Hubris: How HBOS Wrecked the Best Bank in Britain (15 page)

Bank of Scotland’s timing was impeccable. The IMF and World Bank meetings would not start until the Monday, but many senior bankers were either already in the US on Friday 24 September or
on their way. The Royal Bank’s Sir George Mathewson had taken a few days off and crossed the Atlantic early to watch the opening of the Ryder Cup, the annual golf tournament between Europe
and the United States. That morning he was among the crowd on the edge of the green at the Country Club, Brookline, near Boston. Club rules dictate that all mobile telephones must be switched off
during play, but Mathewson had never been one to follow rules and took the call telling him of the Bank’s bid. He cut short his vacation and flew back for a hurriedly arranged meeting with
the Royal Bank’s City advisers, Goldman Sachs and Merrill Lynch. They were, he told his colleagues later, ‘gagging for us to make a counter bid’. Mathewson, however, decided to
hold his fire. He was not the only one to catch an early plane home. Peter Ellwood, LloydsTSB’s chief abandoned the IMF meetings and flew back that Sunday.

The bid sent a shockwave through the City. An early morning flash from Reuters declared: ‘Bank of Scotland has torn up the handbook on how to achieve a British financial services merger
and thrown the pieces to the wind.’ An unnamed analyst was quoted as saying: ‘This is about as hostile as you can get without going up and punching the other side in the face. The law
of the jungle now presides.’
¹

Meanwhile the war of words had started. Bank of Scotland’s team were busy undermining the record of the NatWest management and rubbishing their future strategy.
Peter Burt called NatWest’s plan to buy Legal & General an expensive and ill-judged diversion from the urgent work the English bank ought to be undertaking to improve its core banking
business and reduce costs. Bank of Scotland would offer shareholders a real choice between its own ‘value adding’ proposals and NatWest’s ‘value destroying’ plans. If
successful it would sell NatWest’s peripheral businesses, the fund management group Gartmore, Ulster Bank and the American investment bank Greenwich, and return the proceeds to shareholders.
This would enable it to concentrate on the basic banking business.

For NatWest Sir David Rowland hit back, describing the bid as unsolicited, unwelcome, ill-thought-out and undervaluing NatWest. Peter Burt, he declared, was long on rhetoric and short on
substance. There was a big difference, Rowland declared patronisingly, between running a corner shop and running Tesco.
²

Analysts friendly to NatWest were roped in to say that the bid was opportunistic. ‘I don’t think this is a sincere bid,’ said one anonymous source. ‘It is a spoiling
tactic against the Legal & General bid and a PR exercise following the Pat Robertson fiasco.’ A more measured and perceptive comment was given by Justin Urquhart-Stewart of Barclays
Stockbrokers, who, as a Scot, knew the Bank pretty well. ‘This move is almost as defensive as it is aggressive and it is a good strategic play by a medium-sized bank. One reason they are
doing this is as a pre-emptive action, it moves their share price and it shows they are aggressive and gives out a clear message to anyone who might be thinking of them as a takeover
target.’

Most comment, however, favoured the Bank. The financial news service of Reuters said that the bid had ‘stunned and delighted’ the City. ‘A David of British banking has taken on
one of its Goliaths and the delighted spectators think it can win.’ The following morning’s newspapers were equally enthusiastic.
The Times
said the bid had been timed to
perfection and the paper contrasted the return shareholders had received from Bank of Scotland over the past decade with that from NatWest. A hundred pounds invested in the Bank at the beginning of
1989 was worth £1,515 a decade later, whereas had it been invested in NatWest it would be worth less than half that at £745.

The
Financial Times
Lex column said it was hard to feel sympathy for NatWest and when it came to a comparison of the management of both banks it was an easy
choice. The Sunday papers were also almost unanimous in being equally complimentary. Only the Glasgow
Sunday Mail
came up with an original line, first reporting that Gavin Masterton had
taken Saturday afternoon off from the bid battle to see the ‘Pars’ (Dunfermline Athletic football team, where he was on the board) get beaten 2:1 by Ayr United, and then warning that if
Bank of Scotland succeeded in winning NatWest it would inherit Coutts, the exclusive private bank, and with it the overdrafts of Sarah, Duchess of York, and Elizabeth, the Queen Mother (reputed to
be £4 million, said the paper, run up on horse racing and fine wines.)

Over the next few days the Bank gave details of how it would transform the performance of its target. A massive £1 billion a year was to be taken out of costs by eliminating duplication
between the two banks and reducing the number of processing centres from 54 to nine. Most of NatWest’s branches were to be moved from Victorian or Edwardian buildings to shopping malls and
there was to be a much more aggressive sales policy. Gavin Masterton let his guard slip when he told journalists that Bank staff were trained so that as soon as a customer entered a branch he or
she was ‘targeted’. He quickly corrected that to ‘approached’, but the message was clear: under Scottish management NatWest would be driven much harder. The underlying
principle of the Bank’s new management style, he added, would be ‘focus, focus, focus’. Brandishing his Scottish credentials, Peter Burt said that NatWest’s bloated and
expensive head office would be reduced to a brass plate in London. The combined bank would be run from Edinburgh.

The Bank team attacked the philosophy behind NatWest’s proposed tie-up with Legal & General – the alleged benefits which would come from ‘bancassurance’, a
fashionable manufactured word to describe putting banks and insurance companies together. In retaliation NatWest leaked to the newspapers the fact that Peter Burt himself had had dinner with the
Legal & General chief executive to discuss some sort of tie-up. It was true, Burt admitted, the two had met, but he had decided that it was not worth pursuing. ‘You don’t have to
own a cow in order to sell milk’ – you did not have to own an insurance company in order to sell its products through branches.

When NatWest issued its response to the Bank’s formal bid there
was a distinct feeling of déjà vu. It was now promising to sell exactly the same
subsidiaries as Bank of Scotland had said it would sell; it would give its branches a makeover, cut costs by freezing recruitment and salary rises; the art gallery in NatWest Tower was to be closed
and the bank would end its sponsorship of an annual art prize. To answer criticism of its management, it would recruit a number two to chief executive Derek Wanless. Burt described the new strategy
as a ‘copycat’ defence and the City was distinctly underwhelmed. NatWest had no answer to the question that if these were such good things to do, why had it waited until Bank of
Scotland had suggested them before proposing them itself? It was too little, too late and it left Derek Wanless in charge – a man associated in the City with NatWest’s years of
underperformance.

The special meeting of shareholders called by NatWest to approve the Legal & General purchase went ahead on 8 October. It was a mournful affair. Professional investors holding the vast
majority of NatWest’s shares did not bother to turn up and the handful of small shareholders who did attend were thanked by Rowland for coming as, he added, it would have been a bleak
occasion had the hall been completely empty. They heard the formal announcement of what the City had known since the morning of the bid – the L&G deal was dead. After the meeting the
NatWest non-executive directors met with David Mayhew, senior partner of Cazenove. Executive directors were pointedly excluded. Wanless was to be thanked for his service and summarily sacked. He
was a nice man but in the gladatorial arena there is no place for sentiment. Rowland assumed the role of chief executive as well as chairman, and as his number two he was to bring in Ron
Sandler,
³
who had fulfilled the same role in Lloyds of London. The City was again unimpressed. Wanless had gone, but now there were two
insurance men running the bank, with not a banking qualification or a year of banking experience between them.

Yet not everything was going Bank of Scotland’s way. Since the bid had been announced the Bank’s share price had been rising, but NatWest’s price had been rising faster. The
stock market signals its intentions through share price movements and the soothsayers who read the entrails declared that this meant one, or possibly, two things: Bank of Scotland would have to
raise its bid; and/or another bidder would enter the contest.

With its collective minds telepathically united, the City now tried to
will these events to happen. Reuters reported that investors were salivating at the prospect of a
counter-bid emerging and the newspapers started to speculate on who the bidder might be. LloydsTSB, HSBC and Barclays were ruled out on competition grounds – they would surely be blocked by
the Monopolies and Mergers Commission – but the former building societies Halifax, Alliance & Leicester and Abbey National were possibilities, as were foreign banks wanting to enter the
UK market. And it emerged that the Royal Bank of Scotland had put down a marker with the Takeover Panel on the day George Mathewson had arrived back in London. It did not mean they would bid but it
did mean they were not excluded.

Takeover Panel rules are clear but careful wording can stay on the right side of them. Peter Burt had declared the Bank’s bid ‘full and fair’. He had not said it was
‘final’. NatWest’s share price had stayed irritatingly ahead of the value of the Bank bid and at the end of November the Bank bowed to the inevitable. Jack Shaw again telephoned
David Rowland before dawn to tell him that Bank of Scotland had made an improved offer, there was to be more cash, meaning higher borrowing for the Bank, there was to be a special dividend of
£2 billion for shareholders as an extra inducement and, crucially, NatWest shareholders were to get more of the combined group; now they would own 70 per cent as against 68 per cent under the
first offer. ‘Peter Burt, BoS’ chief executive, insisted that his original offer was “full and fair”, implying he would not open his sporran again,’ reported
The
Economist
.
⁴
Rather sheepishly, he described the new bid as ‘fuller and fairer’.

The whole package now valued NatWest at £24.3 billion – a colossal sum – but it was not enough. NatWest’s share price continued to rise and by the end of the day was
above even the value of this increased offer. The market was expecting even more and the Bank would be stretched to breaking point to provide it.

‘The next thing he does has got to work, otherwise he’s toast’

The Royal Bank launched its attack on NatWest on Monday 29 November. This time Sir David Rowland received his pre-dawn call from Sir George Younger, the urbane and genial
former Cabinet minister who was chairman of the Royal Bank. It hardly came as a surprise to Rowland or to anyone else. The weekend papers had been full of stories of talks between George Mathewson
and Rowland, with the Royal trying to win approval from the NatWest board so that its offer would be friendly and recommended, rather than a second hostile attack. The talks had broken up on the
previous Friday and Rowland had gathered his board together on Saturday for a brief meeting, but there was not much to discuss. NatWest had decided it wanted to remain independent, there was to be
no deal. The fight would now be a three-cornered contest.

The Royal Bank’s team, which had been working on the detail of their offer for weeks, had had to do some last-minute tweaking when Bank of Scotland announced its increased offer;
nevertheless, the new bid had a very familiar shape. The headline value was slightly higher than that offered by the Bank and the promised cost savings were £165 million more, but otherwise
the recipe was the same. Non-core subsidiaries were to be sold, there was to be a closer focus on the core business. The Royal contrasted its financial performance against the record of NatWest and
compared NatWest’s management to its top team – chairman Sir George Younger, chief executive George Mathewson and Fred Goodwin, who was designated as the man who would run the bank. One
of the factors which may have discouraged Rowland from endorsing the bid was that the Royal Bank had made it clear that if it won there was to be no place for Rowland or Sandler in the merged
group. George Younger had
announced the date of his retirement and the Royal Bank’s board had agreed that Mathewson would succeed him as chairman, with Goodwin becoming
chief executive.

Mathewson’s caution in not rushing into a bid had given him a number of advantages. He had seen how the City had greeted the Bank’s bid, he knew the size and structure of the
competing offer and, crucially he had waited until the Office of Fair Trading had ruled that a takeover by the Bank would not produce a monopoly and would not have to be referred to the Competition
Commission. The Royal Bank would have to get similar clearance, but it could use the Bank of Scotland decision to bolster its own case. Although the Royal Bank team had been working intensively on
their bid before going public, they were now coming fresh to the fight, whereas the Bank management had already been at full stretch for more than two months. Also the delay had given the
Royal’s PR team time to leak out favourable news, such as the decision by the Spanish banking giant BSCH (now Santander), which was a shareholder in the Royal Bank, to back the bid and
contribute cash.

In public Peter Burt was philosophical: ‘I would prefer not to enter into a pitched battle with a company so close to home, but the Royal will do what it believes is in the best interests
of its shareholders and so will we.’ But the Royal’s move was a bitter blow. At one time the team from The Mound might have hoped to have declared victory before Christmas and gone home
to their families; now it would continue at least until February and they would be fighting on two fronts. Even for a man of Burt’s prodigious energy, this was a sapping experience and it was
tying up around 150 senior employees in the company. It is a tribute to the depth of management that the Bank was still able to turn out double-digit growth and announce new ventures, but it was a
big distraction.