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  • Peter Smith

THURSDAY 10th FEBRUARY 2000 (part 2); The Full Story

(In part 1 - Top brass at NatWest have convened the senior team after the RBS bid appears to have succeeded).



Sir David stands up. He still appears cheerful and positive; quite an achievement at a time like this. He starts by saying that when he called this meeting, he thought he would be in a position to tell us precisely what is happening- but he can't. So he will go through recent events and say as much as he can about what happens next.


David and his senior colleagues made their first "taster " round of institutional visits three weeks ago. He felt they were in general OK, not wonderful, but it was particularly hard work in Scotland with the institutions there. And some of the smaller investors did not seem very interested in hearing our story at all. But he went into this final round of meetings and presentations with genuine optimism. We had convinced much of the press and some of the analysts, particularly in terms of the difficulties of integrating two companies, two IT systems, and achieving the sort of cost savings the bidders were forecasting.


But David Mayhew of Cazenove (probably our most valued adviser) had always warned of the extra difficulties posed by having two bidders. Investors and others would want some result, and if momentum started to swing behind one bidder, then there could easily be a cascade effect.


David, Ron, Richard and Gordon have held around 30 meetings, each of around an hour and a half, over the last two weeks. David felt they had gone well and that the NatWest team could not have presented the case any better. The principal investors like Prudential, MAM and Schroders had given serious consideration to our presentation, sometimes with as many as 15 of their key people listening and questioning the NW team. However, some of the smaller investors almost seemed annoyed that we were making them think about the issue - the impression was that they had made their minds up very early and resented giving up time to listen properly to the arguments. In at least one case, Sir David doubted that their audience had even read the relevant documents.


In another episode, our team of four were shown into a small glass sided cubicle to meet two people from an investing company. After half an hour, David noticed a rather portly chap come into the main office and get shown into a rather larger room. Suddenly, one of their listeners announced he would have to go; his investment adviser was here to discuss some personal issues. This was obviously portly person. Oh, said David, who does he work for? Yes, you've guessed, NatWest was the answer!


By the beginning of this week, the polls were indicating a close run result. Our top team went to Scotland on Tuesday. After a long morning, and late for the next meetings, they were hurtling from Glasgow to Edinburgh in a snowstorm when Richard Delbridge tried to adjust his seat in the people carrier taxi they were using. His seat slipped out of its mountings and Richard shot around the back of the vehicle "doing his astronaut in zero gravity impression". (That would have been an interesting development if Richard had ended up in intensive care; good for the sympathy votes!) This was, though, by the sound of it, a single light moment in a depressing day.


Again, the Scottish investors seemed keen to see a local victory, and by Tuesday evening things were looking bleak. A number of investors whom we had hoped would back us declared they would support RBS, and the feared cascade started. On Wednesday, in the middle of the daily NatWest 8a.m. war council with our senior team and key advisers, Peter Burt rang to say that Bank of Scotland were admitting defeat and withdrawing, although there would be no public statement just yet. Since then, more and more of the investors were declaring in favour of RBS.


Comments privately to Sir David from the key decision makers were positive in that they felt we had played a bad hand very well, and, like the skating judges, they scored the NW team well for elegance and endeavour - but there were two factors in the end that mattered. The first was the "Oh, it's NatWest making promises again" factor. There was just too much history, and too many past disappointments. Secondly, the market wants consolidation in the Financial Services industry (whether for selfish or good business reasons) and if these bids failed, then there would be much less chance of others happening in the near future.


So, the Wednesday board meeting agreed that, as soon as it was clear that RBS would get the 50% acceptances, a statement promising co-operation would be issued. They had expected to do that today. But the RBS share price promptly collapsed almost 20% in two days when it became clear they were winning! It appears that we have been too successful in pointing out the risks inherent in this process.


Hence the Board was now in a difficult position. It is hard for them to recommend a bid, which is still largely denominated in RBS shares, against a backdrop of a collapsing share price. However, as soon as it is absolutely clear that RBS have 50%, then we will issue a statement; that could be Monday, or earlier. But we won't change our view of the risks or that we believe still NatWest would be better off alone. The statement will not be a retreat. However, it will look forward positively and agree to work together for the benefit of the shareholders.


David is remarkably chirpy through all of this; it is not at all a downbeat or depressed presentation. At this stage, his smile broadens further. There are still, he grins, a couple of unlikely but possible wild cards. Sometimes, when David and Ron have a difficult decision to make, or they are trying to look into the future and predict an outcome, such as how RBS might respond to one of our moves, they have consulted the "Oracle of the Golf Balls". David and Ron are both golfers and keep a putter in the office for those boring or stressful moments. The Oracle involves putting one ball each down the Lothbury 4th floor corridor that runs past their offices. This is about a fifty-foot stretch.


If they can both get the ball to stop under the table at the far end of the corridor, without hitting the far wall, then the answer to whatever question they have posed is "Yes". So last night they tested various scenarios and questions, and Sir David is pleased to tell us that the Oracle fully expects HSBC to bid for RBS before the RBS shareholders meeting in two weeks! No, he continues, he doesn’t really think this will happen, but you just never know..... The second long shot is that the RBS shareholders reject the deal, but as these are chiefly the same people who have voted against us, this seems unlikely, even given the decline in the RBS share price.


Next Monday, he will be meeting Younger, Mathewson and Goodwin from RBS to discuss what they want us to do as custodians of "their" business during the two weeks before their shareholders meet and the deal is finally confirmed. This will be a strange two weeks, as NatWest management is still formally running the business, but we should not do anything counter to the wishes of RBS -I'm not clear whether that is a legal requirement or an ethical issue, or both. Once they have held their shareholders' meeting, then they will take over fully.


Sir David looks much as he has done all through this process - a little older perhaps, and with a hint of tiredness, but not exhausted, defeated, or even particularly emotional. I suppose he does not have any real history with NatWest, unlike Bernard for instance with his 35 years service. The criticism levelled at the company is clearly not David's "fault", except perhaps the Legal and General bid, and he has I suspect no great emotion about the intangible aspect of a great old institution disappearing down a Scottish plughole. That is not to say he hasn't done everything anyone could possibly have done, but it was I think a business exercise for him rather than a gut­ driven fight for survival or honour. And probably he was more clear-headed and objective because of that.


He wraps up his speech; he has enjoyed the whole process, he says. NatWest people have really responded to the challenge, which made his job easier, even if we couldn't finally pull it off, and he is very grateful to us for that effort. He sits down to genuine and long applause and Ron Sandler takes the floor. I realise with some shock that I may never hear Sir David speak, or perhaps even see him again.


Ron only speaks for a couple of minutes. He gives his thanks to everyone. But now we have another real challenge ahead of us. We all have to show real leadership over the next weeks. During the interregnum fortnight we will help Royal Bank and their senior people to understand our organisation, and impress on them that NatWest people are proud people. RBS will need to engage with us, just as we have to engage positively with them; we will both need to make adjustments if we are to make this successful.


Now it is Gordon Pell's turn; the first time I have really heard him speak. He is very impressive, talking mainly about his experience of the Lloyds TSB merger. On Monday night, he jokes, there will be a bunch of delighted Scotsmen celebrating their win. On Tuesday morning, the same bunch will be exceedingly worried managers when they realise just what they have taken on. They will have two months to either bring NW staff on board, or face "the biggest fiasco in financial services history."


From Tuesday this is effectively a merger, with a combined team running an organisation that has promised challenging results to shareholders. But these results can't be achieved by RBS doing things to us; they can only be achieved with us. RBS do not have the management resource to simply sweep in and run NatWest. He himself has been here for three weeks and still got lost on the way to this meeting! They have no hope of running the new business successfully without support from many existing NW people.


I'm sure he is right, but there is a dichotomy here. RBS will have to change things massively to achieve the cost savings they have promised, and they can't do that with all the current management in place. And part of the justification of the bids has been the issue of management competence, an argument I think we have to assume we lost.


In all truth, there have been far too many NW senior managers whose absolute number one priority was the size of their own power base, budget and staff. Hence the trick will be to get rid of the bureaucrats, the timeservers and the self-servers; and identify those who can adapt, be positive and dynamic. However, the problem is that these stars are also the people who are most mobile and flexible and may take the opportunity to get out, particularly if there are attractive redundancy deals available.


Gordon continues, talking about the process he expects RBS to follow. They will almost certainly have management consultants involved. In the first two weeks, the Board level jobs will be decided. Decisions will be taken as to the areas where rapid integration is feasible and desirable, such as Investor Relations and Treasury. Other areas, such as the branch network, may (like Lloyds I TSB) take years to integrate. There will probably then be some sort of competitive interviewing process to fill jobs down to about G1 level (upper middle management.) Once this is done, working parties will spend about 3 months coming up with the detailed integration plans. In the short term, he believes there is more work rather than less. There will be all the business as usual stuff plus the integration work. There will be some exciting opportunities and many of those will undoubtedly come the way of NatWest staff.


As he finishes, I hope (thinking as a shareholder) he personally stays. He is very impressive, and I would have thought both his general management experience and his knowledge of the Lloyds I TSB merger would be invaluable to RBS.


There is only one question from the floor. What happens about the sale of the various businesses like Ulster that have been proceeding during this process? Ah, says Sir David, that will probably be high on the agenda for Monday when he meets the RBS people. He then invites us to stay for a glass of wine - ''we need to reduce the stocks in the Lothbury cellars over the next two weeks!"


Well, if the stuff I tried is indicative, we should have no worries about tight Scotsman considering us spendthrift. "Vin Rouge Fruite" was anything but "fruite" and could have powered a small turbine. The white vin de pays de something might have once been just boring but has declined into something decidedly agricultural (and being served tepid does not help.) The third bottle is an Italian white with a very attractive line drawing of a vine on the label, as if to say, "look, it is made out of grapes, honest guv...." It just screams £1.99 bin end. Anyway, at least I am not tempted to linger or drink too much. Apparently, Christopher Fitzgerald is the keeper of the cellars, but unfortunately I am not really on good enough terms with him to ask for a tour. I would love to know what is down there.

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