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Scottish Agenda: Goodwin can deliver after the year’s big deal

By Ian Fraser

Published: The Sunday Times

Date: December 30th, 2007

The jury is still out on the long-term merits of Royal Bank of Scotland €71 billion (£52 billion) acquisition of ABN Amro. Yet Sir Fred Goodwin still deserves to be named Scotland’s corporate hero of 2007, not least because of the flawless way in which he executed this hugely complex transaction, the biggest banking takeover in history.

Goodwin and his dos amigos, Banco Santander’s chairman Emilio Botin and Fortis chief executive Jean-Paul Votron, plus their advisors at Merrill Lynch and Linklaters, completely out-manoeuvred Barclays to walk away with ownership of one of the world’s leading banks.

Nor did they shy away when obstacles were thrown in their path. In the summer, rivals were pouring scorn on Goodwin’s ambition, arguing he must be insane to proceed with such a deal as credit markets seized up. They said the acquisition would turn out to be a poisoned chalice for Goodwin, bringing nothing but further exposure to the worst-hit areas of the financial markets. Others said he should have invoked material adverse-change clause to bring down ABN’s price. Yet Goodwin ploughed ahead.

Goodwin must be aware mega-deals are not always a passport to greatness. Sometimes they backfire spectacularly, leaving shareholder value and corporate reputations in tatters. Recent examples include Scottish Power’s 1999 acquisition of US utility Pacificorp and Stagecoach’s takeover of Coach USA.

The 37% fall in RBS’s share price since April has led some to believe that Goodwin is so obsessed by scale that he has finally overreached himself, and that with ABN Amro he has prioritised size for size’s sake over sustainability and shareholder value.

However this fails to take account of the Paisley-born accountant’s superb track record where the integration of large acquisitions is concerned. With NatWest, Goodwin took a hopelessly inefficient and badly managed institution, sacked 18,000 people, integrated the systems and transformed it into a much better bank.

Admittedly he faces a much bigger challenge with ABN Amro, given its greater international reach. Also, the Amsterdam-based bank must still be carved up between its three new owners before the painful process of “integration” can actually commence. But this does not mean it is beyond Goodwin’s reach. He has promised shareholders he will deliver annual cost savings of £1.3 billion from the parts of ABN Amro that RBS is acquiring. I believe he will comfortably exceed this target. One thing he has learnt is that it is best to under-promise and over-deliver.

RBS’s share price will also recover and breach its previous high of 705p once investors cotton on to the real value of this deal. Ultimately, the Edinburgh-based RBS will be a better-balanced, more diversified bank that will be better able to weather localised economic storms than it is at present.

Goodwin – who is feared and revered in equal measure in Scottish business circles – will be vindicated. For the moment, however, he is having to contend with being villain and hero at the same time.

Nats no numpties

Most business organisations were running scared of an SNP victory in last May’s Holyrood elections.

However, eight months on, the Scottish branches of both the Institute of Directors and the CBI are slowly coming round to the Nats. Both organisations, albeit through gritted teeth, now acknowledge they might even be preferable to the Labour numpties who preceded them.

In his new year message, IoD’s Scotland head David Watt said: “Many Scottish business leaders – even those who would never have considered voting SNP – have admired the enthusiasm and opportunism of the new administration.

“Our new positive attitude and the fact that the complete cabinet has agreed that sustainable economic growth should be top of the agenda is a welcome start.”

Iain McMillan, the director of CBI Scotland, who was more overtly anti-Nat than Watt before May, said: “I welcome the government’s economic strategy, which includes, for the first time, a target for growth to be achieved by the end of the Scottish parliamentary term in 2011.”

However, pockets of disappointment remain, including dismay at the scrapping of the Edinburgh airport rail link, the treatment of Donald Trump and the continuing dominance of the public sector. McMillan also complained about the government’s “ideological aversion” to nuclear energy and to the privatisation of Scottish Water. Still, it’s remarkable what a difference a year makes.

Asset to the firm

Talking of opportunism, Martin Gilbert, the boss of Aberdeen Asset Management, has shown superb timing with his £80m acquisition of the German property group DEGI. This brings €6.4 billion of property assets to manage, on top of Aberdeen’s existing €13 billion property portfolio.

The deal makes it look as if Gilbert, who prides himself on being “contra-cyclical” – meaning he buys into sectors when they are out of favour – genuinely believes in building AAM for the long term. The contrast with his friend John Duffield, whose New Star Asset Management is showing signs of self-destructing at the moment, could not be more marked.

This article was published in The Sunday Times Scotland’s business section on December 30th, 2007

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