RBS to Become NatWest - Oh, The Irony!

RBS announced today that it will change its corporate name to NatWest Group because of the toxicity of the "RBS" banking brand that remains after the crash and bailout of 2009. I assume it is coincidence, but it is 20 years to the day that the RBS takeover of NatWest was concluded when 60% of shareholders accepted the offer. I was Group Purchasing Director for NatWest through the takeover, and kept a diary, which I have been publishing in "real time plus 20 years" here. As well as the daily entries, I wrote some longer essays on the background to the events, so given today's news, I thought it might be worth publishing one of those here. This was my take, written 20 years ago, on why RBS rather than Bank of Scotland, succeeded with their bid.

So Why Did RBS Win?

Given that NatWest finally ran out of investor goodwill, and the market wanted a result rather than a no-score draw, why did RBS win rather than Bank of Scotland? After all, BoS had the "first mover advantage" as our dot.com friends would say. They were bold enough to make the first move and put NatWest into play. They made much of the planning that went into their bid, and the cadre of highly skilled and trained managers who were ready to parachute into NW, leap into action and start sorting out the inefficient monolith (if their publicity was to be believed.)

Perhaps most importantly, they offered a very focused strategy, modelled to some extent on that successfully followed for years by Lloyds TSB, the industry paragons. They would concentrate on largely domestic retail and corporate banking and ignore the distractions of fund management, Ulster, and other non-core businesses. And they poured scorn on the ideas of bancassurance and cross selling of multiple products on the back of basic banking relationships. Stick to the knitting seemed to be their slogan.

There was really no financial difference between the bids, despite the confusion caused by offers of loan notes, deferred capital returns and so on. And the longer-term profit forecasts were similar; the anticipated cost savings put forward were the same within what was rounding error given the size of the numbers. RBS and BoS had both performed very well themselves over the past years, and while individual analysts may have rated one slightly above the other, the general consensus would have put them on a par in terms of credibility and City respect. Yet, despite all these similarities, and a couple of apparently major factors in Bank of Scotland's favour, investors chose RBS by, ultimately, a very convincing margin. Why?

The BoS "sensible" strategy should have been music to the ears of investors tired of NatWest's ventures into the US, global investment banking and assorted cock-ups. Royal Bank, on the other hand, offered a vision not very different from that put forward by Derek and Sir David when the bid for Legal and General was announced. RBS emphasised their relationships with Continental partners such as Banco Santander, and their tie-up with CGU on the insurance side. They boasted about their innovative deals with the likes of Virgin and Tesco, and the entrepreneurial achievements such as the creation of Direct Line. (And not unfairly, I would add, speaking as a very impressed and satisfied customer.)

They painted a picture of a new, major force in pan-European bancassurance, a vision just as inspirational (or unattainable, depending on your degree of cynicism) as any of NatWest’s historical objectives. And the investors bought it, which suggests that a promise of future excitement, international growth, and possibly more acquisition activity still gets people more turned on than the prospect of grinding out efficiencies in the core UK business. Perhaps this demonstrates the appetite for risk and long-term vision of the City; or it may prove to be another triumph of hope over expectation.

Another aspect is that the margin of victory was not really as clear as it appeared. As Peter Burt said to his people when it became clear BoS had not won, the decision could have gone either way until very late in the day. But once the momentum was with RBS, and a few of the most influential shareholders declared for them, then there was a snowball effect. Above all, the investors had decided that NatWest should not remain independent, so the nightmare scenario of a split vote was to be avoided at all costs.

RBS also played the hostility element of the bids very well. There was still some fear that hostile bids in financial services were difficult and could lead to all sorts of nasty things; loss of investor confidence, a run on the bank, Bank of England intervention, who knows. BoS and NatWest quickly descended into fairly acrimonious arguments about IT integration, the past history of banking mergers and so on. RBS managed to just about remain above the worst of these debates, aided by NatWest who saw them (if it did come down to defeat) as a more attractive partner than BoS.

Another major factor was the credibility of the management teams. RBS fielded a very impressive three-man team; Viscount Younger, the Chairman; George Mathewson, the Chairman designate, and Fred Goodwin, the Chief Executive in waiting of the new Group. Younger was polished, conciliatory, an excellent communicator; Mathewson had a tough reputation but had delivered success over a number of years, and Goodwin, though young and somewhat unproven appeared scarily bright, focused and ruthless. The City could easily accept the concept of these guys running NatWest successfully.

Bank of Scotland, on the other hand, had Peter Burt and Gavin Masterton. Questions were quickly raised about Masterton’s role. He was presented as the key man who would take over responsibility for NatWest, but rumours started that he had been about to retire, and he was less than visible to the press and investors. The BoS Chairman, Sir John Shaw, largely stayed out of things, unlike Younger. Burt was very highly regarded and was reckoned to have done everything he could during the bid, but too often he was perceived to be on his own. Thus, although they arguably had more management strength in depth ready to sweep in to NatWest, BoS presented a less credible and impressive top team than the RBS triumvirate.

Finally, there were a couple of key aspects of the detailed integration planning where RBS presented a more credible case than BoS; perhaps because they had the time to analyse both NatWest and the press responses to the BoS bid. There is no doubt that BoS caught a cold somewhat over the IT integration plans. Were they going to move quickly onto one common system, or run two in parallel? Would they use the relatively unproven Bank West system? NatWest did a good job in drawing these issues and inconsistencies into the open. Similarly, there was some confusion over the BoS plans for branches. They talked about reducing the branch footprint, but were less clear about whether this meant closures, relocations, cutting branches in half and using a bit as a wine bar. ...The possibilities were endless.

RBS, on the other hand, kept it simple. There would be no branch closures (at least not directly because of the deal) and the current RBS core IT system was quite capable of handling all the NatWest accounts as well. And that had to be true, because IBM said it was. This simple approach made their bid a harder target for NatWest to attack, and probably convinced investors that there was a significantly lower implementation risk inherent in the RBS bid.

So, RBS should be congratulated.  To come in late and win with a bid no higher than that of their rivals, with a business strategy similar (in some ways) to that which investors rejected in NatWest's hands, was a significant achievement, and reflects well on RBS management  and advisers. Now all they have to do is deliver what they have promised.