Goodwin hunting

By Ian Fraser

Sunday Herald

December 30th, 2007

Businessperson of the Year: Sir Fred Goodwin

THE €71 billion (£49bn) takeover of Dutch bank ABN Amro was a coup that has left little room for doubt. Sir Fred Goodwin, the 49-year-old chief executive of Royal Bank of Scotland (RBS) has been confirmed as the uber-hero of Scottish business and finance.

The three-way takeover, in which RBS acquired the Dutch lender’s European corporate and investment banking arms as well as its Asian operations, with other parts going to RBS’s bidding partners Banco Santander and Fortis, is the largest and most complex banking takeover ever. At a stroke it has transformed RBS into a much more global financial services player, enabling it to narrow the gap with giants such as Citigroup and HSBC.

However, for many in the City, the jury is still out on the deal. This is partly because of the high price paid at a time when bank shares have been falling inexorably and serious questions have arisen over investments in opaque derivatives whose value has plummeted because they are linked to shaky sub-prime mortgages in the US.

This probably lies behind Goodwin’s reluctance to crack open the champagne quite yet. Speaking to journalists on defeating Barclays for control of ABN Amro in October, he said: “There won’t be a bubbly moment. I’ve just got a funny feeling we will be getting straight into the hard-work moment.”

One of the things that Goodwin, who can be charming and witty despite his extremely focused exterior, learned from the NatWest takeover seven years ago is that actually closing an acquisition is less than half the battle. Indeed the most challenging task facing Goodwin and his close colleague Mark Fisher (RBS’s director of manufacturing) is to deliver on promises they made to investors during the gruelling takeover battle, which lasted from April to October.

This will include dividing up the spoils between the three winning banks without upsetting customers or staff as well as integrating the businesses that RBS has acquired with the Edinburgh-based bank’s existing operations – again without alienating ABN Amro’s customers or staff.

Given that Goodwin has promised the City cost savings of £1.3bn a year from the parts of ABN Amro that he is acquiring, job losses are clearly on his agenda. There could be as many as 20,000, and he has said they will not uniquely fall on the previously underperforming Dutch side of the equation.

On December 6, Goodwin — nicknamed Fred the Shred for the way he laid people off as chief executive of Clydesdale Bank in the late 1990s — said: “One of the most important things we’ve been doing is looking at management structures. One of the things we did after NatWest, and it slows things down a little bit but it’s critically important, in making all the management appointments, is to go through an interview process and we involve external consultants in the process, to ensure fairness and also to ensure an appearance of fairness. Once the senior appointments have been made, it removes a lot of uncertainty.”

That’s all very well, but Goodwin must be aware that some investors are questioning the very logic of the deal. It is fair to say some are seething. This is largely because of the effect the deal has had on the value of their shares.

In their view Goodwin has sacrificed shareholder value on the altar of a questionable deal that involved overpaying for a weak business at the peak of the banking cycle. RBS’s shares were trading at 705p on February 16, before Goodwin announced his intention to bid for the Amsterdam-based bank. They have since fallen 39% to 432p.

Admittedly, all bank shares have taken a hammering over worries about exposure to bad debts arising from the sub-prime mortgage crisis. Investors have been fretting about the true level of that exposure, enmeshed as it is in opaque and convoluted financial instruments such as collateralised debt obligations (CDOs), which are basically parcels of debt extended to sub-prime borrowers in the US.

After the $10.5bn acquisition of Ohio-based Charter One Financial in May 2004, Goodwin came in for a similar drubbing from investors, dismayed that he had overpaid for the US bank. Goodwin was forced to promise to steer clear of further big acquisitions and pledged to do more to boost shareholder value through organic growth, higher dividends and share buybacks. For a couple of years he kept to his pledges but when the opportunity to acquire ABN Amro arose last spring, he could not resist having a go.

Writing in the Financial Times in October, Lina Saigol claimed that Goodwin and his Dos Amigos — Emilio Botin, patriarch of Madrid-based Banco Santander and Jean-Paul Votron, boss of Belgian-Dutch bank Fortis — were “driven by ego, conceit and a deep-seated need for power” to plough ahead with the ABN Amro deal even as global capital markets were collapsing. She argued they were paying a 70% premium to ABN Amro’s share price prior to the announcement of its abortive tie-up with Barclays.

Many critics argue the three bidding banks would have been better advised to walk away or at least lower their offer for ABN Amro. They say they could have invoked a so-called “material adverse change” clause, arguing that the sub-prime crisis — which had yet to erupt when they made their offer in April — had changed the value of ABN Amro for good.

James Eden, bank analyst at Exane BNP Paribas, says: “We did not condone the decision by RBS management to press ahead with the value destructive acquisition of ABN Amro. In our view, it could – and should – have walked away, or at least secured a lower acquisition price.”

It is not yet clear, however, whether such a plan even crossed Goodwin’s mind.

In October and December he was keen to stress the value that he believes lurks within ABN Amro’s international franchise. He also said it had only about £300 million of mark-downs on its sub-prime related investments.

Speaking on December 6, Goodwin argued that RBS’s prime motivation for the ABN Amro deal was to diversify its asset base and give the Edinburgh bank a wider range of strategic options. “What we’ve been trying to do for a long time now is build a group that has sufficient diversification in its income streams that we’ve opportunity to participate in growth whenever and wherever it happens. No single economy is ever going to be booming all the time but having a finger in a greater number of pies gives us a greater opportunity to deliver sustainable good quality earnings.”

On that occasion Goodwin also took the opportunity to reassure investors that RBS’s annual results for 2007 (due in February) will be ahead of analysts’ estimates — in other words more than £10 billion — and that the merged bank’s exposure to the whole sub-prime mess would be much lower than had been feared. Overall, he said the bank will write-off about £1.5bn because of its exposure to the toxic tide and that large areas of RBS are performing strongly.

After biting his tongue for several weeks while the brickbats fell all around, Goodwin clearly relished being able to deliver a much more positive story than many in the Square Mile had expected on December 6.

He said: “It hasn’t exactly been beer and skittles this year but we’re anticipating a strong set of results. I think you’ll see in the body of the pre-close trading statement a comment suggesting that when you strip out the markdowns and the gains, you’ll see a growth trajectory that’s pretty consistent.”

Goodwin is also surprisingly upbeat about the outlook for the UK economy – which some believe will follow the US into recession. “It is not in bad shape,” he says. “Slowing down never feels as good as speeding up or being at a constant speed. From our customers’ perspective it doesn’t look too bad. Obviously the retailers are all looking to see anxiously what happened over the Christmas period but, touch wood, so far so good. We’re seeing some very high levels of credit-card spend.”

Nor does Goodwin believe the crisis at Northern Rock will affect consumer confidence or cause people to leave their credit cards at home. He says: “Insofar as there’s any damage from Northern Rock, I think it’s more to do with international perceptions of the UK financial services industry. I don’t think it will affect the behaviour of the consumers in the UK because no consumers have lost any money as a result of Northern Rock.”

He also points out that RBS has been a major beneficiary of the Newcastle-based lender’s collapse, with many depositors shifting savings to RBS and NatWest as part of a “flight to quality”. Overall, he says, RBS saw inflows of more than £1bn during September (the month in which Northern Rock collapsed).

Goodwin does not even think there will be a recession in the US. Even if the US does catch a cold, he believes other economies are less vulnerable to catching influenza. “With every passing year economies elsewhere become a little bit more decoupled from the US as you get more and more consumption within those countries themselves,” he says.

Goodwin has an uneasy relationship with the media. Following a rash of negative stories about his decision to scrap plans for a new RBS head office on the site of the St James Centre in Edinburgh in October 2000, he is believed to have clamped down on any RBS people or consultants talking to the media about RBS business.

This prickliness came to a head in 2004 when Goodwin launched a libel action against the Sunday Times for running a number of diary stories about RBS’s new £350m headquarters at Gogarburn. Eventually Goodwin withdrew the writ, but some City observers were surprised at his willingness to go to court over what were essentially frivolous articles.

During the protracted bidding process for ABN Amro, he seemed more open and accessible, giving press conferences with the Dos Amigos.

Goodwin, who last year earned £4m from RBS, is also chairman of the Prince’s Trust, and has led government task forces examining issues such as the work of credit unions and the New Deal. In recent years he has been a regular visitor to Number 11 Downing Street. Last year, RBS was the country’s biggest payer of corporation tax, handing over £3bn.

Goodwin was rumoured to have been approached to take over from Charles “Chuck” Prince as chief executive of Citigroup. Even though such a move would see him multiply his remuneration package tenfold, Goodwin is seen as unlikely to want to take over the reins at the New York-based banking giant. He recognises that his job at RBS is far from complete. As long as he can apply the same ruthless determination to integrating ABN Amro as he applied to the integration of NatWest, he might be able to prove his critics wrong.

© Copyright Ian Fraser 2007

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1 Comment for “Goodwin hunting”

  1. Dear Sir,

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