Early morning call starts David and Goliath battle

SIR DAVID ROWLAND and Derek Wanless first found out that their bank was facing a pounds 22bn takeover bid when the telephone rang early yesterday morning inviting them to meet their opposite numbers at Bank of Scotland.

Such "courtesy calls" are the usual form in the City and to their credit, the chairman and chief executive of National Westminster Bank took up the offer. Neither side is saying what transpired during the meeting inside NatWest's grand marbled headquarters in the City, a stone's throw from the Bank of England.

But it is a safe bet to assume the atmosphere was frosty and the conversation businesslike, for Bank of Scotland's bid was accompanied by a withering and quite extraordinary attack on the track record, strategy and management capability of its bigger rival.

This may be a David versus Goliath takeover battle - Bank of Scotland is about a quarter the size of NatWest in terms of assets, employees and branches. But the smaller bank tore into its prey with a ferocity surely born of more than just the normal commercial rivalries.

As he briefed City analysts and the financial media on the rationale behind the audacious bid yesterday, Peter Burt, chief executive of Bank of Scotland, was critical to the point of being contemptuous about the stewardship of NatWest in the past decade. The bank, he said, had a history of underperformance judged against almost any financial yardstick, and had shortchanged its shareholders and customers by embarking on a series of disastrous forays into investment banking, broking and capital markets.

NatWest's latest deal - the pounds 11bn acquisition of life insurer Legal & General - was merely the latest attempt to distract attention from its miserable record, he said. Moreover, by proposing to put the head of L&G in charge of NatWest's own high-street banking activities, the board was abdicating responsibility for the core of its business.

Such cut and thrust is predictable when one management asks investors to back its judgement and ability against that of another - as Bank of Scotland has done by offering to pay for NatWest largely with its own shares rather than cash.

But where this takeover battle will end and what the British banking scene will look like at the end of it is anyone's guess. For Bank of Scotland's tilt at NatWest could just spark the consolidation of the banking industry everyone has been waiting for.

NatWest is itself the product of a merger in the 1960s of three regional banks - District, National and Provincial and Westminster. Since then the English high street has come to be dominated by NatWest and three other big retail banks - Lloyds TSB, HSBC (which used to be called Midland) and Barclays, with Bank of Scotland and Royal Bank of Scotland dominant north of the border.

Not so long ago a merger, friendly or otherwise, involving any two of these banks would have been unthinkable, even ones with virtually no overlap in branch networks such as Bank of Scotland and NatWest. Eight years ago Lloyds was prevented from buying Midland because of the huge share of the domestic and small business market the new, enlarged bank would have held.

But the financial services sector has been transformed in the past decade. Building societies such as Halifax have turned themselves into huge banks in their own right, and there has been a wave of new entrants led by the big supermarket chains such as Sainsbury and Tesco. In addition, there has been an explosion in telephone banking, soon to be followed by a similar phenomenon in Internet banking.

Against that backdrop, some consolidation among the traditional high- street banks begins to look inevitable. Bank of Scotland has promised that if its bid succeeds, it will continue to operate on the basis of "one system, two brands". That means that while the staff of NatWest will reap the whirlwind of change - its workforce will be shrunk by perhaps 16,000 over the next three years - its 6 million customers will only see changes for the better.

The NatWest name will be retained but its branch network will metamorphose. Out will go its vast banking halls - or "mausoleums" as Mr Burt describes them - and in will come much smaller boutique-style branches with a handful of staff and a couple of automatic teller machines.

The bigger question, however, is whether Mr Burt gets to pursue his vision. It is an open secret that NatWest has been courted by half the financial institutions in the land, including Halifax and Barclays.

The City is now awash with speculation that Bank of Scotland's move will spark an auction for NatWest, whose share price soared 30 per cent yesterday to well beyond the value of the bid. Royal Bank of Scotland has already said it is watching the position very closely.

But everyone in the City is waiting to see whether Bank of Scotland has created the kind of mood music that will tempt the heavyweights of the banking world - HSBC and Lloyds TSB - on to the dance floor.

Those who argue that consolidation of the British banking scene is inevitable can point to any number of international precedents. In the US, the spate of mergers among regional retail banks seems neverending, while the French banking sector has just witnessed the takeover of Paribas by Banque Nationale de Paris (BNP). The banking industries of Spain, Italy and the Scandinavian countries have also been bitten by the merger bug.

Meanwhile the hostilities here are only just beginning. After his demolition job yesterday on the professional reputation of NatWest's Derek Wanless, Bank of Scotland's Peter Burt was asked if there was anything complimentary he would like to say about his rival. Back came the reply. "Well, on a personal level, he is a very nice man, charming, urbane and good company." But not, perhaps, yesterday morning.

Business, pages 19 and 21

THE HUNTER

Peter Burt, chief executive, Bank of Scotland

DEREK WANLESS may be more fun as a drinking partner than the Bank of Scotland's Peter Burt, but there is little doubt about who is regarded as the better banker. In the industry, Mr Burt, 54, has long been viewed as the smartest banker in Britain, with the sole exception of Sir Brian Pitman, the chairman of Lloyds-TSB.

Mr Burt's one very serious lapse of judgement came earlier this year, when hemarched into a joint venture deal with Pat Robertson, the American preacher, only to back out after the uproar Mr Robertson caused by telling an American television interviewer that Scotland was a "dark land" that was overrun by homosexuals.

To those who paint the looming battle as the revenge of the Scots on their old enemy in the South, Mr Burt makes an unlikely Braveheart. More Magnus Magnusson than Mel Gibson, he is a private individual very much in the mould of the Scottish presbyterians who have traditionally run the bank. He is a bit unworldy, which may explain his failure to see the public relations minefield he was entering with the Pat Robertson deal.

South of the border, the Bank of Scotland is regularly confused with its arch-rival, the Royal Bank of Scotland. Few people who have never lived in Scotland probably realise that the Bank of Scotland exists, let alone comprehend the place it occupies in the tight circle of grandees which traditionally dominated Scottish commercial and political life.

Its headquarters in Edinburgh's Old Town dominate the city, literally and figuratively. It is as old as the Bank of England and still issues its own banknotes. But in the last ten years the bank has transformed its position in the market place, quietly stealing business from its English rivals and turning itself into one of the UK's most innovative and profitable banks.

For years, Mr Burt laboured in the shadow of the governor of the Bank of Scotland, Sir Bruce Patullo, a formidable member of the Edinburgh establishment and hammer of the Scots Nats and Europhiles. Since Sir Bruce stepped down two years ago, Mr Burt has been waiting for his chance to make his mark, not to mention the chance to live down the embarrassment of the Pat Robertson affair.

THE HUNTED

Derek Wanless, chief executive, National Westminster Bank

DEREK WANLESS, the chief executive of NatWest starts the battle to save his own career on the back foot - a sporting metaphor which the lifelong cricketing fan would appreciate more than most.

A jovial Geordie, the 52-year-old Mr Wanless is nowhere more in his element that at Lord's on the day of the NatWest trophy final in his blue blazer discussing batting averages over a pint of bitter with colleagues and guests.

Yet the affable exterior hides a very sharp intellect and a steely determination.The former grammar school boy, who graduated from Cambridge with a double first, is the great survivor who has been written off several times in his career only to bounce back smiling.

Three years ago when Kyriacous Papouis, a young options trader, departed the bank leaving a pounds 70m black hole, most commentators thought it would be curtains not just for Mr Wanless but the end too of independence for one of Britain's best known banks. Yet he rose to the challenge and saw them all off.

But he has perhaps overjudged the extent to which his rehabilitation of the bank in the eyes of the City had succeeded. His joy at the mess that Barclays found itself in last year when its bright and dynamic chief executive Martin Taylor unexpectedly quit was a little bit too obvious for some tastes.

The hostile City reaction to the pounds 10bn deal Mr Wanless struck three weeks ago with David Prosser of Legal & General, the life insurance group, would have bitterly disappointed him. To him it signified NatWest was back in business, but the City saw it as too much too soon.

The sad reality is that NatWest like many of Britain names has been living off its past for years. The bank's sumptuous granite headquarters overlook the Bank of England. NatWest's tragedy is redolent of the days of Empire, its board packed with knights and members of the House of Lords.

In 1990 NatWest could rightly claim to be one of the world's top ten banks. Today it would not even make the European top ten. At last, the City may have the opportunity it has been waiting for to hold Mr Wanless to account for that decline. As one City banker remarked cruelly yesterday: "NatWest days are numbered, and quite right too."