As Peter Burt, chief executive of the Bank of Scotland, looks out of his office he surveys the whole of Edinburgh's financial district. In his sight is Europe's fourth largest financial centre, a bastion of safe and respectable money invested in pension funds and insurance. Peter Burt knows that if Edinburgh is to hold its position in the world of finance, it needs to break the bounds of pinstripe respectability and start fighting.
That's why the Bank of Scotland wants to buy National Westminster Bank, which also owns the Ulster Bank. The NatWest isn't best pleased and is fighting for its independence. It is a fight made more complicated by the fact that the Royal Bank of Scotland decided it too would bid for NatWest so now a three-way battle is on.
After three years' preparation the Bank of Scotland moved when the NatWest made a bid for Legal and General in the summer of 1999. The bank said NatWest was inefficient with a cost to income ratio in the mid-60s, compared with its ratio of 48. The Bank of Scotland said it would strip cost out of the NatWest, give it a stronger direction and raise the group's performance.
The Bank of Scotland's bid would mean NatWest subsidiaries such as the Greenwich NatWest and Ulster Bank would be sold off. The offer to NatWest shareholders is £1.75 sterling (€2.83) of Bank of Scotland shares, £1.90 in a loan note and a special dividend of £1.20, paid for by the sale of Ulster bank.
Critics say the special dividend is a messy way of raising the bid price.
The NatWest took one look at a bid that promised to find more than £1 billion of savings and which described senior management as inexperienced, and rejected it. A war of words broke out, proving that respectable bankers can be as childish as the rest of us. The NatWest said the Bank of Scotland was in no position to criticise as it was no more than a retail bank, while the Bank of Scotland derided NatWest's record.
The Department of Trade and Industry (DTI) said the bid could go ahead and so the 60-day period for shareholders to decide was started. However, the clock was stopped when another Scottish financial institution came into the frame. The Royal Bank of Scotland also thought it would like NatWest's 6.5 million customers and corporate banking services, so it made a bid.
The Royal's bid is made up of 96 pence of shares and £3.05 in loan notes and would not mean the sale of Ulster Bank. The DTI ran its rule over the Royal's offer and said it too was legitimate and so the 60-day clock began again, with the time running out on February 14th. It is going to be a wonderful St Valentine's Day for one bank - but possibly both Scottish bidders will find themselves crying into their consultants' fees.
The NatWest, pricked by the criticism, has decided to fight for its freedom. A new chief executive and deputy have been appointed to toughen up the operation. A radical overhaul has begun which may see the NatWest make the £1 billion savings without losing ownership. The banking unions are furious, as their members are losing jobs no matter what the outcome is.
The Scottish banks aren't too happy either, as they appear to have given free advice to NatWest without any return.
The City is undecided. It detects flaws in the Bank of Scotland's bid and thinks it may have over extended. The special dividend is seen as risky because it presumes a return from the Ulster Bank. Everyone involved views the Ulster Bank as a good operation. Observers think the £1 billion in cost savings might be exaggerated. The Bank of Scotland's offer values a NatWest share at £14.72, £2 above its market price.
The Royal's bid values NatWest at £1.00 above its market price.
The Royal has the larger capitalisation and significantly higher market share price than the Bank of Scotland. There is greater compatibility between the Royal and the NatWest, but the City view is that shareholders could well stick with the NatWest, particularly given the new backlash against mergers and demutualisation in the financial sector.
But the bidding war has signalled a new attitude in Edinburgh. Both the Scottish banks have embraced new technology. The Bank of Scotland already runs telephone banking services through Europe, including a mortgage service in the Republic. Peter Burt's first attempt at expansion was to run a telephone banking service for the American TV evangelist Pat Robertson. It proved disastrous with Scottish customers boycotting the bank because of Mr Robertson's antigay and allegedly racist preaching. Mr Burt had to fly to the US and cancel the deal only weeks after the contract had been signed.
But the Bank of Scotland's enthusiasm for expansion is undimmed. The truth of the new technology such as phone and Internet banking, is that not only are branches not needed, or counter staff, but the idea of national banks itself is outdated. Globalisation means that banks must belong to the world of cyberspace and service any market they can access.
The Royal Bank had come to the same conclusion. Like the Bank of Scotland, the Royal prides itself on being more efficient than any UK rivals. Unlike the Bank of Scotland, the Royal has a much larger corporate operation. It too needs to expand to remain competitive. Both banks know if they don't buy out rivals, then it is only a matter of time before they are swallowed by a predator.
"There is no reason, just because we are in Scotland, we can't do it as well as anyone else," says the corporate affairs spokesman for the Bank of Scotland, Mr Alex Pagett. "What you are seeing at the moment is a combination of confidence, aggression and awareness that Edinburgh can't compete if it stands still."
