THE Royal Bank of Scotland will this week seek to get its bid for National Westminster Bank, currently valued at £24.6 billion, back on track. The start was faltering, even embarrassing, as the value of its semi-hostile offer for NatWest sank below that of rival Bank of Scotland’s. And Sir George Mathewson, Royal Bank of Scotland’s chief executive, appears to have discovered he is not quite the darling of the City that he had hoped.
The Royal Bank will now be struggling to rally its flagging share price by convincing analysts and fund managers that its proposals for turning around NatWest, and that its partnership of Spanish bank BSCH and insurer CGU, stack up. Both Scottish banks must also learn to cope with the subtle ploys of Sir David Rowland, the NatWest chairman, who on Friday declared he would rather merge with a mortgage bank such as Halifax, Abbey National or Woolwich than either of them. This is a diversion they could do without.
When announcing its bid last Monday morning, the Royal Bank of Scotland had clearly intended to trump its rival’s increased £26bn offer. Instead, its bid was undermined by so-called “winner’s curse”, a reflection of the perverse mathematics of share-based takeovers.
The presumption of a victory has paradoxically caused the Royal Bank of Scotland’s share price and the value of its bid to drop. Mathewson, perhaps feeling misunderstood by the City, was ringing round investment analysts on Tuesday demanding to know what was going on. Some analysts are questioning whether Mathewson and his deputy, Fred Goodwin, are as good at banking as the pair would like to think.
Investors also recognise that turning around an organisation as big and unwieldy as NatWest is a lengthy and risky process. They believe that, in the near term at least, the process of reinventing NatWest is bound to dent the Royal Bank of Scotland’s share price.
Furthermore, some investors doubt whether the £1.18bn of cost savings promised by Royal Bank of Scotland are achievable. The City is factoring these expectations of future disappointment into the bank’s current share price.
By contrast, the presumption that Bank of Scotland will lose, and that the OFT will not intervene to protect it in the event of it facing a hostile takeover following its failure to secure a takeover of NatWest, has benefitted its share price. “Bank of Scotland is efficient, nimble and suddenly nubile,” said one analyst who preferred to remain anonymous.
Having handed over their fates to investors in London and Scotland, both the Scottish banks have to an extent signed a Faustian pact. From now until decision day, probably in early February, they will be prisoners of their own fluctuating share prices. The values of their bids will, over the next couple of months, be entirely dictated by stock market movements – which will be influenced by only two things: their perceived chances of winning NatWest, and the City’s view about which is better placed to turn it around more successfully.
In this context – and despite all the protestations to the contrary – it is the shareholders that really count. Customers, staff and local heritage come a poor second. And as they impassively amend their portfolios, the investors’ sole aim is to eke out maximum value from the first stage of UK bank consolidation.
This week, Royal Bank’s top brass will again descend on London to meet analysts and fund managers and promote their plans for NatWest. Their main thrust is going to be that the Royal Bank of Scotland will place greater emphasis on generating additional revenues at NatWest than Bank of Scotland. The message will be that cost-cutting counts, but only as the platform for future growth.
They will also be pulling out all the stops to persuade City investors that they are not imperious, hostile and aggressive and that they will be nice to NatWest’s customers and staff.
“We firmly believe the best way to improve an organisation is through growth,” explained Iain Robertson, chief executive of Royal Bank of Scotland’s UK bank. “By all means get NatWest as efficient as you can, but make sure you have growth firmly in the minds of the management. Make yourself competitive and aggressively competitive if need be. That’s our way.”
What’s unexpected about Royal Bank of Scotland’s bid is it does not plan to make any branch closures, which is seen as surprisingly timid by many in the City of London. Most analysts had assumed the whole point of bringing the two networks together in England – where NatWest has 1700 branches and Royal Bank of Scotland 308 – would be to save money by shutting some down.
But the Edinburgh-based bank maintains that neither closures nor relocations are not on the agenda.
“There are two sets of customers who have committed themselves to either NatWest or Royal Bank of Scotland,” said Robertson. “It would be foolish to say, ‘We’re going to ride roughshod over you and bang you together’. If I was a customer, I would object quite strongly”.
Another investment analyst detects a different reason for not making branch closures. “It’s all about making the right noises to the OFT,” he says. The Royal Bank of Scotland is understood to have entered intense negotiations with the Office of Fair Trading in an attempt to avoid a referral to the Competition Commission. It has offered to make branch disposals and business account transfers in north west England, in some parts of which the two banks combined have about 50% of small business lending.
Bank of Scotland was last week making maximum mileage out of its rival’s discomfort. Although not prepared to pay a “silly price” for NatWest, Peter Burt, chief executive of Bank of Scotland, still strongly believes that he can persuade investors the bank’s offer is both more attractive and more workable.
Gavin Masterton, chief operating officer at Bank of Scotland, has assembled a “crack” team of around 100 managers, who for several weeks have been preparing for the task of turning round NatWest. The Bank of Scotland believes their depth of experience and banking focus will be a major factor in bolstering its chances of success.
“We are more and more advanced with our programme for change,” said Alex Pagett, director of media relations. “This is the culmination of several years work. The urgency is based on the assumption we will succeed.”
Bank of Scotland is also cheered by the regulator’s extension to the investigation of its rival’s bid, which creates added uncertainties for Royal Bank of Scotland. However, at the end of the day, Burt admits both banks are “equally untested” when it comes to integrating an acquisition of the size of NatWest.
With assistance from its advisors Goldman Sachs and Merrill Lynch, Royal Bank of Scotland will this week also issue its formal offer document. This will start the 60-day takeover clock ticking all over again.
Despite Rowland’s claimed preference for a deal with a mortgage bank, Royal Bank’s Robertson hopes the NatWest chairman will come round to recommending the Royal Bank of Scotland’s offer to NatWest shareholders. If this is to be achieved, the bank may need to scrape together more cash if its shares remain such an uncertain currency.
“I’m sure you noticed NatWest’s response [to our offer] was one of interest rather than hostility,” Robertson said. “To an extent, I think they probably sign up to the vision that we were presenting to them.” It may be for this reason no-one at Royal Bank of Scotland is prepared trade insults with either Bank of Scotland or NatWest.
By tearing up the “Scottish card” with his initial hostile bid for NatWest on September 24, most analysts are agreed Burt has left his outfit vulnerable.
David Poutney, banks analyst at WestLB Panmure, said: “If it loses, I can’t see how the Bank of Scotland can retain its independence. The management would have failed twice in 12 months – first with Pat Robertson and now with this – and will lose credibility. Their share price will fall to the extent that they will become a target.”
Alison Galbraith, an analyst at Glasgow-based Britannia Asset Management, added: “The Bank of Scotland share price was very depressed until last Monday, because the market thought it was going to get NatWest. Now there’s a certain relief factor.”
If another bidder does come out of the woodwork, it’s most likely to be Barclays, in a bid to redeem English honour.
But isn’t buying “bricks and mortar” in England misguided anyway when the future of banking is likely to be on the internet? Mathewson says no. “My mother won’t even use an ATM,” he says. His colleague, Robertson, adds: “This is not about bricks and mortar. What you’re buying is a fantastic customer base and a tremendous brand which we believe can be revitalised within England.”
This article was published in the Sunday Herald on 5 December 1999