Ian Fraser and Kenny Kemp report

IF the National Westminster Bank is a foundering ship on a tempestuous sea, apparently now holed below the waterline, and its two Scottish aggressors are more nimble pirate corsairs, it is remarkable to find such calm on its bridge.

Neither Sir David Rowland, the bank’s executive chairman, nor Ron Sandler, its recently appointed chief operating officer, last week showed any visible signs of being rattled by Bank of Scotland’s exquisitely-timed increased offer – nor by the racing certainty that Royal Bank of Scotland will make its own counter bid within the next few days.

Made at 6am on Friday morning, the Bank of Scotland’s revised offer of £25.6 billion together with a £2bn special dividend on completion of sale of certain non-core businesses, could not have been more badly timed for NatWest. Coming as it did on the back of clearance from trade secretary Stephen Byers, it badly wrong-footed the defence team at the beleaguered English clearer.

The revised offer has meant hundreds of thousands of copies of NatWest’s previous defence document, which were due to have been dispatched to shareholders yesterday, have had to be pulped. Last night, members of the bank’s defence team were running around like headless chickens at the bank’s London headquarters, wondering how they might patch up the damage done by Peter Burt’s unexpected cannonade.

Teams of highly-paid investment bankers were scrabbling round-the-clock to put the finishing touches to a completely rewritten version of the defence document due to be sent out before midnight. However, neither NatWest’s skipper nor his recently recruited chief engineer were showing visible signs of fear.

Rowland and Sandler know the game is up. Their duty to shareholders now is simply to eke out the maximum value for NatWest, either by accepting a bid from Royal Bank of Scotland, Bank of Scotland, or a third party.

Yesterday, as Sir George Mathewson, chief executive of Royal Bank of Scotland, descended on the City of London in an attempt to agree favourable terms with NatWest, it was clear there would be no room for either Rowland, the polished former chairman of Lloyd’s of London, or his sidekick, the ex-Booz-Allen & Hamilton consultant Sandler, at the top table in any RBS/NatWest get together.

This became apparent on Friday with the announcement that Mathewson would succeed Lord Younger as chairman in January 2001.

“The Royal Bank’s over-hyped PR announcement made it quite clear this was the preface to a bid within the next couple of days,” says one experienced City observer.

There can be little doubt, however, that the pair who managed to bring Lloyd’s of London back from the brink of collapse have been enjoying trying to pull off a similar feat at NatWest. As Rowland dismisses Bank of Scotland’s raised £25.6bn bid, his disdain for the the Edinburgh-based institution is palpable.

“The first bid was clearly ridiculously low,” he said. “They’ve done something to address the value issues but done absolutely nothing to address the risks, particularly in information technology and revenue loss, inherent in their proposals.

“Bank of Scotland have not done their homework. They come along, not knowing how our information technology systems work, then tell us they can make savings of £1bn. Joining the two banks is a huge task of integrating systems. We know how [the NatWest information technology system was put together], so how does the Bank of Scotland, which has never had to deal with this size of organisation or volume of transactions, think it can tell us how to do things better?”

He adds, with a slight sneer: “It’s all gone very quiet from Gavin Masterton. He was named in the offer document as the guy who would be in charge, but we haven’t heard a cheep from him.”

HOWEVER Peter Burt, chief executive of Bank of Scotland, is astonished by Rowland’s claims. “They have dismissed our second offer as undervalued but three months ago they made an offer for Legal and General which valued NatWest shares at £11.50. Looked at in this context, for them to dismiss our £16.50 offer as undervalued simply beggars belief.”

It is clear Rowland would welcome a more consensual get together with Royal Bank of Scotland, or perhaps another bank. Arguably, two banks which have made such a public dis-play of their dislike of each other, as Bank of Scotland and NatWest have, would find it difficult to work together post-merger.

However, last night he said: “The position is there is only one bid on the table. We cannot comment on what the Royal Bank of Scotland may or may not do. Of course we know Sir George Younger [chairman of the Royal Bank of Scotland], we have talked informally many times, but there is no official bid.”

Rowland maintains that ‘shareholder value’ is paramount, which is why he is prepared to countenance accepting a “good” bid. But he says the Bank of Scotland’s offer is not a “good” bid – even in its revised form.

He is determined to keep a sense of perspective, despite all the talk about his “hugely underperforming” institution. “The [Bank of Scotland bid] has given us a remarkable focus but we still have a large bank to run,” he said. “As a bank we are now doing well. This isn’t Lloyd’s of London Don’t forget, NatWest made profits of nearly £2bn last year.”

And Rowland argues that NatWest’s management team – minus chief executive Derek Wanless, who was ejected on October 8 – is better prepared than ever to deliver the kind of returns its investors want.

To get a feel for the audaciousness of the Bank of Scotland bid is to understand how it hits at the very heart of the London financial community. Rowland’s window overlooks Bartholomew Lane, a short rat- run near the Bank of England. At the end of the street is the sign for the Royal Bank, which has its London office on nearby Threadneedle Street. Just across the road is the green rotunda of the Bank of England, with its gilded crown. The building is now a museum, which sharpens the mind about the future these large high street banks really face.

Even in the frenzied climate of last week Rowland could find time to be philosophical, introducing an element of Darwinism into his analogies: “I see it like two ancient turtles lumbering up the beach in the Galapagos islands and slogging it out for supremacy. They are two old-established institutions.

“But the sleaker and quicker lizards are arriving. These represent the new generation of internet banks able to cherry-pick the best customers. This is the real challenge for us at the end of the day.”

Rowland believes traditional banks are under threat from these new entrants and says they must change fast if they’re going to give customers a reason for staying. “There was a time when we were a major bank and we strove to be careful and prudent, everything was done by committee. Now banking has changed so much that decisions must be made far more quickly. Instead of months to get things done, we have to make faster decisions. It’s the nature of the beast now.”

Yesterday the decision about the future of NatWest was being done on an even tighter timetable. But as the battle for British banking accelerates towards its denouement, Rowland and Sandler may find themselves on the job market sooner than they imagined.

HOW THE ROYAL BANK CLEARED THE DECKS FOR ITS BID

THE announcement of Royal Bank of Scotland’s succession plans on Friday cleared the decks for its bid for NatWest – and signalled a shift in the balance of power at 36 St Andrew Square.

Royal Bank chairman Lord Younger, a former secretary of state for Scotland, is understood to have had reservations about a hostile bid for NatWest, fearing that a head-to-head battle with Bank of Scotland would benefit nobody. He has therefore stepped down as chairman to make way for chief executive George Mathewson and his deputy Fred Goodwin.

Goodwin — nicknamed “Fred the Shred” for his aggressive approach to cost-cutting while he was chief executive of Clydesdale Bank — will assume the role of chief executive in January 2001, while Mathewson gets the chairman’s role.

The announcement came as a clear sign to NatWest’s management as to who would be wearing the trousers in any merged entity. In nine years at RBS, Mathewson – a former head of the Scottish Development Agency – has taken the bank from near bankruptcy to pre-tax profits of £1.1 billion.

Having failed to do a deal with Barclays earlier this year, he clearly intends to make a successful bid for NatWest his swansong. Following protracted negotiations with the English bank all day yesterday, he may be near his goal.

If a friendly deal fails to materialise, RBS will have to abide by a new timetable – laid down by the takeover panel – under which it must declare its intentions by December 8. If RBS launches a hostile bid, the 60-day takeover clock will be reset to zero.

Copyright SMG Sunday Newspapers Ltd 1999

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