Big brother buy-outs

'For Barclays, being with the Woolwich could be the start of a better run of news'

Barclays' bid for the Woolwich is set to be the most popular thing the "Big" bank has done this year. Barclays has given us branch closures, chief executive Ray Barrett's bumper pay package, the ATM charges row and internet security breakdowns in quick succession. But what will the Woolwich deal, if it goes ahead, mean for customers?

Barclays' bid for the Woolwich is set to be the most popular thing the "Big" bank has done this year. Barclays has given us branch closures, chief executive Ray Barrett's bumper pay package, the ATM charges row and internet security breakdowns in quick succession. But what will the Woolwich deal, if it goes ahead, mean for customers?

It could mean good news for the fifth of the UK's banking customers who have their account with Barclays, because of the dramatically lower interest rates with the Woolwich "Open Plan" series of accounts. If the deal prompts Barclays to lower its own rates, then many customers could benefit.

The Open Plan Offset Mortgage enables customers to borrow on their current account at the same rate as their mortgage - around 5 to 6 per cent. This compares to Barclays' standard overdraft rate of 18.8 per cent. Woolwich customers can also use their debit cards at this lower rate. Barclaycard, although it has the advantage of being a credit card, charges over 18 per cent.

It appears Barclays wants to use the Open Plan accounts to lure customers away from rival banks. Woolwich has won many plaudits for its product. If I were an existing Barclays customer, I would demand the same low interest rates and high levels of service. Just how Mr Barrett will handle this remains to be seen.

Other high street banks have been trying to improve their products recently. Royal Bank of Scotland is seeking to cut overdraft rates at its own recent acquisition, NatWest, and HSBC has made similar changes at what used to be Midland. The threat to this rosy picture is the risk that the Woolwich management and its products will be swamped by the notoriously labyrinthine Barclays bureaucracy.

What does the deal mean to Woolwich shareholders? It seems to be good news, at least when set beside the poor share performance of the other former building societies since demutualisation. Investors in Woolwich are being offered 164p in cash plus 0.1175 of a Barclays share for every Woolwich share, which is 362p per Woolwich share, taking Barclays' share price on 8 August at 1667p. This is above the 296.5p that the Woolwich shares originally floated at on 7 July 1997, but investors might not think it a very healthy return for three years' wait. And whether they relish becoming Barclays shareholders is questionable.

I cannot suppress a pang of envy at the good fortune of one of my friends, who did a bit of carpetbagging with the Woolwich by putting a couple of hundred pounds into it before it demutualised. He pocketed the windfall, and now stands to get the Barclays payment. His wife is also a long-term Woolwich investor, making him a "triple-bagger."

The deal could prompt another round of branch closures and job cutting, especially amongst the Woolwich's 6,500 staff. From the customers' point of view, the Woolwich's 400 branches are concentrated in towns in the South-east which have other bank branches, so communities are unlikely to be left without a local bank.

For Barclays shareholders, the news is more gloomy. The share price fell on news of the bid talks because of the low interest rates Woolwich can offer. City investors are worried Barclays' profits will be hit if it emulates Woolwich's Open Plan account.

On the other hand, the shares could do better long term if the Woolwich management, under chief executive John Stewart, is given a role in shaking up the Barclays organisation. For Barclays, being "with the Woolwich" could be the start of a better run of news.

* John Willcock is the Personal Finance Editor of The Independent

* j.willcock@independent.co.uk