The St Valentine’s Day Massacre

On 14 February, the bitter battle between the Bank of Scotland and the Royal Bank of Scotland to take over NatWest came to an end. Dearbail Jordan tells the story.

When the BBC broadcast a lunchtime bulletin about the Bank of Scotland’s (BoS) daredevil hostile £20.8bn bid for National Westminster Bank on 24 September 1999, the station mistakenly used the Royal Bank of Scotland’s (RBoS) logo.

While the BBC coped with a gaggle of griping viewers, it could not have known that the error was, in fact, eerily prophetic for the deal which would become, in the words of Robert Elliot, corporate partner at Linklaters & Alliance: “A piece of corporate history.”

At the beginning of September, NatWest decided to move into the new field of “bankassurance” and entered talks with Legal & General, following on the heels of Lloyds TSB’s £7bn offer for insurance group Scottish Widows.

But from the outset, NatWest’s decision to take over the insurance giant was marred with problems.

On 2 September, before the talks between the two parties were formally announced, Legal & General’s shares began trading at an increased rate on the London Stock Exchange.

The shares shot up by 10 per cent and rumours began to circulate that NatWest’s takeover intentions had been leaked.

The Stock Exchange tends to look into situations where there has been a movement of over 10 per cent on a share price in one day, so it was no surprise when an investigation was launched by its surveillance team.

Olivia McKendrick, corporate assistant at Linklaters who was part of a 40-strong team, headed by Elliot, advising NatWest, says: “That really put a spanner in the works because NatWest’s share price plummeted.

“It was more disappointing than anything. We had all been working so hard to keep it secret.”

The two parties were then forced to come clean about the proposed deal. NatWest confirmed that it was in talks with Legal & General on 4 September.

Because of the fluctuations in the bank and insurer’s share price, the value of the deal was suddenly altered.

Legal & General tried to calm the situation at a hastily called meeting. McKendrick says an adjustment mechanism was introduced which gave an average price for both parties’ shares and fixed the value of Legal & General at £10.7bn.

Two days later, NatWest’s recommended offer for Legal & General was posted and by 20 September the insurer had published its offer document.

But the City was less than enamoured with deal.

McKendrick says: “The market hated the Legal & General deal. It didn’t like the price.”

Elsewhere, another bank was watching the developments with a great deal of interest.

While the City expected a rash of other banks to attempt to usurp NatWest’s offer for Legal & General, BoS had other ideas and on 24 September it launched a hostile takeover bid the size and scale of which has never been seen in the UK before.

Elliot says: “I was in my car, listening to the radio at 7.45 in the morning when I heard. I was astonished.”

Not as astonished as NatWest chairman Sir David Rowland, who was about to go for a run when he received an early Friday morning call from BoS chairman John Shaw, who informed him that the bank was launching a £20.8bn hostile bid for NatWest.

For an industry which had relied on an age old gentleman’s agreement that rival banks would never attempt to take over each other, BoS’ move was an unprecedented shock.

What was more astounding was that BoS was just half the size of NatWest – at the end of trading on 24 September, BoS market capitalisation was £8.96bn compared to NatWest’s £17.7bn.

BoS had timed its bombshell perfectly. NatWest chief executive Derek Wanless was on his way to the International Monetary Fund conference in Washington, as were the chief executives at RBoS and Lloyds TSB, and Barclays’ acting chief executive.

Michael Walter, corporate partner at Herbert Smith, who led a team of eight acting for BoS, says: “There was no indication or leak about what we were going to do.

“The number of people who need to know what is happening in this type of situation is quite large, so the fact that we were able to keep it a secret is a credit to the people involved.”

Walter says the firm was instructed at the beginning of September, winning the work after Allen & Overy decided not to act for BoS because of the firm’s relationship with NatWest.

Alan Paul, corporate partner at A&O, says: “It was more about doing the right thing rather than it being technically a legal thing.”

Ironically, the firm ended up acting for BoS’ financial advisers Credit Suisse First Boston and Morgan Stanley Dean Witter, which Paul describes as “very interesting work”.

While it was already determined that the bid was hostile, BoS pulled no punches when saying what it thought the failings of its target were.

BoS chief executive Peter Burt said it had been spurred into action by the Legal & General bid which he claimed was a smoke screen for NatWest’s poor performance record.

Burt also said that BoS’ proposal was dependent on NatWest’s shareholders rejecting the Legal & General offer.

In the face of such unmitigated aggression, NatWest was able to respond quickly and by the end of Friday, unequivocally rejected the hostile bid, stating that the offer undervalued the bank and was “unsolicited, unwelcome and ill thought out”.

However, BoS’ bid had already begun to cause repercussions. NatWest announced that an extraordinary general meeting (EGM) set for 6 October to approve the Legal & General acquisition was adjourned.

Walter says: “There was a realisation that we had to do some major sums for this bid – the biggest hostile takeover the UK has ever seen. It was a very exciting deal to work on.”

But while BoS was revelling in the panic it had created, certain key executives at RBoS were being instructed to fly back to the UK.

McKendrick says: “There was talk about RBoS being forced to come out and it seemed to be circling.”

RBoS had itself nearly been in the same situation that BoS was now in. A few months before, it had briefly considered taking over Barclays, but talks had never proceeded past a preliminary stage.

However, the Scottish rival was now being forced to act since it faced being dwarfed by BoS if its bid for NatWest succeeded.

By 27 September, RBoS announced that it was watching the situation carefully and reviewing its options. It was to be some weeks before it put its cards on the table and announced its true intentions.

Julian Long, corporate partner at Freshfields, who headed a team of 17 on behalf of RBoS, says: “We liked going second because it gave us time to take a different tack. You can take your time to prepare fully.”

By the beginning of October, the effects of the BoS bid began to bear fruit. The EGM to vote on Legal & General had been called off indefinitely, NatWest’s chief executive Derek Wanless stepped down and by 11 October, the deal to become a “bankassurer” had fallen through.

Three days later, BoS posted its offer document and the clock began ticking on the Takeover Panel’s 60-day timetable, established under the City code during which a deal has to be agreed by the target company’s shareholders.

The next worry was that the bid might be referred to the Competition Commission by the Office of Fair Trading (OFT) and the timetable was frozen pending a decision.

Walter says: “We were very confident that there were no competition issues and we would be cleared.”

BoS then pulled off another masterstroke of timing when it decided to review its original offer on day 38 of the timetable – one day before NatWest was due to publish its defence document.

McKendrick says: “What really threw us was the day when we were getting out the document.

“It could have pulled the rug from under us since we would have sent the document to the printers and we would have had it printed without reference to the revised offer.”

But luckily, she says, the printing process had not begun and the lawyers were able to act quickly on the revised bid and send out NatWest’s document via Reuters’ wire service.

She adds: “We slightly premeditated that they might do it. It was an example of the cunning use of timing throughout.”

But Walter says: “It was purely where we had got to and partly because day 39 was coming up we had to put in the revised offer.”

That weekend RBoS also decided to sit down with NatWest and attempt to thrash out a friendly takeover deal.

However, both parties failed to reach an agreement and NatWest became the subject of a two-pronged attack from the Scottish rivals.

On 29 November, RBoS announced its official offer for NatWest – £28bn compared to BoS’ revised bid of £26.8bn.

The takeover timetable was frozen once again as RBoS waited for the OFT’s decision on competition issues. But NatWest rejected both offers outright.

By 16 December, the RBoS offer was not going to be referred to the Competition Commission and it posted its own offer document.

Again, the 60-day clock was reset.

Over the Christmas period, events settled down but on 14 January, RBoS extended its offer to institutional investors in the US.

Both BoS and NatWest followed suit taking advantage of the fact that on 24 January a new US securities law came into effect allowing US shareholders to have a minority stake in a non-US target without having to contend with the previously long and drawn out regulatory processes under the old law.

After NatWest issued its second 39-day document, a game of “my bid’s bigger than your bid” began as BoS and RBoS reviewed their offers to £24.97bn and £25.5bn respectively.

NatWest appealed to its shareholders in its final defence document to reject both of the reviewed offers.

Each of the parties then went on the rounds to convince the City’s institutional investors to back them.

The five months of blood-letting were about to come to a climax, but each party had to convince a crowd of jaded City investors that they were the right one to go with before 14 February – the final deadline.

While NatWest and its lawyers held out for the possibility of a split vote which would give it a fighting chance of remaining independent, the chance of such of an occurrence became less and less likely.

RBoS was the first to win the backing of a major shareholder in Norwich Union and Britannic Asset Management, giving it 1.9 per cent of NatWest’s shares.

But BoS crept back into the fray after winning the support of NatWest’s major investors Phillips & Drew Fund Management (PDFM) and Edinburgh Fund Managers, securing a 2.6 per cent stake.

Elliot says this part of the process was unusual because the shareholders were being very public about which party they were backing.

“They decided to make their positions public so it would have a cascade effect,” he says.

Their wishes were granted when City big hitters Mercury Asset Management (MAM) and Schroders backed RBoS.

At that point the deal seemed to be in the bag. RBoS had the winning hand and on 9 February BoS told NatWest that it was pulling out.

Two days later, NatWest grudgingly told its shareholders to back RBoS and by Valentine’s Day BoS was finally defeated.

McKendrick says: “When the MAM and Schroders votes came in everyone’s hearts sank. Just then we knew we would lose. It was so galling.”

NatWest is making it quite clear that it is still not happy about the takeover but its own shareholders helped engineer the deal.

By 6 March RBoS must show that the conditions of the sale have been satisfied, but after the fight it has been through, sorting out the actual sale must be like a walk in the park.

McKendrick says: “At the end of the day it was a real landslide. We knew people would follow suit.”

But she adds: “We put up a good fight.”