THE GIANT KILLER

By Financial Editor Ian Fraser and Business Editor Kenny Kemp

Published: Sunday Herald

Date: February 13th, 2000

It was the ultimate battle. Two Scottish banks fighting head-to-head to take over NatWest. Financial Editor Ian Fraser and Business Editor Kenny Kemp examine the fortunes of a war which ultimately led to the Royal Bank of Scotland slaying Goliath

THE Savoy cuisine of Anton Edelman is just the sort of pick-me-up that a busy executive needs after a gruelling day presenting his case to a bunch of pedantic fund managers. And for Sir George Mathewson and Fred Goodwin, the Savoy Hotel on the Strand has been their battle headquarters as they fought their three-month battle for control of the jaded giant, the National Westminster Bank.

A London restaurant critic describes master chef Edelman as “maintaining consistent attention to detail without losing sight of his overall strategy. He is a hands-on chef who leads by example.” A bit like Mathewson, the Royal Bank of Scotland’s chief executive, then?

Mathewson admits he is easily bored and needs constant stimulation, but it was his eye on the long game which eventually led to a spectacular victory. Many fund managers say you could not put a cigarette paper between the Royal Bank and Bank of Scotland over their bids for NatWest, although some were more attracted by the Royal’s expansionist vision than Bank of Scotland’s more narrow focus on efficiency gains. Ultimately it came down to hunch and attitude and it was Mathewson’s Scottish swagger that triumphed.

Of course, he has an exemplary lieutenant. Fred Goodwin might have earned the nickname “Fred the Shred” from his job-cutting days at Clydesdale Bank, but he has been the genial, figures-off-the-top-of- the-head man. He is polite, often charming, but with an edge of tempered steel. He played the good cop to Mathewson’s Harvey Keitel.

Between them, the streetwise duo have relentlessly focused on wooing investors ever since launching their counter-bid for NatWest last November. At meeting after meeting — with 70 different fund management groups in Scotland, England, the United States, Italy and Europe — they have plugged the same message: a mantra about solid returns and expansion, about IT and cost savings.

The core theme, however, was that growth was more important than cost-cutting. They didn’t waver. And while Peter Burt, the group chief executive of Bank of Scotland, was seen as a sincere and effective operator, and was prepared to spend more time explaining his plans to journalists, the Royal’s Blues Brothers’ attacking performances were critical in winning this battle.

“It’s the sheer persistence and volume of George and Fred’s presentations to every investor that shone through,” said Viscount Younger, chairman of the Royal Bank of Scotland.

After each battery of meetings, the team regrouped at the Savoy Grill where the asparagus spears and fresh Billingsgate langoustines would be eaten and the next day’s strategy planned. While Mathewson and Goodwin were painstakingly working their way through the fund management houses, Younger was working behind the scenes in London, orchestrating ranks of highly paid advisers — including Goldman Sachs, Merrill Lynch, Credit Lyonnais and Warburg Dillon Read. “My job was to ensure they were all happy and did a good job,” said Younger, modestly.

The battle began in 1998 after the Royal’s failure to secure a takeover of the Birmingham Midshires building society. Then softly-softly attempts to woo Barclays Bank also proved abortive. So, for Mathewson, there was no margin for error this time.

Younger explained that during the Edinburgh Festival last year, the two Scottish banks had been working on a joint takeover bid for NatWest, with the aim of carving up the spoils. Peter Burt and Gavin Masterton at Bank of Scotland wanted to press ahead, but Younger said: “The problem was how we would divide up NatWest between us. Would you take an arbitrary line and say you guys can have everything north of the Wash? Peter thought it would be possible but we were doubtful.”

The project collapsed and soon afterwards Bank of Scotland decided to go it alone in a unilateral action against NatWest on September 24. Mathewson was quietly fuming when he heard of the audacious bid. He cancelled flights to attend the IMF summit in Washington DC and headed straight into meetings with his advisers at Goldman Sachs and Merrill Lynch in London.

Mathewson was reluctant to be pushed into any corporate action by advisers rubbing their hands at the prospect of their next big fee. Younger said: “Everyone was saying, ‘When are you going to bid?’ But even though the advisers would have loved it to be done in the next 10 minutes, George said, ‘What’s the hurry?’.” He insists that when the Royal Bank’s £26 billion bid came on November 29, it was not hostile but that RBS was “pressed by NatWest”.

For nearly eight weeks, Bank of Scotland had been the only bidder, although there had been constant speculation that the Royal Bank or even Abbey National would jump into the fray. Now Mathewson and Goodwin were ready to hit the ground running.

Throughout December and January, with a short break for millennium parties, the three warring banks had battled to get their messages across. These had been scrutinised by investors, City journalists and the Takeover Panel.

STUBBORN NatWest chairman Sir David Rowland adopted a scorched earth approach and a sarcastic tone towards his aggressors. He maintained that his board was strongly opposed to both bids, arguing they overestimated the merger benefits and underestimated the integration risks. Rowland played a hard game, saying the potential for destroying shareholder value – as had happened in similar US bank mergers – was huge.

First he sacked chief executive Derek Wanless and brought in his old friend Ron Sandler from their time at Lloyd’s of London. Then he lured Gordon Pell from Lloyds TSB. It was enough to convince investors that Rowland was serious about seeing off the Scottish marauders – or at least extracting as high a price as he could from them by playing one off against the other. Mathewson remained sanguine as the Royal’s share price sank. At a Christmas lunch he jokingly told journalists to: “Buy our shares. If we win, you gain. If we lose, you gain.”

Normally in contested takeovers, the shares of the favourite rise in value. This battle has been different because of a phenomenon known as “the winner’s curse”. The big investors marked down the shares of whoever had been seen as the winner, because they were frightened of being too exposed in an increasingly uncertain financial services sector. The theory is that traditional bricks and mortar banks will suffer a loss of customers and revenues as internet banks encroach on their territory.

And there was also a growing acceptance in the City that, despite the relentless desire of investment bankers to talk them up, mega- mergers often fail to deliver their expected benefits. And then there were fears about the enormity of the task that the winner would have to take on.

On January 31, both the Scottish banks upped their offers. Even though both were now stretching themselves to the maximum and calling in favours from all sides, neither was able to deliver a knockout blow.

The deal was finally clinched last Tuesday. Bank of Scotland’s team had woken up in high spirits. Phillips & Drew — which has 2.3% of NatWest — had the previous evening declared its support for the Mound’s bid. That morning the influential Lex column in the Financial Times had backed Bank of Scotland, saying “its strategy looks clearer than that of the Royal Bank”. The mood on the Mound was verging on the euphoric. Public support from a leading investor such as PDFM could easily “encourager les autres”. The pendulum in the City was swinging Bank of Scotland’s way. Or so it thought.

The Royal Bank team was shaken, and even the imperturbable Younger admits to being “a bit rattled.” But Mathewson and Goodwin kept their cool. “It was the first large investor to break cover and it was not for us,” he said. Then Bank of Scotland’s share price started to wilt as it too suffered from a dose of “winner’s curse”. Meanwhile the Royal Bank’s shares soared, as dealers assumed that it had escaped being saddled with the task of turning NatWest around.

That morning, Mathewson and Goodwin were at their lowest ebb as they plodded their way around the final presentations to City institutions including Lloyds TSB subsidiary Hill Samuel Asset Management. One fund manager said: “We caught them at a hairy time. Certain members of the team were pretty frayed.”

But this blip was short-lived. Later that day Deutsche Asset Management, formerly Morgan Grenfell — which has 1.4% of NatWest — came out in favour of the Royal. An extremely sensitive decision for Sir Robert Smith, chief executive of Deutsche Asset Management and the chairman of the BBC’s Broadcasting Council for Scotland: he is also a non-executive director of Bank of Scotland.

After lunch, the Royal Bank announced that it had the support of 12.88% of NatWest’s shares, which it hoped would start a bandwagon rolling. Merrill Lynch executive Paul Thompson said he had been putting this “investors’ club” together since Monday. But there was a fatal mistake. An initial report on the Reuters financial news service, which said that “12.88% of NatWest shares accept bid”, had to be corrected. In fact, valid acceptances for Royal Bank had only been received from 1.81% of NatWest’s shares and 11.07% were “non-binding confirmations”.

But for Burt, Masterton and their team the correction came too late. They felt this misleading announcement had a critical effect on institutions which were waiting to see which way the tide was going. It was a shot which hit Bank of Scotland amidships.

What struck them below the waterline was a decision later that day by Schroders, the venerable British investment house, which was one of NatWest’s leading shareholders with a 3.33% stake. It was an agonising choice for Bill Baker, Schroders’ head of FTSE100 equities, and his team. For two and a half hours on Tuesday morning, a meeting of fund managers and internal bank analysts tussled with the problem. They didn’t really want NatWest to survive — but which should it be, Bank of Scotland or the Royal?

“The meeting was tense, but not so heated that we came to blows,” said Baker. “Because there were three equity-based alternatives it was very finely balanced. We all found elements of each alternative proposition compelling, but you have to be reasonably cold-blooded. Your duty to investors is to select the best alternative and the management approach which offers the best balance of risk and reward.” They came out in favour of the Royal’s approach.

This turned out to be the watershed. By 6.43pm that evening, Schroders’ decision was flashed on to the Reuters trading screens. Burt, Masterton and colleague George Mitchell, sitting with the Financial Times editor Richard Lambert and banking writer George Graham at the newspaper’s Southwark Bridge offices, had been dealt a mortal blow.

The crestfallen team headed out to an Italian restaurant in Kensington that evening to pore over what had gone wrong. As they munched through pasta and sipped their red wine, they knew that other investors would follow Schroders’ lead. They decided there would be little point in continuing with their final meetings, scheduled for the next day.

“Schroders are very influential”, commented Robert Mackenzie, banks analyst at WestLB Panmure. “It was so finely balanced that many of the institutions were looking for a lead.” As Burt feared, the snowball started to roll and it was gathering pace.

But what it reveals about the City is interesting. Large shareholders in NatWest maintained they were making their decisions through their own rigorous evaluation of each bidder’s proposals. They claimed to assess the merits of each bid in isolation — but in share-based, contested takeovers people are often more sheep-like.

“Human beings like to be on the winning side,” said a leading City stockbroker. That trend was reinforced since no NatWest shareholder wanted to be singled out as being responsible for causing the split vote that might allow NatWest to escape. This explains Phillips & Drew’s decision to consider switching sides, despite its earlier support for Bank of Scotland.

Mercury Asset Management also faced a hard choice, which highlighted the incestuous nature of many major investors in the City. It favoured Bank of Scotland but was reluctant to vote in a way that would antagonise parent company Merrill Lynch, which was advising the Royal and earning significant fees.

By Wednesday night, an exhausted Burt retreated back to Edinburgh while Mathewson and Goodwin headed back to the Savoy. They reportedly tucked into two enormous knickerbocker glory ice creams in the Grill. Sir George, with an enormous grin on his face, realised he was on the threshold of victory. “It was a quiet celebration,” he told us last night. “But there was no way we were going to count our chickens at this stage.”

That same evening, Viscount Younger and Sir David Rowland, his opposite number at NatWest, talked again about a deal. Throughout the bid, Younger and Rowland – who have known each other since the 1980s when George Younger was Defence Secretary – had been in constant touch and trying to work out an agreement. But Rowland would not budge.

All day Thursday, the City waited for Rowland to capitulate. But he didn’t. As more fund managers moved over to the Royal, it became clear that Bank of Scotland had lost. Burt sent an internal memo to his staff. “You will have heard that we have lost our bid for NatWest. This saddens us, but we are far from downhearted.”

Burt said last Friday: “At lunchtime on Tuesday, the market was saying it was looking pretty good, but by six o’clock it had all gone pear-shaped. It was a close-run thing.”

He added: “With the vote totted up it will look like it was 11- nil to the Royal Bank of Scotland, but it wasn’t.” Masterton believed a better analogy was that the Royal Bank won in a penalty shoot-out after extra time.

By Friday morning, after fund managers expressed their anger at NatWest’s desire to soldier on, the English bank finally caved in. Rowland recommended that shareholders should accept the Royal Bank of Scotland’s bid, now worth £20.9bn. The irony is that Bank of Scotland’s second bid on November 26 was worth £27.6bn — while the Royal’s first offer, made three days later, was worth £26.5bn. Both of these had been rejected by Rowland as “inadequate”.

The NatWest takeover represents a massive victory for the Royal Bank of Scotland and for Scotland’s reputation as a global financial services centre.

But winning is only the start of a string of fresh challenges facing Goodwin and Mathewson. “What we’ve just done was the easy part,” said Viscount Younger last night. As they gear themselves up for the daunting task of reinventing NatWest, the dynamic duo will need to prove again how tough they really are.

Top 10 Scottish-English deals by value:

1. Royal Bank of Scotland takes over NatWest in 2000: £21billion

2. ScottishPower takes over PacificCorp in 1999: £7.7 billion

3. Lloyds TSB takeover of Scottish Widows in 1999: £7billion

4. Stagecoach’s acquistion of Coach USA in 1999: £1 billion

5 Scottish-Hydro becomes Scottish & Southern Energy in 1998 deal: £5.8billion

6. CGU and Perth-based General Accident merged in 1998: group worth £15billion.

7. Prudential buys Scottish Amicable in 1998 for £1.9billion

8. Scottish & Newcastle takes over Courage in 1995 for £443million

9. Lloyds takeover of TSB in 1995: £1.6billion

10. Guinness bought Distillers Company (now part of Diageo) in 1986: £2.7 billion

Copyright SMG Sunday Newspapers Ltd 2000

Short URL: https://www.ianfraser.org/?p=283

Posted by Ian Fraser on Feb 13 2000. Filed under Article Library. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry