The sins of the past come back to haunt NatWest's takeover of L&G

News Analysis: Sceptical fund managers have not forgotten the bank's recent acquisition disasters

WHEN NATWEST'S share price slumped nearly 5 per cent on Friday on news that it was in takeover talks with Legal & General, senior executives of the high-street bank could at least console themselves with the thought that the market was not in full possession of the facts.

Yesterday NatWest got the chance to make the case for its pounds 10.75bn deal - and still the share price fell.

The lukewarm City reaction to the deal is in marked contrast to the enthusiasm that greeted the announcement of Lloyds TSB's takeover of Scottish Widows, the mutual life insurer in July. Although Lloyds' share price also fell on the morning the Widows deal was announced, by the end of the day it closed roughly unchanged.

What both deals have in common is that they are an admission by the banks that attempts to cross-sell higher margin life and pensions products to their current-account customers have failed. By different routes, both Lloyds and NatWest have concluded that to capitalise on the growth in the long-term savings market they need to buy in both the brand and the product expertise from outside.

Yet conceptually there is little doubt that NatWest's takeover of L&G is the superior deal. NatWest is talking of being able to achieve annual cost savings of pounds 130m within three years by eliminating the overlap with its existing investment management business, compared with the pounds 60m Lloyds hopes to achieve by taking over the Scottish mutual group. Moreover, NatWest and L&G also appear to have given much more thought to how the two groups should mesh in the longer term.

Unfortunately for NatWest, talk of blending management cultures and careful husbanding of brands cuts little ice with the more hard-bitten City fund managers, who naturally feel with this particular bank that they have been here before. NatWest has come a long away in the last two years, but it has yet to live down previous acquisition sprees in the US, and more recently in investment banking, which ended in disaster.

Tom Rayner, bank analyst at Societe Generale, said: "I think there will be long-term benefits. However, the market is a bit sceptical. People worry about whether they will be able to generate enough income. Unlike Sir Brian [Pitman, the Lloyds TSB chairman] who can announce something and people believe it straight away, with Derek Wanless [NatWest group chief executive] the reaction is people tend to believe the opposite until proven wrong. Given the NatWest track record on acquisitions people will prefer to wait and see if they deliver."

NatWest is going to have to prove the deal will mean that L&G sells more policies than it would on its own. It is here that analysts are most sceptical. David Prosser, the L&G chief executive who joins NatWest as deputy chairman responsible for the retail and wealth management business, waxed lyrical about the opportunities presented by NatWest's underexploited base of 6.5 million current-account customers.

"NatWest has 1.3 per cent of the pensions market but 16 per cent of current accounts. That gives you an idea of the opportunities we are looking at," he said. "We would hope to double NatWest's market share in three years." That would add pounds 100m to the bottom line each year.

Sir David Rowland, the NatWest chairman who made the call to David Prosser three weeks ago, is well aware of the depths of City scepticism. "I think NatWest has learnt some really hard lessons. There is no point being rueful about what happened in the past. I do see a fierce determination to ensure that the lessons learnt from the past really are applied to the future," he said.

Indeed, for Sir David the chance to bring L&G's management expertise on board was as important as acquiring its low-cost financial services "factory", which will now be pumping its products through.

Mr Prosser, who has turned L&G into one of the most feared producers in a highly competitive life sector, is clearly savouring the prospect of being let loose on the flabby midriff of the NatWest retail bank. NatWest is halfway through its retail transformation programme aiming to get costs back down to 1997 levels by 2000. Mr Prosser said: "We can easily match those targets and more."

But still analysts wonder whether even someone of David Prosser's track record can do what no one else in the UK has managed: to persuade ordinary banking customers to buy pensions from their banks.

Bancassurance - selling insurance through bank branches - works well on the Continent, to the extent that two of Europe's largest insurance groups - ING and Fortis of Holland - are also banks, and Allianz, the German insurer, can justify being the controlling shareholder in Dresdner, one of the country's biggest banks. But the concept has not worked in the UK.

NatWest says the reason UK bank customers have stubbornly refused to buy more than the odd travel insurance policy from their high-street bank is that up to now their products have not cut the mustard. The plan is that NatWest will be able to offer NatWest products made in L&G's factories, while L&G will continue to offer L&G-branded products to existing customers through the IFA (independent financial adviser) sector.

But Mr Prosser may have a rather too rosy view of the power of NatWest's brand. "This is not the ideal deal," fretted one banker yesterday.

What the City really wants from NatWest is what it cannot have - at least not with the Government in its current frame of mind - a merger with Barclays or Lloyds, both of which would yield 10 or 15 times the cost savings talked of yesterday.

At 210p NatWest has paid up what it needed to get the deal through. The price - 85p in cash, the rest in NatWest shares - was enough to secure the backing of L&G's board and probably enough to deter even deep-pocketed foreigners from trying to gatecrash the deal.

But Terry Eccles, the banker from JP Morgan who advised NatWest, said philosophically: "Judging by the share price reaction we've probably got the price about right. If anything we may have given more of the value to L&G shareholders. What we've still got to do is sell it to NatWest shareholders."

Suggested Topics
Start your day with The Independent, sign up for daily news emails
Sport
football This was Kane’s night, even if he played just a small part of it
Travel
travel Dreamland Margate, Britain’s oldest amusement park, is set to reopen
News
news
News
Founders James Brown and Tim Southwell with a mock-up of the first ever ‘Loaded’ magazine in 1994
media
News
Threlfall says: 'I am a guardian of the reality keys. I think I drive directors nuts'
people
Voices
voices The group has just unveiled a billion dollar plan to help nurse the British countryside back to health
News
The Westgate, a gay pub in the centre of Gloucester which played host to drag queens, has closed
news
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Retirement Coordinator - Financial Services

Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...

Recruitment Genius: Annuities / Pensions Administrator

Negotiable: Recruitment Genius: You will be the first point of contact for all...

Ashdown Group: HR, Payroll & Benefits Officer - Altrincham - up to £24,000.

£18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...

Ashdown Group: Learning and Development Programme Manager

£35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...

Day In a Page

The saffron censorship that governs India: Why national pride and religious sentiment trump freedom of expression

The saffron censorship that governs India

Zareer Masani reveals why national pride and religious sentiment trump freedom of expression
Prince Charles' 'black spider' letters to be published 'within weeks'

Prince Charles' 'black spider' letters to be published 'within weeks'

Supreme Court rules Dominic Grieve's ministerial veto was invalid
Distressed Zayn Malik fans are cutting themselves - how did fandom get so dark?

How did fandom get so dark?

Grief over Zayn Malik's exit from One Direction seemed amusing until stories of mass 'cutting' emerged. Experts tell Gillian Orr the distress is real, and the girls need support
The galaxy collisions that shed light on unseen parallel Universe

The cosmic collisions that have shed light on unseen parallel Universe

Dark matter study gives scientists insight into mystery of space
The Swedes are adding a gender-neutral pronoun to their dictionary

Swedes introduce gender-neutral pronoun

Why, asks Simon Usborne, must English still struggle awkwardly with the likes of 's/he' and 'they'?
Disney's mega money-making formula: 'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan

Disney's mega money-making formula

'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan
Lobster has gone mainstream with supermarket bargains for £10 or less - but is it any good?

Lobster has gone mainstream

Anthea Gerrie, raised on meaty specimens from the waters around Maine, reveals how to cook up an affordable feast
Easter 2015: 14 best decorations

14 best Easter decorations

Get into the Easter spirit with our pick of accessories, ornaments and tableware
Paul Scholes column: Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season

Paul Scholes column

Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season
Inside the Kansas greenhouses where Monsanto is 'playing God' with the future of the planet

The future of GM

The greenhouses where Monsanto 'plays God' with the future of the planet
Britain's mild winters could be numbered: why global warming is leaving UK chillier

Britain's mild winters could be numbered

Gulf Stream is slowing down faster than ever, scientists say
Government gives £250,000 to Independent appeal

Government gives £250,000 to Independent appeal

Donation brings total raised by Homeless Veterans campaign to at least £1.25m
Oh dear, the most borrowed book at Bank of England library doesn't inspire confidence

The most borrowed book at Bank of England library? Oh dear

The book's fifth edition is used for Edexcel exams
Cowslips vs honeysuckle: The hunt for the UK’s favourite wildflower

Cowslips vs honeysuckle

It's the hunt for UK’s favourite wildflower
Child abuse scandal: Did a botched blackmail attempt by South African intelligence help Cyril Smith escape justice?

Did a botched blackmail attempt help Cyril Smith escape justice?

A fresh twist reveals the Liberal MP was targeted by the notorious South African intelligence agency Boss