Jeremy Warner's Outlook: As Crosby takes aim, is Abbey worth the risk?

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HBOS has yet to enter the bidding for Abbey National, yet it is already fighting its corner as if in the full intensity of battle. Yesterday's broadside was a letter to the European Commission complaining that Santander Central Hispano's (SCH) continued relationship with Royal Bank of Scotland Group (RBS) would pose a serious threat to competition in the UK market if SCH succeeds in its takeover bid for Abbey National. HBOS demands that the two banks be required to dismantle their cross shareholdings and directorships as a condition of regulatory clearance.

The cross shareholdings are in truth of little significance, as they are too small for either party to be able to exert any influence over the other, but the interlocking directorships are plainly rather more of a problem. With representation on each other's board, each bank is privy to the inner most secrets of the other's strategic thinking. It cannot be right that through SCH, Britain's largest bank - RBS - would have open access to the plans and competitive thinking of Britain's sixth largest. This would be a bit like Tesco having a man on the board of Wal-Mart, through which Tesco would be able to learn everything that Asda was planning.

SCH is confident that it can gain regulatory approval without damaging its relationship with RBS, but this is only bravado speaking, and privately it must have realised that the Scottish connection would be the first casualty of its decision to bid for Abbey National.

The original intention was to bid in conjunction with RBS, which under the terms of the deal would have taken over the administration of Abbey's mortgage book. But the Abbey board felt unable to recommend any such transaction, given its obvious regulatory risks. SCH is now fully reconciled to building its own platforms in the UK, and if abandoning the alliance with RBS is part of the price that has to be paid, then so be it.

That relationship has in any case largely outgrown its usefulness. Forged years ago when the two of them were still smallish, regional banks, it is today of little more than sentimental value. With both banks now among the top 10 in the world, the two are today much more likely to come up against each other as rivals than as bedfellows. They've both outgrown their early love affair.

Emotionally, Sir George Mathewson, the chairman of RBS, would be extraordinarily reluctant to give it up. For him, the Spanish connection is inextricably linked with both his own and his bank's good fortune. From small beginnings little more than 10 years ago, RBS and SCH have grown up together to become perhaps Europe's two most successful banks. There's an interlinking of fortunes which superstition alone would dictate should be left untouched for fear of angering the gods. Yet for Sir Fred Goodwin, RBS's chief executive, there is no such attachment. He's got none of Sir George's history, and clinical operative that he is, I doubt he would be bothered by its demise. Indeed he might even welcome any loosening of ties.

HBOS will nonetheless regard it as an important victory if it succeeds in breaking the two up. Rivalry between Bank of Scotland (part of HBOS) and RBS is still as strong as ever. For HBOS, any collateral damage the battle for Abbey might cause RBS would be regarded as a bonus. Yet in the end, all this skirmishing is just a sideshow in the wider game.

In my view, HBOS's chances of successfully countering SCH are still quite slim. James Crosby, its chief executive, seems to believe he owes it to his shareholders at least to try, and it is perhaps always better to try and to fail than never to have tried at all. For him, the prize is the mouth watering one of the biggest cost-cutting merger since RBS's acquisition of National Westminster Bank. Yet his already-slender chances of being waved through without a Competition Commission investigation would shrink to nothing at all if rival UK banks enter the fray.

HBOS thinks of itself as the UK bank with the least challenging competition case to argue. It is hard to share that confidence. HSBC combined with Abbey would have a larger share of the current account market than the HBOS alternative, but not by much, and its share of the mortgage and savings deposit market would be much smaller. Other UK banks might have more of a problem, but that won't stop them throwing their hats into the ring, if only for the purpose of thwarting HBOS. They can afford to take a more sanguine view of SCH.

In making his bid, Mr Crosby therefore has to ensure that his terms are sufficiently attractive to make it worthwhile for Abbey shareholders to forgo the certainty of the existing offer from SCH for the possibility that HBOS may eventually, after a six-month investigation, be allowed. That's a big ask, especially as SCH is likely to respond by sweetening its terms and providing a full cash or cash equivalent alternative to its present shares and cash offer.

All the signs are that Mr Crosby will bid. It may be a bigger gamble than he thinks. Peter Ellwood's reputation as chief executive of Lloyds TSB never recovered from the ruin of his bid for Abbey National, which was blocked by the Competition Commission. The City was left wondering, "what now for Lloyds TSB?", and Mr Ellwood was unable to provide an answer. Tread carefully, Mr Crosby.

¿ Overpaying ARM

Never invest in anything you cannot understand, says Warren Buffett. After agreeing to pay an astonishing $913m (£504m) for a US rival, ARM may be a case in point. One of the glamour stocks of the dot.com boom, ARM designs software for specialist microchips, mainly for use in mobile phones. Artisan, the company it is proposing to buy, is a leading provider of physical intellectual property (IP) components for the same sort of integrated circuits as ARM caters for, so on the face of it, the two are highly complementary. Marry ARM's software design with Artisan's components' IP, and you end up with a form of vertical integration which in something as small as a microchip would seem a more than logical response to a fast changing market.

Yet it wasn't the industrial logic the City was questioning yesterday when it marked the shares down by 19 per cent. Rather, it was the price. At around 60 times earnings and approaching 10 times sales, Artisan is being bought on multiples more suited to the heady days of the technology bubble than today's downtrodden investment environment. Most of the consideration is in ARM shares, so Artisan's vendors will have suffered alongside ARM shareholders in yesterday's sell off. Even so the deal is bound to be earnings dilutive, at least initially, and with the world economy faltering again, the timing just doesn't seem to be right to be splashing out with apparent abandon on New Economy expansion.

Warren Buffett had in mind all technology shares when he warned about the dangers of investing in things you don't understand, but intellectual property and microchips are a particularly difficult thing to get your head around. By the company's own admission, the technology has reached a level of sophistication where it is beginning to outgrow the known laws of physics. Protection and effective exploitation of intellectual property in such an environment becomes extraordinarily difficult to achieve.

Sir Robin Saxby, the chairman, and his chief executive, Warren East, will struggle to convince that this is the right move for ARM. Like virtually every other technology stock, the shares have suffered a calamitous fall since the heady days of the dot.com bubble. Yet there was a conviction that ARM was one of the long-term winners, and its shares have maintained a strong investment following. Many of the technology floats of the late 1990s turned out to be little more than candyfloss. By contrast, ARM seemed to have a reasonably compelling growth story to tell.

The trouble with this acquisition, ARM's first of any significance, is that it is strongly suggestive of an industry which is already past its main growth phase. Consolidation seems now to be the order of the day, and expensive consolidation at that.

jeremy.warner@independent.co.uk

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