Outlook: Sir David struggles with City sceptics

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The Independent Online
NATWEST'S PROPOSED pounds 10.7bn acquisition of Legal & General got a surprisingly lukewarm reception in the City yesterday for what, on the face of it, seems a logical and well thought out deal. Why is this?

One reason concerns NatWest's acquisition track record, which for as long as anyone can remember has been a disgrace. Slavishly following whatever happened to be the current fad for empire building among the banks, NatWest has managed to screw up on one acquisition after another, either by overpaying or by failing adequately to think through their strategic purpose. Hundreds of millions of pounds of shareholders' money have been squandered in this manner, some of it under the present chief executive, Derek Wanless.

Bancassurance acquisitions are the latest thing to capture the banking sector's fancy. Citicorp has done one, Lloyds TSB has done several, and they are all the rage on the Continent. Is not NatWest in danger of repeating past mistakes? But what is certainly true is that NatWest is paying as much as it can afford. Given that this is a takeover rather than a merger, NatWest is also giving away a fair bit of the upside in the deal to L&G shareholders by way of bid premium. Add to that the fact that the deal is likely to take some years to become earnings enhancing, and you begin to see why it is being sceptically received in the City.

The cost benefits at pounds 130m annually by 2002 are not dramatic enough in themselves to justify the takeover, so the two sides are forced to fall back on the more intangible opportunities for revenue enhancement that can be achieved through bancassurance - putting together a bank's retail distribution channels with a life assurer's long-term savings products. Here Sir David Rowland, NatWest's chairman, is asking us to take a lot on trust.

There was little in yesterday's documentation to elucidate what the group expects to achieve on this front. A doubling of market share over three years for NatWest's existing long-term savings products was about the most the group was prepared to venture publicly. Since NatWest starts off with a quite small percentage of these markets, this is not overly impressive. Pressed further, some insiders say privately the group might be able to achieve extra profits of pounds 100m annually as a result of the benefits of cross selling.

Again, this is not a particularly big number in the scale of things, and in any case it is a quite questionable guesstimate given the rapidly changing nature of the savings market. With the advance of e-commerce and interactive digital TV, it can be argued that in future people will be even less likely to buy their long-term savings products through their local bank branch than they are now.

Sir David has moved to counteract investor concern that his existing chief executive, Derek Wanless, may not be the man to deliver the revenue enhancing promise of this takeover by giving L&G's David Prosser a key role, perhaps the key one, in the merged group. Mr Prosser is generally regarded as a class act in the City, but even he will struggle if the concept of bancassurance proves an outdated one.

However, on one level NatWest is undoubtedly right to be making this move. The traditional business of banking, that of deposit taking, will with the advance of technology eventually become a low cost, commoditised and low-margin one. The real growth in financial services is not in deposit taking anyway, but in long-term savings products. People are less and less willing to leave their money sitting around in poor-value deposit accounts. Traditional banks must, therefore, migrate themselves into these higher growth areas or face possibly terminal decline.

Seen in this light, as a defensive buttress against a fast changing world, NatWest's move looks both understandable and justifiable. But don't expect fireworks in terms of value enhancement.