Sir Fred forced to go cap-in-hand to investors for cash

Buying ABN Amro was a deal the Royal Bank of Scotland chief had to pull off. But will his triumph now turn to disaster? asks Simon Evans

Just over a year ago Sir Fred Goodwin, chief executive of Royal Bank of Scotland, stayed the night at Geneva's plush Four Seasons hotel. He was there for a secret meeting with Banco Santander's Emilio Botin, and Fortis boss Jean-Paul Votron. They were to help him with his plot to break up and bid for ABN Amro, the Netherlands' biggest bank.

But John Varley, chief executive of Barclays, had already put in a bid for the ailing Dutch house, in play after being ambushed by the hedge fund TCI. That did not matter to Sir Fred, who for years had harboured ambitions to transform RBS into a European player.

Sir Fred had proved himself in the UK, having masterminded the textbook purchase and integration of NatWest for £21bn in 2000. The rival bidder, Bank of Scotland, was left to scuttle away with its tail between its legs, later consoling itself with Halifax.

And Sir Fred wasn't about to lose out this time – his pride would not let it happen. So in came the consortium with a £49bn knock-out bid that left Barclays on the back foot. Varley had been blown out of the water. He must have been furious at being usurped, but the sense of relief in Barclays' Canary Wharf skyscraper became evident later on. One can only imagine the devastation the impact of winning the race for ABN Amro would have had on it.

With the deal effectively done, all eyes focused on how Sir Fred would finance it. Rumours abounded that Merrill Lynch, RBS's adviser, wasn't prepared to underwrite any fundraising, but they proved unfounded as RBS managed to get away a £4.2bn preference share offer, the largest undertaken by a bank at the time.

That RBS raised the cash as the world's financial markets were being gripped by fear of the credit crunch and the collapse of Northern Rock was no mean feat. Sir Fred was proving the naysayers wrong again. Europe's regulatory bodies were also happy with him and his consortium, waving through the deal without any fuss at all.

By October it was closed, with the consortium paying £49.3bn – 93 per cent of which was made up in cash. It wasn't cheap, but he'd done it again.

One Scottish newspaper trumpeted at the time: "It's unquestionably the greatest coup by any Scottish business and, as evidence of the vitality of the 'new Scotland', it's surely something we ought to be cheering lustily."

Sir Fred's audacity had paid off but many in the City remained uneasy at the extent to which RBS had stretched itself. While most companies, banks and people were reining in their expenditure, Sir Fred was flashing the cash and it was showing in the company finances. All banks have to put aside cash, the size of which is dependent upon the perceived riskiness of the assets it owns. RBS's capital ratios were stretched to the limits.

Nevertheless, talk that a rights issue or a shoring up of the company's balance sheet was needed were readily rebuffed by Sir Fred and his foot soldiers. They ploughed on regardless.

In December, at the presentation of company results, Sir Fred remained resolutely robust, some might say bizarrely chipper. Write-offs at RBS related to the credit crunch were slightly higher at £1.25bn, but light years away from the travails being endured by banks across the Atlantic and in Europe.

"It is very unfashionable to be rabidly positive about the UK economy, but it is not in bad shape," remarked a cheerful Sir Fred, who remained undented by missing out on a £1m bonus as the bank's share price fell.

The City decamped for the long Christmas break less worried that RBS was suffering. But just days after the New Year return, analysts began warning their clients that the RBS situation wasn't sustainable. Something would have to give.

Mike Trippett, analyst at Brewin Dolphin, said in a note, entitled "Rights Said Fred?", on 11 January, that "a rights issue cannot be ruled out" but "on balance we would assign a lower probability".

But it was a note by Credit Suisse analyst Jonathan Pierce, the man whose stock was already high after calling the collapse of Northern Rock, which caused the most consternation. "This is the only remaining option," said Mr Pierce, noting that if a rights issue was pursued to the tune of the £12bn needed, there would be one hell of a stigma attached to it. "In the last 15 years, only one UK bank, HBOS, has done a major non-acquisition rights issue," he added.

"It might be seen as an admission that the group should not have proceeded with its acquisition of ABN businesses at the price offered. This could put pressure on senior management."

And quietly, pressure was being exerted. Within days of Mr Pierce's note, investors were slowly coming out of the woodwork. One "leading investor" is reported to have said at the time: "My view is that it needs to have a rights issue. Its capital base is too slim for current market conditions."

But the mounting pressure didn't seem to faze RBS, which issued flat denials aplenty. Behind the scenes there was much cosying up to select journalists and analysts, rather making a mockery of Sir Fred's claim not to like "fireside chats or seeing editors for a coffee or a beer".

Weeks afterwards, confirmation came that Sir Fred was right – why had anyone doubted him? – when he revealed that the company's beleaguered shareholders would enjoy the fillip of a 10 per cent hike in the value of its dividend. But concerns were to resurface later.

Behind-the-scenes chats are thought to have taken place with key investors, who were reassured by senior management that a rights issue wasn't needed. One analyst said: "The reassurances were still coming as late as early last week."

On Thursday, two days after Sir Fred and other banking bosses visited the Prime Minister at No 10, rumours strengthened that a rights issue was on. This time it was "no comment" rather than "no rights issue".

When the company's results are issued on Wednesday, Sir Fred will have to detail the extent to which the bank is going cap-in-hand to its investors. Could this be the beginning of the end for him? Maybe.

As they say, past performance is no indicator of future success but in Sir Fred Goodwin's case, it would take a brave man to bet against him.

'THE WRONG SIDE OF HIM IS A VERY BAD PLACE TO BE'

When Sir Fred Goodwin underwent an image change a few years ago and abandoned his glasses in favour of a more modern look, Royal Bank of Scotland contacted various media and asked them to return or destroy any old, bespectacled photographs of the chief executive.

While there was possibly a degree of vanity involved, the move was more about Sir Fred being in control – a position in which he prefers to be.

In the past, less moderate words than "controlling" have been used to describe Sir Fred. He was once famously accused of being a megalomaniac by investors concerned by his relentless hunt for acquisitions.

"There is a steel to him, a ruthlessness," one banking analyst said. "He is polite and helpful on the surface, but I get the impression that the wrong side of Goodwin is a very bad place to be."

The Paisley-born 49-year-old has a tense relationship with the media, granting few interviews and guarding his privacy. As a result, little is known about Sir Fred, bar brief mentions of him being married with two children, and having a penchant for fish and chips, golf and shooting, and a passion for restoring classic cars.

Sir Fred has defended his reluctance to engage with the media, once saying: "As a general rule, I don't do fireside chats or see editors for a coffee or a beer. It's not done out of malice, just a desire to run a business."

This lack of openness has caused a number of myths to develop around him, such as the story that he was once mugged at one of his own cash machines while his chauffeur sat just a few metres away. It has also contributed to his image as the hard man of banking, reflected in his moniker Fred the Shred, which he gained after his aggressive cost-cutting while at the Clydesdale Bank.

While his interactions with the media have been tense, he has enjoyed a far more fruitful relationship with Downing Street. Sir Fred is one of the few bankers Gordon Brown has relied on for advice.

The trust the Prime Minister places in him is shared by many others who know him. Sir Fred is said to be remarkably hard-working and self-driven – so competitive that he trains before his annual medical so he can beat his previous scores.

His strict work ethic and drive to succeed enabled him, at the age of 32, to oversee a 1,000-strong team at accountants Touche Ross, and also to transform RBS following his arrival in 2000.

As a man who likes to be in control, Sir Fred is accustomed to being the person making the tough calls and the job cuts, but over the coming weeks he could find himself the one being shredded.

RAISING FINANCE: HOW IT WORKS

What is a rights issue?

A rights issue is used by companies to raise money from their shareholders. The money raised is intended to shore up a company's capital base or fund new growth and acquisitions.

Shareholders are offered a certain number of new shares, often priced at a discount to the current share price, for every one they already own. By buying their full allotment of new shares, a shareholder can maintain the size of their stake in the company.

Shareholders do not have to exercise their right to buy the shares; instead they can sell that right.

What is Basel II?

The Basel II framework was adopted by the world's top banks in January after almost a decade of preparation. The purpose is to create an international framework that can be used by banking regulators to control how much capital a bank needs to put aside to safeguard against financial and operational risk.

Last week, the Basel Committee on Banking Supervision, the world's top bank regulator, published proposed new rules to try to prevent another credit crisis. The proposals require banks to set aside more capital against complex structured products and off-balance sheet vehicles.