Protagonists gird loins for final push

By Ian Fraser

Published: Sunday Herald

Date: February 6th, 2000

Image courtesy of BBC

The fate of rival bids for NatWest rest in the hands of the faceless large investors. Ian Fraser reports

THE Royal Bank of Scotland has edged ahead in the battle for the National Westminster Bank. But a late surge in favour of its Bank of Scotland rivals on the Mound has not been ruled out by the people who matter – the fund managers and analysts.

This week will see a frenzy of Powerpoint presentations, with each and every nuance of the Scottish protagonists examined for any sign of doubt or fear. Even Sir David Rowland, the NatWest chairman, is heading to Scotland for the first time with bank associates, Gordon Pell and Ron Sandler, to try to win over investors. A discreet meeting with Royal Bank’s chairman Sir George Younger has not been ruled out.

The two bids drew closer together in value last week after the Royal Bank of Scotland failed to deliver the “knock-out” blow that some had expected last Monday. This led to Bank of Scotland being given an even chance of success but caused its share price to be afflicted by the “winner’s curse” which has hit the Royal Bank of Scotland since it joined the fray last November.

The success or failure of either bid is now largely in the hands of large investors – the faceless institutions that control the bulk of the UK stockmarket, many of which prefer to hide their immense influence behind the cloak of anonymity.

“Most are keeping their powder dry,” said a financial adviser to the Royal Bank. This is mainly because some of the institutions are still expecting final presentations from the squabbling banks early this week.

The large investors’ primary goal is to increase the value of their shareholdings, so they can be expected to vote in a detached way for whichever bank they believe is best-placed to generate maximum value from NatWest in the long term.

Since nearly three-quarters of what the institutional investors are being offered in exchange for their NatWest shares will be “Scottish paper” (shares in either Bank of Scotland or the Royal Bank of Scotland), they will be voting for the management team they believe has the most convincing proposals for turning NatWest around.

They may be swayed by the views of the investment analysts employed by City merchant banks and stockbrokers – who last week deluged them with a slew of recommendations in this bidding battle – but at the end the day it is the fund managers’ call.

In view of the current similarity of the two bids in purely financial terms, the 40-plus one-on-one presentations made in recent weeks by Sir George Mathewson and Fred Goodwin (the top duo at the Royal Bank of Scotland) and Peter Burt and Gavin Masterton (their counterparts at Bank of Scotland) will prove vital in securing victory for either bank.

THE aim is to persuade individual fund managers of both their management credentials and the superiority of their plans for transforming NatWest. Typically, at the end of these sessions, the fund managers will be non-committal. Rather than declaring support for either bank, they have a habit of remaining tight-lipped. Their preference is to discuss the merits of what they have heard privately among themselves once the banking bigwigs have left their premises.

These meetings can be gruelling and were beginning to take the toll on some members of the banks’ teams as the week progressed. All three banks will continue making such presentations right up to the wire, stopping on Tuesday (in the case of Royal Bank of Scotland) and Wednesday (Bank of Scotland and NatWest)

To a lesser extent, institutional investors may be swayed by the slightly greater cash component in the Royal Bank’s bid. City types are growing increasingly disenchanted with the whole financial services sector, mainly because bank shares have performed so abysmally since last autumn.

Many institutional investors make no secret of the fact they would have preferred a “cash” bidder from overseas. This would make it easier for them to extricate themselves from UK banking shares and bring themselves “up to weight” in an enlarged Vodafone-Mannesmann and in Glaxo-Smithkline.

The five largest shareholders in NatWest – Prudential, Mercury, Schroders, Legal & General and Standard Life – which between them own nearly 20% of the English bank’s equity, were last night giving nothing away as to their voting intentions.

Tomorrow a committee of fund managers at Standard Life Investments will decide how the Edinburgh-based institution, which has a 2.66% stake in NatWest and formerly owned 30% of Bank of Scotland, should vote.

It was therefore left to smaller shareholders, including Glasgow-based Britannic Asset Management and Edinburgh Fund Managers to declare their hands. Both Britannic Asset Management and Norwich Union, which between them have around 2% of NatWest’s equity, said last week they would support the Royal Bank.

Peter Reid, chief investment officer at Britannic Asset Management said: “Bank of Scotland’s offer is very good as well, but their plans for reforming NatWest’s branch network are too risky. They would create too much upheaval and could alienate customers. RBS is focusing on improving performance, reinvigorating the management and stemming customer loss.”

Reid saw a presentation from the Royal Bank of Scotland last Wednesday, at which he said: “Fred Goodwin [deputy chief executive] was particularly impressive. He really stood out.”

Reid said BAM was sticking its head above the parapet because “we want to set something in motion and emphasise our desire that NatWest should not stay independent”.

In reply, Peter Burt said last night that the BoS plans were not risky. “I can’t think of any other retail company that has not upgraded their shop in the last 20 years. The risk would come from doing nothing, not from upgrading the branches.”

Sir David Rowland was due to present his case to BAM on Wednesday. “We are not prepared to wait until then and will be cancelling the meeting,” said Reid.

Edinburgh Fund Managers, which owns 0.3% of NatWest, said it supported Bank of Scotland’s £23bn offer because it has a better track record. “Also I feel sympathy for Bank of Scotland. They have the high moral ground because they moved first,” said Mike Balfour, chief investment officer at Edinburgh Fund Managers. “It would be a travesty if they (NatWest) were to survive.”

When, after a two-hour board meeting last Tuesday, Sir David Rowland rejected both the Scottish banks’ bids, saying: “Neither offer adds real value and both would leave them financially stretched,” Some people in the City were stunned.

Unsurprisingly many fund managers would prefer Rowland to recommend one or other offer and bow out gracefully. For NatWest to soldier on, even though only a tiny minority of his shareholders had wanted it to remain independent, would incense many in the City.

“It’s not about giving up the ghost but about having some integrity,” said one fund manager. A recommendation would also avoid the danger of a split vote.

However, there could be hidden dangers to a recommendation from NatWest. Andrew Wilson, Scottish Nationalist MSP and shadow finance minister, and a former economist at Royal Bank of Scotland, warns the Scottish banks against allowing their enthusiasm for an agreed deal to cloud their judgment.

Wilson said: “The two suitors are so anxious to secure Sir David Rowland’s support that they may effectively agree a deal which amounts to a reverse takeover by NatWest. This would jeopardise the independence of the Scottish institution and could lead to a leaking of key functions to the South.”

This sort of Pyrrhic victory would be in the interests of neither Scottish bank

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