Cover Story: Nice little earner
To the surprise of many in the City, an American was hired to head the British institution of Barclays Bank. But Mike O'Neill is no outsider, and no stranger in the top circles of international banking. That know-how makes him the ideal man to help the troubled giant make the next big step, to a merger. But who is the ideal partner?
Wednesday 24 February 1999
BARCLAYS BANK began in 1690 as one of the many firms of goldsmith bankers in 17th century London. It was started by John Freame and Thomas Gould and James Barclay became a partner in 1736 after marrying John Freame's daughter.
Twenty small private banks came together in 1896 to form a new joint- stock bank which took the name of Barclay and Company. The largest were Barclay, Bevan, Tritton, Ransome, Bouverie and Co, the Gurney Group of banks founded in 1776 and based in Norwich and East Anglia, and Jonathan Backhouse and Co of Darlington, founded in 1774. Many of the families were Quakers and Barclays became known as the Quaker Bank.
The new bank had 182 branches mainly in the east and south-east and deposits of pounds 26m. It rapidly took over Bolithos in Cornwall, the Southwest in 1905 and United Counties Bank in the Midlands in 1916. In 1918 it merged with London Provincial and Southwestern Bank to become one of the "Big Five" and in 1925 three overseas banks in which Barclays held shares were merged to form Barclays (Dominion, Colonial and Overseas) in Africa, the Middle East and West Indies.
Its last major acquisition was Martins Bank in 1969. but Barclays DCO was merged into the parent bank in 1985. In 1986 Barclays set up a investment bank, incorporating its own merchant bank established in 1977 with stockbroker de Zoete & Bevan and stockjobbers Wedd, Durlacher Mordaunt.
In 1987 parts of BZW were sold and the remainder renamed Barclays Capital.
SIR PETER MIDDLETON has seen some dramatic resignations in his time - not least that of Nigel Lawson, who unceremoniously quit as Chancellor on a point of principle while Sir Peter was still Permanant Secretary at the Treasury. But even Sir Peter admits Martin Taylor's petulent walkout as chief executive of Barclays takes some beating. Suddenly, Sir Peter, a non-executive director of the bank, found himself thrust into the limelight once more as a stopgap chief executive. With that came the burden of dealing with a crisis of City confidence to compare with some of the worst the bank has seen in its long and distinguished history.
After a spate of accidents from the botched sale of part of its investment banking arm to an embarrassing involvement in the Russian bonds and Long Term Capital Management fiascos, Barclays appeared in disarray, out in the cold and wide open to an opportunistic takeover. Who in their right mind would want to take on that job as chief executive, many people in the City were saying.
Two months on, the perception could hardly be more different. Sir Peter has not only found someone who evidently does want to do the job, but he has also found someone of a calibre few thought Barclays capable of attracting. In doing so, Barclays is making a decisive break with the past; it is not only appointing an outsider to an organisation which has traditionally been run or dominated by family interests - a legacy from its history as a series of regional banks - but he is also an American. What's more, Barclays has had to agree to pay him one of the highest executive salaries in Britain. Is he worth it?
Mike O'Neill, 52, has spent a large part of his career outside the US - in Europe, the Middle East and Asia. He has worked in nearly every branch of the industry. His record as a trouble shooter, of improving financial performance and negotiating large-scale mergers is impressive. And there appear to be no Britons with a comparable range of experience and abilities.
Much of the focus has been on his salary, vast in British terms, but par for the course in America. The assumption has been that he will earn it by selling or merging Barclays, turning it into a larger and more robust financial institution capable of taking on the European and American giants. But as Mr O'Neill's track record shows, he can do more than that.
Barclays' sudden need of a chief executive came last November when Martin Taylor, the former journalist and Courtaulds executive, abruptly resigned when the bank's long-simmering differences over strategy came to a boil.
Sir Nigel Rudd, one of the bank's non-executive directors who was influential in the Mr Taylor's departure, is said by people close to Barclays to have led the swift and efficient search for a successor, which may have been initiated before Mr Taylor's departure. Four weeks later, Mr O'Neill was at the final interviews.
Sir Nigel, with his experience at Williams Holdings, would naturally look abroad. Equally, the head of group human resources at Barclays, Sally Bott, is an American, recruited in 1994 after 23 years at Citibank. Although the name of Mike O'Neill was virtually unknown a month ago in London, he already had a very well-established record.
The most striking thing about his curriculum vitae is that it is unusually international, especially so for a senior American banker, and it started early. Though he served in the US Marine Corps intelligence, he had also worked in Vietnam for his father's construction company. His mother was Belgian, and he spent many summers with the family at Stavelot, in the south-east, among the rolling hills of the Ardennes.
His Belgian background made him a natural to send to Brussels to begin his career with Continental Bank, an old-established Chicago institution then regarded as the JP Morgan of the Midwest. Continental had bought a local institution, and it was trying to win custom in the Belgian market. His language skills and knowledge of the country helped him adapt quickly and he became what a former colleague calls a "platform leader": others looked to him for advice and expertise. "He was the best I'd ever seen," says one old friend and colleague. By the time he left for London in 1977, he had won his spurs.
In London, too, he quickly adapted to life in the bank's Moorgate headquarters, from where its European operations were run. Again, Continental was trying to become indigenous, not just an operation for American companies and their expatriate employees. At 31, he was responsible for relations with large British companies - including Dunlop, Unilever and BOC - and dealt directly with chief financial officers. His ability to handle personal relationships and his analytic powers marked him for success. So did his ironic sense of humour, a rarity amongst American bankers not noted for their sense of the ridiculous.
O'Neill bought a house in London. Again, this was unusual: most bankers rent homes, thinking of London as just a posting on the road to success back at head office. But he was to spend a large part of his professional career in London. In 1980 he left for Hong Kong, where he worked in the company's regional office for Asia, and returned in 1983 as head of Continental's ship financing business. In 1984 he was named UK country manager.
Continental was going spectacularly wrong in the 1980s, expanding too swiftly with too little thought to the consequences, and its troubles came to a head. One of O'Neill's tasks was to try to maintain the company's access to funding through the Euromarkets as the bad news mounted, but it was too late. A series of bad lending decisions in the US threatened to bring it down and weaken the whole banking system in America. The Federal Deposit Insurance Corporation stepped in to take Continental over in August 1984. Though he had another job with First Interstate Bancorp as manager for Asia, O'Neill was seconded back on a leave of absence to clear up problem portfolios in Europe. "He was too junior to have had anything to do with the crash, but he was part of the solution," says a former colleague. He remained in London as an independent banking consultant through the mid-1980s, specialising in loan workouts and restructuring, with a heavy emphasis on the Middle East and Asia.
In 1989, as Continental returned to financial health, O'Neill was taken on for the third time, as managing director and head of mergers and acquisitions, chief of staff for vice-chairman Richard Huber and from 1993, as chief financial officer.
He gained a reputation for a tough attitude towards credit risk, rigorous cost control and what he called "disciplined expansion", after his years in London and his experience of Continental's disastrous dash for growth in the 1980s. He got rid of First Options, a clearing and finance subsidiary, and outsourced data processing and legal services: they were not pivotal to the company's bottom line, or to shareholder value. He helped trim Continental's non-performing property loans in California and elsewhere, improving the company's credit quality. But he also bloomed in a difficult political atmosphere, getting on well with almost everyone in the company, brokering factional differences and acting as de facto number two to the chairman, Tom Theobald.
He was a natural choice to run the company's negotiating team in 1994 when it began talks with Bank of America, the San Francisco giant that was, like all US banks in the mid-1990s, searching for new markets and partners. BoA's previous attempt, purchase of Security Pacific, had not worked out well, and both sides were cautious. But the deal that resulted was well received by virtually everyone: many of the senior officers of Continental got generous golden parachutes, some (including Mr O'Neill) went on to senior positions in the merged company, and many of Continental's corporate clients stayed with the group, including the UK conglomerate Hanson. Shareholders seemed happy too.
For the first year, O'Neill moved into the background, running the equity investment portfolio. But in late 1995, the company's new chairman, David Coulter, abruptly promoted him to chief financial officer. He had got to know O'Neill during the merger negotiations; the chemistry between them was good, and he wanted to reshape the organisation.
Under Coulter and O'Neill, Bank of America went through a comprehensive reworking. Each area of the company had to make money, or go; cash was ploughed back into the business or returned to shareholders with buybacks. The company's consumer finance section went; so did hundreds of retail branches and thousands of jobs. O'Neill had a central role, putting in place new capital control models adjusted for risk, keeping the investment community and shareholders happy with a new emphasis on buybacks, and bringing down financing costs. In a year, the ratio of operating expense to revenue was among the industry's most competitive.
He would have had a fair shot at the top job, if Coulter had moved on. But Bank of America was seeking further expansion through merger, while the US industry remorselessly consolidated. As the market increasingly forced even large regional players to seek national roles, Coulter took the bank into a new relationship. When Bank of America and NationsBank merged in September 1998, O'Neill returned to his role as dealmaker: but the result was less successful. Coulter and O'Neill were quickly sidelined by NationsBank people, who rapidly emerged as the new masters. He was on the way out.
But O'Neill would figure on anybody's list of possible top jobs. His career gives the impression of a rounded person with very varied experience and skills. He has the broad international background, and considerable personal strengths: it is hard to find anyone who has worked with him who has a harsh word to say about him. He has a strong analytical mind. His banking experience has been broad, but especially strong in working out problem portfolios and building private banking, areas where Barclays has some interest.If Lombard Street was looking for someone to take Barclays into a marriage with another bank - especially an American one - then it could not have done better. He has been received uncritically, partly because there was so much perceived need for someone new at Barclays. "People are looking for a leader," says one observer. "You had Buxton, who was not in any way a leader and Martin, who is very clever, didn't regard team leader as part of his job".
The issue of compensation raised its head quickly: O'Neill is to be paid a salary including pensions and allowances worth pounds 2.3m in his first year, plus performance-related share options worth a further pounds 3.4m. That may be a lot by British standards, but for America it is unexceptional. The issue was talked through with Barclays institutional shareholders.
Many of the problems with a new arrival can be discounted. He has good contacts in London, his postings have taken him around the world, and his wife Patricia has a Foreign Service background. But the publicity will come as a new departure, and that may sting if he decides to cut jobs, and the press turns critical. He has never sought the limelight, his friends say, and there are remarkably few profiles of him in the US press. "Mike is all substance," says a former colleague. "It allows other people to take the credit." But if things go wrong, he will still take some of the blame. There are a series of high-profile problems waiting. The first is Barclays Capital, the investment arm which went so wrong in Russia. He has said he will not float it off wholesale, as some had expected, because the group needs its services. But he is likely to wind up quickly its more risky or less profitable activities.
The second issue is the bank's personal banking side, one of its great but (in the view of some Barclays insiders) unappreciated strengths. John Varley, the division's highly-regarded chief executive, recently reorganised it to combine disparate products and divide the sector between mass market and wealthier customers. A marketing blitz and rethinking is likely.
They must find out "how to make it motor," says one ex-banker. While Mr O'Neill was at Bank of America, it introduced a stress on "zero defect service" to keep customers happy, and launched a "switch blitz" to bring in new ones.
The main problem is the long-term future of Barclays. "Given the changes in Europe, I would doubt if Barclays will be an independent business in five years," says one observer.
Mr O'Neill has discounted a swift merger, though discussions with various others, including Royal Bank of Scotland, are no secret. It is hard to identify a possible American bank partner, and the experience of British banks in the US is spattered with horrible failures. The return on capital of most European institutions is so low as to make a European partner unattractive.
That leaves British partners, a ticklish subject. One of Barclays' major tasks will be to persuade the government and the regulatory authorities that a large-scale merger in Britain - which would reduce consumer choice and probably lead to mass job losses - is as important to the long-term health of the sector as the shakeout in US banking in the last five years.
Technology, global competition and the convergence of markets drove Continental towards Bank of America, then NationsBank: it will probably take Barclays in a similar direction, say sources who have followed Barclays' strategy.
Europe, like America in the 1990s, is creating powerhouses with the grasp and depth to handle the single currency area. Ultimately, it O'Neill's experience of that process, and what it might imply for Britain will decide whether he succeeds, and where he takes Barclays.
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