Hubris: How HBOS Wrecked the Best Bank in Britain (14 page)

Planning a massive hostile takeover is like planning a military campaign. The generals have a team working out what their moves should be, but they also have a shadow team role-playing the
management and advisers of the victim company. How will they respond? What will be our reaction to any counter-moves they make? There may also be third or fourth teams playing the parts of other
companies which might be provoked by the bid into joining the fray, either on the side of NatWest as so-called ‘white knights’ or as opportunists attempting to snatch the prize for
themselves. At the back of everyone’s mind was the thought that London banking had been too cosy and too complacent for too long and that a bold move like this from Bank of Scotland could
signal the start of a wave of consolidation within the sector which would bring other, possibly bigger and better resourced, opponents into the battle.

As in any military campaign, surprise is a valuable tactic. So preparations have to take place under strict secrecy, with special passes to get into parts of the adviser’s offices and
codewords used for predator and prey. The timing of the announcement is also important. You want to choose a time convenient to you, but one which would wrong-foot your opponent and any possible
counter-bidders. As it happened, an ideal opportunity was coming up at the end of September. The annual meetings of the International Monetary Fund and the World Bank in Washington are usually
attended by the chairmen and chief executives of all major commercial and central banks and the events that go on around them, dinners and receptions, are fertile ground for informal networking and
deal-broking. Everybody who is anybody in banking would be there. Peter Burt and Sir Jack Shaw were due to attend, but quietly they cancelled their air tickets and persuaded Sir Bob Reid, one of
the Deputy Governors of the Bank, to go instead. Discreet inquiries were made to find out when Sir David Rowland and Derek Wanless, NatWest’s chairman and chief executive, planned to cross
the Atlantic: Sunday 26 September.

Most contested takeovers do not come completely out of the blue. They are preceded by talks between the boards of the bidder and the target aimed at trying to secure agreement. Only when those
talks
break down does the previously friendly and coaxing bidder turn hostile. In this case NatWest was given no warning. A board which had already cast itself as predator
with its own bid for Legal & General was hardly likely abruptly to swap roles and accept the part of prey. In any case, Bank of Scotland had already been rebuffed twice in the recent past and
was not going to subject itself to the third rejection.

Initially the announcement of the Bank’s bid was planned for Thursday 23 September, but the supporting documentation was not ready and it had to be put back for a day. There followed 24
hours of intense nail-biting, waiting to see if the news leaked, but the security held fast. That evening Burt left the investment bankers, lawyers and brokers working on the documents and went to
bed early, but he could not sleep. The adrenalin was already pumping around his body and his feet were so cold that he had to put on two pairs of socks. He was told by his doctor brother later that
this was usual in people in a heightened state of expectation and was the origin of the phrase ‘to get cold feet’. But there were to be no cold feet and no turning back.

Takeover announcements have to be made before the Stock Exchange opens in the morning and dealers get to their screens. Traditionally, the first news is delivered in a call from chairman to
chairman and the contacts books of the top city advisers contain the ex-directory home numbers of every FTSE chair and CEO. At dawn on Friday 24 September Sir Jack Shaw psyched himself up to make
an historic call. He would announce the largest-ever takeover bid for a British bank and torpedo NatWest’s planned takeover of Legal & General, which was acknowledged to be Sir David
Rowland’s idea. At the very least it would ruin Rowland’s day, but it had the potential to cut short his banking career.

At 6.30 a.m. Shaw dialled Rowland’s home, only to be told that Rowland had gone out for an early morning run and would call back. The
Financial Times
later reported that in fact
Rowland was still in bed, trying to decide whether to go for a run or not, but in any case a few minutes later he returned the call and Shaw delivered his bombshell.
¹

By 6.45 a.m. Rowland had called Wanless, who called his senior executives and summoned them into the office for an urgent meeting. For most it was merely an early commute, but for Bernard Horn,
NatWest’s head of group operations, it meant a scrambled return from Lake Como, where he was celebrating his wife’s birthday. Also
called was Terry Eccles, the
senior executive of the investment bank J.P. Morgan, which was advising NatWest on the Legal & General deal.

At 7.15 a.m. first news of the bid hit dealers’ screens.

At 9 a.m. there was a hastily arranged meeting between Bank of Scotland’s senior team and their NatWest counterparts. The Scots outlined their proposal, the English listened politely, but
were noncommittal and the meeting ended quickly. Another part of the ritual over.

Peter Burt then hurried to a meeting of stockbrokers’ analysts. These were key people, experts in banking and finance who followed every major company in the sector, dissecting figures and
trends, assessing strengths and weaknesses, predicting future performance. They would all write notes to their clients on the merits of the bid and eventually, when the campaign was nearing its
end, would make recommendations to accept or reject. They were not decision-makers, but they were key influencers and their reaction on this morning could determine the course of the battle. One of
the requirements for their job is that they take nothing at face value and they tend to cultivate a professional cynicism. They are not often given to collective enthusiasm.

The Bank of Scotland chief executive gave a presentation which was characteristic: it was detailed, thorough, dense with facts and evidence and driven by a remorseless logic, spiced with
occasional touches of humour. Afterwards the analysts asked questions and then, unexpectedly, at the close of the meeting they rose to their feet and gave Burt a standing ovation. In his haste to
get on to the next event he had already left the room, didn’t notice and had to be told about it afterwards, but the campaign could not have had a better start than this.

Morituri te salutant
²

The City loves big hostile takeovers. Contrary to the impression given by films such as
Wall Street
and
Margin Call
, much of the daily grind in the financial
sector is routine, predictable, boring and repetitive – relieved by a long Friday evening session in the wine bar. Unsolicited bid battles, which can run for months, bring a period of
unpredictability and excitement and everyone can join in. Some will be closely and directly involved. The companies on either side will have one or perhaps two principal advisory firms from among
the handful of investment banks which comprise the global elite. The team directing the campaign may be fairly small, but everyone on the staff will feel they have a part in it, down to the
receptionist at the door. Bids mean fees and fees mean bonuses. Then there will be one or two stockbrokers, big City firms of lawyers and accountants and, of course, public relations companies. The
battle will be fought at many levels. These days the skirmishes take place on computer screens, but in the late 1990s they still happened in the financial pages of the newspapers and magazines
which carried stories every day.

At any one time there can be dozens or perhaps hundreds of people working full-time on each side of a bid. And this is only in London. If the bidder or the target company has interests abroad or
its shares are traded on markets in New York, Paris, Frankfurt or Tokyo, there may have to be teams in those cities too.

The fees are huge. In 1999 Bank of Scotland was budgeting for £82.5 million, with a further £105 million on top to go to the Government in stamp duty should it be successful. The
money goes to boost corporate profits and annual bonuses for the City’s stars, but it also trickles down a long way. Specialist financial printers get extra for rush jobs done under strict
security, newspapers get an
unexpected surge in advertising revenue, courier companies have cyclists and motorbike riders on standby, even contract caterers benefit from the
sandwich meals brought in to be consumed in overheated rooms in the middle of the night. These events are so essential to the well-being of a major financial centre like London that the top
advisory firms try to stimulate them into happening whenever possible by sliding a list of possible bid targets across the desks of their clients. Not for nothing are the most successful corporate
financiers known as ‘Rainmakers’.

There were ironies in the teams lined up on either side in this bid. Schroders, who had advised the Bank on its earlier approaches to NatWest, was now in the opposite camp, as was Cazenove, whom
the Bank had backed when it decided to stay independent. The firm had told the Bank then ‘We will never go against you.’ Now they were. On the Bank’s team, advising in the US, was
the Wall Street investment boutique Gleacher, run by Peter Burt’s old golfing partner Eric Gleacher. The firm had previously been owned by NatWest and Gleacher himself still had a large
personal holding in the London bank.

When a bid happens everybody tries to get aboard the bandwagon. The advisers to firms not directly involved will call suggesting that they keep a watching brief – for a modest retainer of
course. Other big banks and newly demutalised building societies were consulting their brokers and investment bankers. Analysts and fund managers who are normally reticent and guarded in print are
able to let themselves go when called by a journalist for an unattributable quote. Some may be close to the action, but even those who are not feel entitled to an opinion. Those not important
enough to be telephoned will find an audience for their views propping up the bar in Balls Brothers, Corney & Barrow or El Vino on Friday evening.

At one level takeover battles are governed by strict rules. The stern watchdogs are the Stock Exchange and the City Takeover Panel, who insist that form is followed, that documents are issued,
that statements are supported by evidence, that rigid timetables are adhered to and that there is no mischief-making in the form of companies suggesting they might bid, when they have no intention
or lack the wherewithal to do so. The Takeover Panel cannot send anyone to prison, but woe betide any investment banker, stockbroker or lawyer hauled before it for a reprimand. His – or,
extremely rarely, her – chances of getting the next lucrative deal will be severely damaged.

Formal documents have to be prepared – at least an offer document from the bidder and a formal response from the target – but perhaps more if the terms of the
offer are changed or another bidder enters the battle. These are not ‘easy reads’; comprising multiple A4 pages of dense text unrelieved by colour, illustrations or eye-catching design,
they conform to a set format, with information in set places. Every fact and assertion stated has to be checked and supported by evidence. This is policed by a team of lawyers.

I was once on the receiving end of this process. Each executive from my company was summoned in turn into the boardroom where the legal verification team (soon known throughout the building as
the ‘Spanish Inquisition’) demanded documentary proof of every fact proposed for the draft document, even down to the three-line biography of each of the directors. The insistence that
I support my claim to qualifications resulted in a floor-to-attic search which eventually revealed that the ‘empty’ cardboard tube my wife had thrown into the recycling bin actually
contained my degree certificates. For one of my fellow managers it was not so simple. He failed to provide proof of a claimed university degree and was quietly dropped – not only from the
document, but also from the board.

This is the formal process and is usually unseen by spectators not actually involved. But the contest also takes place at another level in a series of one-to-one clashes – chairman against
chairman, chief executive against chief executive, investment banker against investment banker – and mob struggles of one PR company against another. This is the gladiatorial spectacle the
City loves, fought in wordplay rather than swordplay in the columns of the newspaper financial pages and the one-line flashes on the newswires. The press likes to personalise the process and often
reduces it to a macho hand-to-hand struggle between chief executives. For those fronting the bid it can become a time of intense public exposure. They are in the public eye and expected to produce
a new accusation or a new rebuttal every day. Some thrive on the experience, others find it extremely stressful.

For those most directly involved it is a long and exhausting process with no let up. Mondays to Fridays will start with early breakfast meetings with advisers to review the progress of the
battle and assess the latest move by the other side. Then there will come a relentless round of press conferences, meetings with analysts and endless
presentations to
shareholders and investors. I went through a similar process a few years before the Bank of Scotland bid and, with two colleagues, made 60 one-hour presentations in two weeks. We started by trying
to vary what we said to add some variety and interest, but by the end we were on autopilot, mechanically saying the same words in the same order in the same monotone each time.

In the biggest battles there may have to be teleconferences with the Far East in the early morning and with New York in the evening. On Saturdays PR advisers will be pressing for new lines for
the Sunday papers and on Sundays they will be hassling for newer lines for the Monday papers. The principal combatants are sustained throughout the campaign on a cocktail of adrenalin, testosterone
(there are still very few women involved, and were even fewer in 1999) and caffeine. Meals are often taken on the move or during meetings. Alcohol dulls the senses and is not taken until the
nightcap whisky before a thin, exhausted sleep.