How a high-stakes poker game stoked a bitter banking rivalry

The Battle for NatWest was brutal, a combination of a fist-fight and a high-stakes poker game played out by Scotland’s two banking leviathans. It was a civil war which had been coming for more than two and a half centuries, as Royal Bank faced old adversary Bank of Scotland.

The animosity runs deep. The Royal was founded to counter the Jacobite links of the Bank of Scotland and the very different traditions were well illustrated in September 1745. As Prince Charles’s Highland army crossed the Forth, John Campbell, the Royal’s chief cashier, moved the bank’s cash, securities and plate into Edinburgh Castle, only to find Bank of Scotland had moved in its assets the day before.

The battle for NatWest more than 250 years later may have been for a bank rather than a nation, but the rivalry was equally intense. When Bank of Scotland slapped in a 21 billion bid in September 1999, the Royal knew it could not sit on its hands. As an insider recalls: "This was too big to miss. Nobody was going to stand on ceremony."

The Royal hired Merrill Lynch and Goldman Sachs, two of the biggest predatory cats in the corporate jungle, to fight the once-in-a-generation UK banking opportunity. It was a fight the Royal intended to win.

It was an open secret the Royal had been sniffing around Barclays, but it was still nervous. After sounding out financial journalists at an informal dinner, Mathewson was cautious: "I’m unsure whether the City would react favourably to a hostile banking takeover."

Bank of Scotland’s hostile bid for NatWest changed the cosy consensus - and the Royal plotted its response.

In what is now seen as a masterly strategy, chief executive Mathewson and his deputy, Fred Goodwin, did virtually nothing publicly for two months. As Bank of Scotland made all the running, the Royal kept its powder dry. It was the end of November before it finally fired off its own takeover bid of 26.5 billion, trumping an increased 25 billion Bank offer.

"The Bank of Scotland bid did not surprise us," recalls Mathewson. "We had discussed the possibility informally, but we would have been reluctant to start a hostile bid. Bank of Scotland going first enabled us to portray our bid as non-hostile."

Just how could these banking upstarts even consider taking over NatWest, a company more than twice their size?

Both banks knew they were being audacious but were certainly helped by the arrogance of NatWest. PR spinners talked of the "Scottish hordes" attacking, while NatWest chairman David Rowland famously dismissed the Bank of Scotland’s "toytown treasury" business.

But the Scottish predators knew they had stronger records and City moneymen sensed NatWest was banking blood in the water. The sharks began circling for the kill.

The Royal was well prepared for the fight. "When we started looking at NatWest, we knew their business," Mathewson says. "We had a sophisticated Treasury operation and 400 branches in England."

NatWest’s crucial high street branch business was struggling and its management team, led by Derek Wanless, was not highly regarded. The final straw was the bank’s failure to complete a tie-up with insurer Legal & General in September 1999; Bank of Scotland slammed in its 21 billion bid just a fortnight later.

It was not hard for the Scottish banks to rubbish NatWest’s poor record. They punctuated these attacks by placing elegant Edinburgh footwear into each other’s nether regions. Bank of Scotland’s chief executive Peter Burt dismissed Goodwin as "Fred the Impaler", one of the nicknames acquired from his fierce cost-cutting years at the Clydesdale (Fred the Shred was a rhyming favourite).

It got personal. NatWest’s Rowland cruelly dubbed Burt’s No 2, Gavin Masterton, who would have run NatWest after a takeover, as "the invisible man" for an alleged charisma deficit. Not to be outdone, Mathewson said integrating a bank of NatWest’s size was "a job for a younger man". Goodwin was a boyish-looking 41, Masterton 57.

The insults were traded up to the deadline of February 2000, as the banks fought for crucial votes of institutional investors. The first to go public with its vote came down for Bank of Scotland. It was a chilling moment for the Royal Bank but events swung quickly. Other big guns, including Standard Life, went for Royal Bank. When the result came, it was a Valentine’s Day massacre; the Royal Bank romped home. There were no cards or flowers exchanged between the protagonists, just a rueful comment from a battered and bruised Peter Burt.

"It was the nearest run thing you ever saw in your life. It was certainly the nearest run thing I have seen in my life," he said, quoting the Duke of Wellington on a bloodier battle.

The Royal had won Scottish banking’s civil war, but there was the small matter of integrating NatWest. It was a modest, three-year operation which saw the Royal shake out cost savings and revenue synergies of more than 2 billion.

As the shredding gathered pace, Goodwin succeeded Mathewson as chief executive in 2001, Mathewson taking over from Viscount Younger as chairman. It was a pivotal point, and the Royal gaze again turned west to America, to extending the Citizens Financial operation. This was the domain of amiable American Larry Fish, who mixes a folksy manner with a bear-trap mind. Goodwin cannot take credit for the strategic push into America’s eastern seaboard, but the expansion accelerated sharply under his stewardship and Royal Bank is now the sixth biggest in the US, not overawed by competing names like Citigroup, Wells Fargo and Bank of America.

It has spent around 9 billion extending its reach and the two biggest acquisitions have been on Goodwin’s watch: $10 billion for Charter One Financial last year, $1.32 billionn for Mellon in 2001.

Royal Bank now makes 1 billion annual profits in America, and sponsors the Superbowl and golf legend Jack Nicklaus. Citizens has come a long way since Fish characterised his banking philosophy as "If you can’t drive to it, don’t lend to it". He has no need to jump on a bus, as he and Goodwin both earned around 3 million in salary and performance-related pay in 2003. With group profits and dividends pushing ever upwards, shareholders aren’t complaining.

Goodwin has not given up on smaller acquisitions nearer home, snapping up Irish consumer finance business First Active and Churchill insurance.

It is far from a one-man show at Royal Bank; it couldn’t be, it is too big.

Goodwin has key lieutenants, but there is no doubt who calls the shots. As chief executive of Clydesdale, the youthful Goodwin gave an indication of his management style. There was no time for "cynics, spectators or dead wood," he said.

One leading City banking analyst sums him up thus: "He comes across as pretty affable, but beneath the exterior, there is a rod of steel. In the upper circles of the Royal Bank, it is known Fred knows what he wants - and gets it."

Goodwin wanted one thing badly - to move Royal Bank into a modern HQ befitting its superleague business status. And Gogarburn beckoned.

RISE AND RISE OF FRED GOODWIN

IN BANKING terms, Fred Goodwin is relatively youthful at 46, but he has certainly come a long way. One senior insider at Royal Bank says this of his management style: "He’s driven but it’s leavened with a mischievous sense of humour. You can take the boy out of Paisley, but you can’t take Paisley out of the boy."

Mr Goodwin attended Paisley Grammar School before studying law at Glasgow University. He joined accountants Touche Ross and got a project ambitious accountants can only dream of, winning his spurs as chief operating officer of the worldwide liquidation of Bank of Credit and Commerce International in 1990.

At just 32, Mr Goodwin was in charge of 1,000 people with teams from London to Abu Dhabi and the Cayman Islands that eventually got back half the money from one of the most complicated, high-profile financial frauds ever.

He was then headhunted for the job of deputy chief executive of Clydesdale Bank in 1995, getting the top job a year later at 38 before he was poached by Royal Bank in 1998, then quickly succeeding Sir George Mathewson as chief executive in 2001. At the height of the NatWest takeover battle, there were murmurs from both the target and rival Bank of Scotland that Mr Goodwin - clearly king in the wings although Mathewson was still number one - was too young to run a major public company. History has proved otherwise.

Mr Goodwin is both politically savvy and well connected.

He has chaired various government task forces including examining the work of credit unions and the New Deal programme.

Away from the office? He is married, loves fish and chips and says one of his hobbies is doing up classic cars. He’s come a long way from buying his first car (a Hillman Imp) from the proceeds of a summer job at a Scottish power station.

And his style? "He’s not desperately patient," says one Royal Bank executive wryly. He is also adept at the faux-diffident put-down. On the possibility of the Royal being allowed to pick up one or two of the UK’s smaller financial services groups, he says: "There may be some possible mercy killings." And of former telecoms regulator Don Cruickshank’s recent claim that banks were still ripping off customers five years after his report to the Treasury, he says: "Anyone who thinks nothing has changed in banking for the past five years is a bit detached."

MARTIN FLANAGAN