Following on from Rob's (TMFEssex) interesting Sector Dissector analysis of the banking sector, I thought I would dedicate today's Lunchbox to the bid that set this sector alight. At the end of September the Bank of Scotland (LSE: BSCT ) made an audacious bid to buy National Westminster (LSE: NWB). It was audacious mainly because of the relative size of the two companies: at yesterday's closing prices NatWest had a market capitalisation of £22,882 million, while Bank of Scotland had a market capitalisation of just £9,002 million, making them only 40% of the size. We are used to seeing big companies swallowing up small ones -- not the other way around!
How can a smaller company actually bid for one that is so much larger than it is? Well, first of all, while the bid which is valued about £22 billion it is not being financed by cash. Bank of Scotland is offering 1.6 new shares and £1.20 in loan notes for each NatWest share. This means that if the take-over goes through, and after all the dust has settled, a shareholder in National Westminster will not immediately receive any cash from Bank of Scotland, but will become a shareholder in Bank of Scotland. Indeed, NatWest shareholders will end up with 68% of the group's total equity. In many ways the take-over of NatWest by the Bank of Scotland is not a take-over of one business by another, it is more like the replacement by NatWest's shareholders of the whole management team at NatWest by the management team of Bank of Scotland.
So what does Bank of Scotland expect to get buy buying NatWest? Well, Bank of Scotland is a much more profitable business that NatWest, and over the last five years they have grown shareholder value much more quickly. They expect to be able to translate this success to the much larger business. Bank of Scotland claim that they will be able to make £1 billion a year savings after the take-over. They will also raise a large sum of money by the sale of NatWest's property portfolio valued at £1.4 billion, and sell of some of NatWest's subsidiary companies, for example Coutts (the Queen's bank), NatWest Life, Ulster Bank, Gartmore and Greenwich NatWest.
The management of NatWest has rejected the offer, but it now looks very unlikely that NatWest will remain independent. The board should now concentrate on getting the best deal for their shareholders, but many of their statements seem to smack of people worried about their own position. There has been much talk about them trying to find a white knight, who will come in and maintain the position of many of the senior management. If that means a better return for shareholders that would be great, but if this is done simply to enable the Directors of the company to retain their comfortable positions then we Fools say "tosh" to that! Get what is best for the shareholders not for the management!
It will be very interesting to see how this all pans out in the long run. Bank of Scotland is much smaller than NatWest. It is easy for the management team of a small and successful company to believe that they can do no wrong, and that their skills can easily be turned to managing a much larger business. Bank of Scotland has 320 branches, NatWest has 1700: managing a much bigger business requires different skills, does Bank of Scotland have these skills? Only time will tell.
It used to be said in boxing circles "always back a good big 'un against a good little 'un": well, what happens when you pitch a good little 'un against a bad big 'un; who will win?
Four-fifths of the FTSE 100 posted gains at lunchtime after a buoyant morning in which traders took solace from some soothing words about the pysche of American consumers. This speech was delivered by a certain Alan Greenspan, who happens to be the US Federal Reserve Chairman.
This in turn helped financial stocks. Many City Wise guys now believe US interest rates will remain the same for a while. This, combined with Wednesday's strong third quarter results, lifted fund manager Amvescap (LSE: AVZ) by 36.5p, or 7.4%, to 527p. Yesterday the shares shot up 12.1%! The company has strong exposure to US stocks.
On the domestic front financiers continued to react to the news earlier in the week that NatWest (LSE: NWB) has rebuffed the Bank of Scotland's (LSE: BSCT) hostile £21b bid. Irish Life & Permanent are apparently circling NatWest's Ulster Bank arm, which the high street giant has said it wants to flog.
Also Alliance & Leicester(LSE: AL.) rose 19p, or 2.2%, to 892p on speculation that the former building society might make an offer for the Woolwich (LSE: WWH).
Bargain hunters dived into go-go cement maker Blue Circle (LSE: BCI), which made a profit warning yesterday. The shares improved 16.5p, or 6.1%, to 286p. This is still 50p below their 336p level of two days ago.
Top technology stock ARM Holdings(LSE: ARM) was also in demand following NASDAQ's recovery last night. The shares shot up 213.5p, or 14.1%, to 1725p.
Golf club operator Clubhaus (LSE: CHA) has bought three more golf courses for £12.2m. However, the illiquid stock remained unchanged at 71p on no volume. Rival PGA European Tour Courses (LSE: PGA) reported a doubling of pre-tax profits to £1.06m at the interim stage. The shares moved forward 1p, or 2.7%, to 37.5p.
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