By Ian Fraser

Published: Sunday Herald

Date: December 23rd, 2001

Deal Of The Year: HBOS

WHAT does it take to get two of the UK’s leading banks to bury their differences and act as one? According to James Crosby – the Yorkshireman who spent most of this year steering Halifax through its £28bn merger with Bank of Scotland and pointing the merged entity, HBOS, onto a path to growth – one thing is essential. Trust.

The fact that when Crosby first met Peter Burt, former chief executive of Bank of Scotland, at Halifax’s company flat in Jermyn Street, London on April 17 2001, there was an almost immediate meeting of minds, must also have helped.

Crosby, 45, said: “Trust has to be there, and the trust starts with just two people. If you’re not honest and open with each other at that stage, you won’t be able to bring two organisations together.” He said it soon became clear Burt was not someone to speak with a “forked tongue.”

The matchmakers who had done the necessary warming up prior to the pair’s four-hour tete a tete meeting were the City stockbrokers Cazenove. “They had cut away the undergrowth and established there was some basis for discussion,” explained Burt.

Crosby said: “I remember the meeting very well. We’d never met before but we spent four or five hours talking quite randomly about the various bits of our businesses and what we felt you could do with them. We also talked about our strengths and weaknesses and what we thought was happening in the marketplace.

“We instinctively felt the same way about nearly every major issue. That was a good thing for me. If in any merger you have to reinvent strategy, you’re in big trouble. One of the reasons this merger will work is that in no division have we sat down and reinvented strategy. That is incredibly unusual.”

Burt and Crosby had had only one previous contact, when they spoke on the phone in March 1999. The circumstances were rather different.

The Yorkshireman had only recently taken the reins at Halifax and was phoning Burt with bad news. Halifax was pulling out of a contract whereby the Scottish bank – with which it had twice had merger talks in the past – was managing the recently demutualised building society’s credit cards business.

Burt said: “That wasn’t a good start, however he was about as pleasant as you can be under those circumstances.”

Of their April 2001 meeting, Burt said: “To quote Mrs Thatcher, he was a man with whom I could do business. What was very clear to us both was our attitudes were very similar.”

When a week later The Herald splashed with news that the two banks were in merger talks, Burt was “utterly bemused”. “To this day I do not know how they got the story.”

But however the story leaked out, it seems to have had a galvanising effect on the merging banks, which took the unusual step of confirming it was true. Burt said: “Leaks are never good news. But if there ever was a leak which was good news then this was it, particularly as it came at a time when a sort of equilibrium in the bank’s share prices made a nil-premium merger feasible.”

Burt said there were many other “serendipitous things” that meant talk could be transformed into action, not least of which was a similarity between the bank’s two logos. He said: “It wasn’t a question of your logo or mine, we combined them.”

“We were [also] very fortunate too that there was so little overlap between the two businesses that most of the management problems of a merger just did not exist. There was no need to argue. There’s nothing like having an obvious way to go to stop people feeling sore.”

The merger talks stepped up a gear following the confirmation of the Herald’s story, with investment banks Lazard leading negotiations on Halifax’s behalf, and Gleacher representing the much older Bank of Scotland. David Mayhew, chairman of Cazenoves acted as “honest broker” (representing both BoS and Halifax) as they literally worked around the clock to consummate their £28bn marriage.

Crunch time came on Sunday, April 29, when the Sunday Herald led its business section with an article saying that most leading institutional investors favoured Crosby over Burt as chief executive of the merged bank.

That evening, as Burt sat down to a sandwich supper in Edinburgh’s Hilton Caledonian Hotel – a meal known as “Burt’s last supper” – he mused on whether or not he was the right person to lead the union.

Also present were Halifax’s Edinburgh-born chairman Lord Stevenson, Crosby, Gleacher’s Sir John Craven, Cazenove’s Mayhew and Lazard’s Marcus Agius. Sir Jack Shaw, governor of Bank of Scotland, was absent.

As sandwiches were munched, it dawned on Burt that the new bank needed clear leadership from day one. At 57, he was only a few years from retirement.

He said: “The great danger was that I would have been a quasi-lame duck … and that two camps would have emerged. We were looking at ways of avoiding that. Eventually I said ‘the sensible thing is for me to bugger off’.”

But the assembled company was aghast. They told Burt this would look like a cop-out, giving the impression Halifax really had taken the pride of Scottish finance without even paying a premium.

So Burt agreed to stay on as deputy chairman for “a period” and oversee the integration process. “We decided that to keep everybody happy.” But certain figures within BoS were non-plussed, telling him the arrangement was a “complete sell out” when they met Burt next morning.

Burt said the critical thing at this point was to hammer home the message that HBOS really would be headquartered on the Mound. There had been some media speculation that he was prepared to sell the bank down the river – relocate the head office to London or Yorkshire – in order to secure himself the top job.

But he says: “There was never any debate about where the headquarters would be,” a view backed up by Mayhew. Burt added: “The difficulty was in persuading the outside world [that was true]. That was why we came up with this statement about a unanimous vote of the board of directors.”

On May 4, full details of the merger finally appeared. One question frequently asked by columnists both north and south of the border was whether this was in fact a takeover of BoS by the Halifax. Meanwhile, the Yorkshire media were baying for blood, saying that Halifax’s executive team had commited an act of betrayal. It is worth noting that since cementing the deal on September 10, Crosby has been in Edinburgh for “between three and four days a week”, even though his family remains in Ilkley, Yorkshire.

Job losses are on a much smaller scale than the 18,000 casualties of the Royal Bank/NatWest deal. Crosby said: “Overall, we will have 2,000 fewer jobs in three years time. That is four months natural turnover – out of a total staff of 60,000.”

To a certain extent, the deal to merge the two banks was the easy part.

Now Crosby, Burt and their newly assembled team have to ensure that the sum of two parts can be greater than the whole. There are also those pesky investment analysts in the Square Mile, who need to be convinced that the synergistic benefits – both in cost-savings and revenues – will be delivered as promised.

Burt said that integration, on which HBOS gave a trading update on December 11, “could not have gone better. The personalities have gelled to a point which I might have hoped but never expected. Perversely, of course, it’s the revenue synergies which I think are going to be the easiest to produce.

But Jon Kirk, an analyst at brokers Fox-Pitt Kelton, said: “The market is very sceptical that the revenue synergies can be achieved,” adding that this is partly because business customers change bank so infrequently. Kirk said there is no certainty that HBOS’s assault on the small business banking market south of the border will bear fruit.

Burt said Kirk is “talking rubbish”. “Our corporate banking business is growing at 25%. This is because we’re shooting with an elephant gun where before we had a .22 rifle. Now we can go after big game.”

Nor does Burt believe Abbey National’s recent announcement that it wants to chase after the UK small business market will jeopardise HBOS’s chances of success, pointing out that experienced small business managers are going to transfer from BoS in Scotland into the English arena – and that Abbey is not able to do this.

Crosby is steadfast in his conviction that HBOS really does represent something new in UK banking. “What are the greatest motivating forces in a large-scale financial services organisation, if you want to get 60,000 colleagues behind what you’re doing?

“One is to give them better products – which [in itself] is unusual and imaginative, given they have for so long been trying to cajole customers into buying second-rate products. Surprisingly, they find that really motivating. And the other is to say: Let’s have a go at the competition, which equally is a different message.”

He insists the big four banks of RBS, Lloyds TSB, HSBC and Barclays have created “a competition failure, not a market.”

Burt believes that minimising costs will be an essential part of ensuring this competitive onslaught bears fruit. He said: “NatWest had a cost-income ratio of 66%. Ours is 45% and Halifax’s is 43%. That is another reason why we can afford to be more aggressive in the market.”

Crosby does not believe the Competition Commission inquiry into small business banking – which the government will probably bury over the festive season – will help HBOS achieve its goals. He would much prefer for HBOS to be the agent of change than for price controls to be introduced.

Crosby concluded: “If you improve portability both in delivery and perception, that is the only contribution that central government can make. My dream Christmas present from Ms Hewitt would be something that really improves portability. If you’re going to go through weeks of pain to transfer it’s not worth it.”

Timeline of the merger

September 1999: Peter Burt, chief executive of Bank of Scotland, kicks off the consolidation of UK banking with his audacious £21 billion hostile bid for NatWest.

February 14, 2000: Having been narrowly defeated in the battle for NatWest by arch rival Royal Bank of Scotland, BoS argues the fight was worth it because it has raised BoS’s profile.

June-October 2000: BoS goes to Abbey National with a merger proposal. The management teams hold talks in July and August but Abbey walks away in September. There is speculation about a clash of egos between Burt and Ian Harley, his opposite number at Abbey, as well as about disagreement about the head office location.

November 3, 2000: Having lost patience with BoS’s intransigence on certain “immutable” issues, Abbey National returns with a takeover – rather than a merger – approach. It issues a statement confirming an approach to Bank of Scotland that “may or may not lead to a bid” for the Edinburgh company. Burt, woken at 3am in the US by Credit Suisse First Boston to issue a Stock Exchange announcement, responded by saying it was extremely unlikely Abbey’s approach would lead to a transaction

December 5: “Stalker” Lloyds TSB attempts friendly merger negotiations with Abbey National.

January 31, 2001: After weeks of speculation Lloyds TSB officially tables a £19bn conditional bid for Abbey National.

February 28: Abbey National officially calls off merger talks with the BoS, even though Burt claims that these had effectively been dead since November. The deal had been undermined by Lloyds TSB’s bid for Abbey – which had won greater City support because of the bid premium.

April 17-18: Burt and James Crosby, chief executive of Halifax, have lengthy one-to-one discussions at the Halifax’s company flat in London’s Jermyn Street. Burt says: “I immediately recognised that James was a man I could do business with.”

April 25: The Herald splashes on merger talks between BoS and Halifax, with suggestions that the top job will go to Peter Burt and that “Scotland would lose out”. The City of London signals its approval of the deal and both banks confirm the story. BoS shares rise 8.2% to 803p and Halifax rises 4.1% to 768p.

April 26-28: Merger talks proceed apace with apparently very little discord about who should get which job or which business division should be located where. Halifax is advised by Lazards and Cazenoves with Merrill Lynch acting as its stockbroker. BoS is advised by Cazenove, Gleacher, Credit Suisse First Boston and Dresdner Kleinwort Wasserstein.

April 29: At a supper in Edinburgh’s Hilton Caledonian Hotel – now known as “Burt’s last supper” – also attended by Lord (Dennis) Stevenson, chairman of Halifax, Crosby, Gleacher’s Sir John Craven, Cazenove’s David Mayhew and Lazard’s Marcus Agius, Burt abandons ambitions to become the merged group’s chief executive. BoS governor Sir Jack Shaw was notable by his absence. Insiders ask whether he should have been present rather than delegating decision-making to his chief executive.

May 1: Halifax holds its annual general meeting in the Edinburgh International Conference Centre, the first time the meeting has been held outside the institution’s native county of Yorkshire in 150 years. The choice of location fuels speculation but was in fact made long before the merger plans gelled and stemmed partly from Edinburgh being the location of Halifax’s online and telephone bank Intelligent Finance.

May 4: Full details of the £28bn merger are for the most part welcomed in Scotland, which is confirmed as the site of the merged bank’s HQ. Burt has fallen on his sword to provide “management clarity from day one” but agreed to stay on as executive deputy chairman to oversee integration until 2004. But Halifax has bagged the top jobs, with Lord Stevenson becoming HBOS chairman; James Crosby, chief executive; Mike Ellis, finance director and Andy Hornby, head of retail.

Three director posts go to BoS executives: George Mitchell, corporate banking; Colin Mathew, business banking; Gordon McQueen, treasury. Crosby says he will open a “Pandora’s box to generate as much pain as possible for our competitors”. The tie-up is billed as a “merger of equals”, even though the Halifax will be the larger partner with 36,000 employees and a market value of around £18bn. BoS has 19,000 staff and is worth £10bn.

July 20: Patricia Hewitt, DTI secretary, clears the merger, noting the transaction might “strengthen competitive pressures on the big four”.

July 24: More than 99% of Bank of Scotland shareholders vote in favour of the merger.

July 25: Halifax shareholders also endorse the merger (98% in favour) at a meeting in Sheffield.

August 7: BoS executives secure 13 of 15 senior jobs in corporate and business banking while Halifax secures 10 of the 13 key executive posts in retail, long-term savings and insurance. Three of BoS’s personal banking managers – Peter Oakes, Andy Betchley and David Sparling – leave the bank.

September 10: Shares in the merged bank, known as HBOS, perform well on their first day of trading. But they fall in line with other financial stocks later in the week following the terrorist strikes on New York and Washington DC.

Copyright SMG Sunday Newspapers Ltd 2001

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