The sheer audacity of Royal Bank of Scotland’s acquisition of a bank three times its size sets it apart from other M&A deals in 2000.
Matthew Greenburgh, co-head of the financial institutions group at Merrill Lynch, which with Goldman Sachs put the deal together, says: “Here was a company bidding for another three times its size and they put into the bid in cash, in one form or another, almost their own market capitalization. In a regulated sector like the banking industry that is unique.”
When Sir David Rowland, NatWest’s chairman, finally conceded defeat last February, it sealed a fascinating chapter in the history of UK banking.
The story, as least in the public eye, began when NatWest’s attempt to buy life assurance company Legal&General collapsed in the summer of 1999. That was all the encouragement Bank of Scotland needed to step in with a hostile bid for the beleaguered bank, followed closely by Edinburgh neighbour Royal Bank of Scotland.
In fact RBS had already been looking at NatWest, as Greenburgh recalls. “RBS had been eyeing UK consolidation for some time and had looked at Barclays originally but soon shifted its sights to NatWest. When NatWest announced the Legal&General transaction it became vulnerable and immediately that happened we got together with RBS and started considering a hostile move.”
The next step was that Bank of Scotland approached RBS to see if it was interested in co-operating in a joint bid, but that fell apart and the two Scots became rivals for the NatWest shareholders’ affections.
At this point Goldman came on board because as RBS’s defence adviser it needed to counter any possible Pacman move by NatWest. From then on, Merrill and Goldman worked together on the deal. It ultimately won the day when, on February 11, after two of NatWest’s biggest shareholders – Mercury Asset Management (now Merrill Lynch Investment Managers) and Schroder Investment Management – lent their support to RBS, Sir David recommended to shareholders that they accept its offer.
Greenburgh says there were three key reasons why the RBS bid triumphed. First, and most important, was the impact on investors of Fred Goodwin, the RBS man who subsequently took over the running of NatWest. “In the one-on-ones and overall presentations he came across brilliantly,” says Greenburgh. “He absolutely impressed the market that he was the man to reform NatWest and to deliver the synergies set out in his detailed plan.”
Secondly, the dealmakers convinced investors that there was a good fit between the two banks – closer than that of NatWest and Bank of Scotland. “RBS had much more overlap with NatWest whereas Bank of Scotland had a more narrow focus,” says Greenburgh. “So RBS had a much greater understanding of the problems within NatWest and there were more synergies.”
Finally, Greenburgh thinks the Merrill/Goldman structured bid was more innovative. “We and RBS were able to get much more cash into the deal than Bank of Scotland at a time when the banking sector was going through a terrible bear market,” he says.
Having come through a very testing time as the deal was concluded, the acquisition has obviously worked from the market’s point of view as the RBS share price has recovered to be 40% up against the banking sector.
“The market wobbled when the RBS share price fell through the floor in the final week of the deal because there was enormous arbitrage activity which has exaggerated the fall,” says Greenburgh. “But even so RBS has outperformed the index by over 50% since before the bidding for NatWest started – so the transaction is a great success for RBS.”
