Bloomberg News

EDINBURGH - Bank of Scotland or Royal Bank of Scotland Group PLC will be vulnerable to a takeover if their hostile bids for National Westminster Bank PLC fail, investors and analysts said Tuesday.

Natwest shareholders have two weeks to choose Bank of Scotland's $37.8 billion offer or Royal Bank's $36 billion bid - or reject them both. The Scottish banks need votes representing a majority to capture Britain's third-largest bank.

Bank of Scotland and Royal Bank generate among the highest returns in the U.K. The bids for Natwest raised the issue of whether the banks have the size to compete at a time when banks are merging to cut costs and boost profits.

"The market will assume that whichever Scottish bank loses is in play,'' said Anik Sen, an analyst at Warburg Dillon Read.

Bank of Scotland has a market value of $12 billion, and Royal Bank has a market value of about $14 billion. Natwest's market value is closer to $31.2 billion.

The Scottish banks made their final takeover bids for Natwest on Monday, and shares of all three banks fell Monday and Tuesday.

Natwest rejected the latest bids from the Scottish banks, calling them "inadequate."

Two of Natwest's biggest shareholders, Scottish Widows Fund and Life Assurance Society and Baillie Gifford & Co., would not say which bid they favor.

The Edinburgh-based banks, which have been rivals for almost 300 years, do not think they will be taken over if they fail to win Natwest.

"We're both very well-run businesses," said Fred Goodwin, Royal Bank's chief executive. "If you look around at the potential field of people who might be willing and able to take us over, it is not a very long list."

Bank of Scotland and Royal Bank have dominant branch networks in Scotland, making them attractive to U.K. banks such as Barclays PLC and Lloyds TSB Group PLC, said John Tyce, an analyst at SG Securities in London.

The list of possible buyers probably is limited to British banks, because unlike foreign institutions, they could squeeze costs from the retail banks, Mr. Tyce said.

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