The hostile takeover climate spread to the United Kingdom on Friday as Bank of Scotland made a $34.3 billion bid for National Westminster Bank of London.
The Scottish banking company, which has $97.7 billion of assets and 320 retail branches throughout the United Kingdom, said it would exchange 1.6 of its shares and $1.96 in loan notes for each Natwest share. At about $20 per Natwest share, the deal represents a 20% premium over the market value last Thursday.
Bank of Scotland, based in Edinburgh, is attempting to absorb a much bigger rival, with $302.7 billion of assets and six million retail customers. "This is David taking a potshot at Goliath," said Paul Cantwell, a partner in the financial services practice of Andersen Consulting.
To its advantage, Bank of Scotland has a quality management team and a track record of cutting costs, analysts said. "Bank of Scotland has been able to transform itself into a very efficient processor," said a London analyst.
Observers see Natwest as struggling with its cost structure. "Natwest has been promising improving standards of efficiency," often without meeting those goals, said John Tyce, an analyst at SG Securities in London.
Bank of Scotland's cost-to-income ratio, an efficiency measure, was 49% for the 12 months ending Feb. 28, in contrast to Natwest's 69% for the 1998 calendar year.
Over the years, Natwest has also had to retreat from various businesses that had not been successful, including forays into U.S. retail markets and global investment banking.
"It's a cheap opportunity for Bank of Scotland," Mr. Tyce said. Natwest shares have fallen 10% since the beginning of the year, while Bank of Scotland's have risen 0.3%.
Also driving the deal may be Bank of Scotland's own vulnerability to takeovers.
"It's on the offensive," Mr. Cantwell said. "With this acquisition, it will be very hard for someone else to digest them."
The company said it would apply its own strategy of streamlining back-office operations and scaling back the branch network if it gains control of Natwest. That would include an immediate freeze on hiring, cutting the current 54 processing centers to nine, and reducing the branch number by about 50% -- a radical change for what has historically been known as one of the top nationwide clearing banks.
Bank of Scotland said it planned to keep Natwest as a separate bank and retain its name and branding.
Bank of Scotland apparently does not necessarily view Natwest, which is in 25 countries outside the United Kingdom, as a springboard to a more global presence. The bank said if its acquisition attempt is approved, it would sell Natwest's fixed-income specialist, Greenwich Natwest, U.K. pension fund manager Gartmore Investment Management, and Ulster Bank Group in Ireland.
The bid would have to be approved by Natwest shareholders and could unravel if they first approve Natwest's previously announced bid for Legal & General Group PLC, an insurance company.
The unwelcome takeover offer sent the stocks of both banking companies on a roller coaster Friday. Mr. Cantwell said Bank of Scotland's chances are better than they would be in a friendly attempt to bring in its own management, which has a strong cost-cutting reputation.
Bank of Scotland said that if the offer goes through, its chief operating officer, Gavin Masterton, would be chief executive of Natwest.
"This is a recognition of the possibility that Banque Nationale de Paris demonstrated: Bank consolidation is doable in Europe, even when circumstances aren't friendly," said Robert Tortoriello, a partner at Cleary, Gottlieb, Steen & Hamilton. He was referring to recent maneuverings among top banks in France, which broke the historic pattern of collegiality and government-planned transactions.
Natwest released a response late Friday, saying it would recommend that its shareholders reject the bid. The offer is "unsolicited, unwelcome, and ill-thought-out," the company said in a statement.
Credit Suisse First Boston, Morgan Stanley Dean Witter, and Gleacher & Co., the investment boutique formerly affiliated with Natwest, are advising Bank of Scotland on the offer.