Scots want first bite of Barclays cherry

News Analysis: A three-way deal with the Royal Bank of Scotland and Scottish Widows could solve all of the big bank's problems at once
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The Independent Online
THE CITY was still digesting the news that Barclays was back to square one in its search for a new chief executive, when Sir George Mathewson, the chief executive of Royal Bank of Scotland, let it be known that if there genuinely was an opening for a merger deal then it wanted to be first in the queue.

It was even suggested by some investment banking sources yesterday that Sir George might be able to persuade Mike Ross at Scottish Widows to throw it into the pot to create a three-way deal.

This would solve the Barclays leadership issue at a stroke. RBS has a respected, if somewhat prickly, chief executive and an able deputy in the shape of Fred Goodwin, who recently joined from National Australia Bank. RBS would also provide a finance director to replace Oliver Stocken, who has twice had to delay his retirement from Barclays. All of the English clearers too would also love to do a deal with Barclays. HSBC, Lloyds- TSB and NatWest are among those who have been down that road in the past.

But with Don Cruickshank's banking commission breathing down their neck, few believe that any further concentration in the banking market would be acceptable on competition grounds.

Peter Ellwood, the Lloyds-TSB chief executive, was tackled on the subject after the bank's AGM yesterday in Edinburgh. He said: "Any merger the size of Barclays would be blocked by the competition authorities."

Neither the Royal nor its rival, the Bank of Scotland, would have that problem. RBS has as many branches South of the border as it has in the North - enough to provide some serious cost savings but not enough to justify serious competition concerns.

In addition, and this particular point is frequently ignored, RBS has strong ties with Banco Santander, which is both Spain's largest bank, and the Scottish bank's largest shareholder. Banco Santander, in turn, has ties with Italy's IMI-San Paolo and France's CCF, all banks which are playing a crucial role in the consolidation of the continental European banking sector.

Financial wizardry would be needed to make the deal work. The relative split in terms of shareholders' equity works 79 per cent to 21 per cent in Barclays' favour, although the gap in net income terms is less wide: 68 per cent versus 32 per cent. Widows, which could be worth pounds 10bn on its own, might just balance that.

But the real obstacle to such a deal is the lack of enthusiasm on Barclays' part.

Sir Peter Middleton, acting chief executive and chairman-elect, despite his evident wish to be allowed to hand on the reins to a younger man quickly rather than see his caretakership stretch out into the remainder of this year, has made it abundantly clear that he is in no mood to be panicked into a deal, and that the search for a new chief executive now resumes where it left off.

"We would not think of consolidation as a solution to our CEO problem," ran the curt response yesterday to news of RBS' interest.

In essence Sir Peter's message on Tuesday had been that all that was needed was to rummage around in one of the dustbins outside Barclays' headquarters in Gracechurch Street, find the old list of candidates and get on the phone.

The bank's headhunters, Spencer Stuart, had identified six candidates of whom three are believed to have been American. Given the fallout from American banking mergers there is also good reason to suppose that some of those identified who were not available then might now be free.

Ray Soifer, an analyst at the Wall Street firm Brown Brothers Harriman, said: "They will find a chief executive. It is a very attractive bank, and the post is one that carries a great deal of opportunities." Indeed one name that popped up yesterday to add to the familiar list of suspects was Mike Shapiro, a senior vice-president of Chase Manhattan who was seen by many as that organisation's heir apparent but has just been passed over for chief executive by William Harrison.

Preliminary soundings yesterday suggested that institutional investors are ready to give Barclays the benefit of the doubt. Jim Cox at Schroders said there are times when a deal is the answer but this is not one of them: "I'd quite like them to get on and run the business. They are just going to have to get on and find a chief executive. People who think deals are the answer to everyone's problem are daft."

David Erskine at Standard Life agreed: "I am disappointed that Mike O"Neill is not coming because he had the right pedigree. I think the board acted very well the last time when Martin Taylor left and will act very well again."

In the eyes of many there is no doubt that Barclays is a far steadier ship than it was when Mr Taylor left in November. This is a testimony to the leadership skills that Sir Peter acquired during his days as a Treasury mandarin. But some observers are less sanguine. One said yesterday: "People forget that anyone who is sounded out for the job will feel that they are automatically seen as second best to Mike O'Neill. It is also very difficult to find someone of calibre who is not already locked in."

If Sir Peter comes up with the right chief executive as quickly as he found Mr O'Neill, then all well and good.

But if the search drags on and it becomes evident that the bank is being hampered by not having a chief executive in place when the banking world is experiencing a major upheaval, shareholders might start getting restless. It is at this point that the blandishments of Sir George become less easy to resist.