I was fairly bearish three weeks ago about the prospect of NatWest Bank solving its problems through the acquisition of Legal & General. It appears that I wasn’t alone – Bank of Scotland, less than half the size of NatWest, reckons it has a better plan with a £22bn hostile bid, effectively putting the L&G proposal on ice.
There is, I suspect, much more to be played out in this drama. Edinburgh’s Charlotte Square financial community is an intensely proud clique and Royal Bank of Scotland’s chief executive officer, Sir George Matthewson, who tried to strike an alliance with Barclays earlier this year, has snubbed the International Monetary Fund in Washington to become NatWest’s white knight.
The City also expects an intervention from a foreign suitor, such as France’s SocietÃ© GÃ©nÃ©rale, which lost out to Banque Nationale de Paris in the struggle for Paribas.
There are other continental possibilities, but they would almost certainly have to be cash customers, given that their lack of listings in London would make any paper offer prohibitively unattractive.
The smarter money is on NatWest turning on Bank of Scotland with its own counter-bid – the so-called PacMan defence, named after the early-Eighties video game.
So this is how it ends for NatWest. Like the rudderless German battle-cruiser Bismark, it is forced to circle while foreign enemies move in to finish it off. It hopes to be able to take one of its tormentors with it.
The analogy doesn’t quite stand up, of course, because the smaller ships racing to the scene don’t wish to sink it so much as tow it into port for refit or break-up. But there is, nevertheless, the feel of the crippled, old dreadnought fighting its last great battle.
What has emerged from NatWest is a defiant message, aimed at rallying battle-weary shareholders to fight to the end.
It spits in the general direction of Edinburgh that Bank of Scotland’s bid is “unsolicited, unwelcome and ill-thought out”. This is respectable pre-fight banter, but note that it makes no mention of “undervalued”, the usual phraseology deployed to reassure shareholders that every penny of value will be wrung from a predator.
This is because NatWest has something of a problem with this claim and knows it.
The bank was poised to issue £6bn-worth of its own stock to L&G’s shareholders, at a considerable discount to the 26 per cent initial premium that Bank of Scotland is offering NatWest’s shareholders.
So NatWest is either ripping off L&G’s shareholders or being generously valued by Bank of Scotland. But it can’t be offering a fair price for L&G and being under valued by Bank of Scotland. NatWest finds itself in the Scottish horns of a dilemma.
Yet it’s difficult not to feel some sympathy for NatWest’s predicament. As someone who was so critical of the L&G deal recently, this expression of sympathy might ring a little hollow. But this is no sudden conversion to the perceived talents of NatWest’s management, led by chief executive officer Derek Wanless. NatWest’s attempts at diversification have not been happy experiences. American investment banking was particularly unhappy. L&G could have been seen as the latest wacky idea. Some shareholders are said to have thought it was.
But that is no reason in itself to swoon at the spectacle of Bank of Scotland riding into the bank like some remake of Braveheart (last analogy, I promise).
It’s all very well for Bank of Scotland to point out that it’s run a tighter ship than NatWest, but it has done so on a far smaller scale – 320 branches against NatWest’s 1,700. Bank of Scotland’s chief executive Peter Burt has never overseen an acquisition of this scale.
Wanless and his management may have been found wanting in the past, but Burt and his colleagues have never even been tested at such a demanding level.
So, on what grounds can we evaluate Burt’s commercial judgment and his ability to take on the job of identifying and implementing the cost savings required to make the deal work?
I’m sorry if this is a cheap shot, but Burt might be best remembered for recently teaming his bank up with Pat Robinson, the US television evangelist with a direct line to middle America, who subsequently described Scotland as a “dark land, dominated by homosexuals”.
Burt promptly withdrew from the relationship and it would be unjust if that error haunted him unduly. But it would be equally unjust for him to be cast as the brilliant strategist and saviour of NatWest’s shareholders, simply because the latter have lost patience.
Burt and Bank of Scotland are okay, but let’s not get carried away. NatWest has been, at best, mediocre, but should not be thrust into the clutches of the first chancer that turns up. While it has made its shareholders suffer, it nevertheless deserves better than that.
George Pitcher is a partner of issue management consultancy Luther Pendragon