How boring old Lloyds turned the tables on its brash rival HBOS
Suddenly life is exciting for Lloyds TSB. For years, Britain's biggest current account provider was the poor relation of British banking as its pedestrian growth in UK retail and mid-level corporate banking was outshone by fast-growing rivals riding the wave of cheap credit and globalisation.
Eric Daniels, the American chief executive, sought and received little attention. His talk of growing by building better understanding of his UK customers seemed dull compared with the rapid growth of rivals such as Royal Bank of Scotland and HBOS.
But yesterday Mr Daniels and his chairman, Sir Victor Blank, were able to claim vindication when they unveiled the takeover of HBOS for a bargain price.
Lloyds' relied chiefly on its retail deposit base for funding and was financing its lending easily in the wholesale money markets when necessary.
By contrast, HBOS had been in danger of collapsing as its slumping share price drained the confidence of wholesale and retail depositors. Andy Hornby, the young HBOS chief executive, was forced to sell to Lloyds, one of the big four UK banks that he had vowed to compete with through aggressive pricing and marketing.
There was no disguising Lloyds' satisfaction in achieving what it thought was out of reach – massive in-market scale that could be used as a launchpad for the international expansion it had been seeking for years. "We are creating a great British bank that will be capable of international [expansion] in due course," Sir Victor said.
Both sides said they had thought about the possibility of combining with the other for years and that Mr Daniels and Mr Hornby had tossed the idea around informally. HBOS had even been advised by its lawyers that a bid for Lloyds - when HBOS was the bigger bank - had a 60 per cent chance of success.
Things started to creak into action six weeks ago. "Eric and I had a conversation in my office and we thought it was an appropriate moment to give Andy a call and have a conversation," Sir Victor said.
Mr Hornby added: "Eric knew that the phone call was likely to get a positive response."
But it was clear almost all the work on the deal was done this week as HBOS's shares went into freefall. At a gathering held by Citigroup, the US financial giant, at Spencer House in London's opulent St James's, the Prime Minister assured Sir Victor that if Lloyds wanted to rescue HBOS the Government would see to it that competition concerns would not be a bar.
The Government's waiver was the key to the deal. Sir Victor said that HBOS could not have withstood the uncertainty of a year-long investigation by the Competition Commission.
The Lloyds chairman insisted that Mr Brown's promise was the only concession made by the Government. Lloyds nearly bought Northern Rock before it imploded but was refused £30bn of liquidity guarantees by the Bank of England. "We have neither sought nor been given any assurances," he said, adding that the combined bank could support itself.
The banks and their advisers – Merrill Lynch for Lloyds and Morgan Stanley for HBOS – started two days of talks that resulted in an agreement on Wednesday evening. HBOS had been pushing for up to £3 a share. But with Lloyds holding all the cards the all-paper deal was struck at 232p based on Lloyds' closing price on Wednesday.
Sir Victor and Mr Daniels will run the bank. The last-minute nature of the deal was exposed by holes in their plans, including the fate of Mr Hornby. He said he would like to play a part in the combined group, while Mr Daniels praised him as a competitor. But his fate remains in the balance. Mr Daniels and Sir Victor also seemed to have no idea what the bank would be called after the merger.
Many HBOS shareholders accept that the game was up and that a 56 per cent premium to the bank's battered share price was a fair offer. But Schroders fund manager Richard Buxton pressed Mr Hornby yesterday on why HBOS had sold up when the Bank of England had extended its special liquidity scheme on the day the deal was brokered.
Mr Hornby defended the decision, saying markets were so turbulent and HBOS was under such pressure that it had to find a more secure home. A chastened Mr Hornby yesterday refused to blame speculators for forcing down the share price and said the buck stopped with him. The structure of HBOS's balance sheet, which required wholesale funding for nearly half its lending, had been caught out by the "febrile" market turmoil. "If there is a lesson to be learnt, and we will look for lessons, it is that balance sheet is always critical," Mr Hornby said.
After yesterday's press conference, Mr Hornby went for a sandwich with Sir Victor while Mr Daniels left the building of Dresdner Kleinwort, Lloyds' broker, lighting a cigarette as soon as he got outside the door.
How did it feel to do this deal after being mocked as boring for so long?
"Oh we're still boring," he grinned.
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