Andreas Whittam Smith: Lloyds and HBOS – a merger that should not go through

The deal is against public interest – it will greatly reduce competititon
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The Independent Online

Ever since the Government decided to supply new capital to any British bank that required propping up, I have thought the proposed rescue of HBOS by Lloyds TSB was a nonsense. The merger is against the public interest, for it will substantially reduce competition in the provision of home loans.

HBOS, by the way, is the old Halifax, once the pride of the building societies movement, wrapped up with the insignificant Bank of Scotland. So I was not surprised when, over the weekend, the board of HBOS was told by two senior Scottish bankers, Sir Peter Burt and Sir George Mathewson, that the deal was misconceived, though I would have chosen different grounds for the argument.

The two critics wrote to Lord Stevenson, the HBOS chairman. It isn't the most tactful of missives. In its first paragraph it tells Lord Stevenson that he and his colleagues "are doubtlessly suffering from the inevitable fatigue that a (traumatic year) has created". In other words, you are all so tired you do not know what you are doing. Then it goes on to demand that the writers of the letter, each fresh from a few years in retirement, should immediately replace Lord Stevenson and his chief executive in their roles.

Yet these heavy-footed critics do raise some interesting points. The takeover is no longer necessary to ensure the survival of HBOS. Correct. But they go on to make the counter-intuitive argument that Lloyds is the weaker of the two parties because, in relation to its existing capital, it requires more support than HBOS. The two critics need to emphasise HBOS's relative strength in order to carry the argument that the terms of the proposed deal are unfair to HBOS.

Personally, I doubt whether this is a realistic analysis. Forecasting the likely performance of Lloyds and HBOS during the next five years would show, I believe, that Lloyds is by far the stronger unit. When a company is rescued in the nick of time, as was HBOS's fate, nothing will persuade me that it was, nonetheless, sort of robust underneath the surface.

Then the authors of the letter cast doubt on the bringing together of the two banks. "The task of implementing the takeover and integrating the two businesses is enormous and Lloyds is taking on a massive challenge." Yes, indeed. Mergers do often fail to realise the economies of scale that had been expected. On the other hand, Royal Bank of Scotland did a pretty good job of integrating National Westminster Bank. It can be done.

This part of the letter, however, is not directed at the HBOS board or its shareholders, but at the bank's staff. For what the retired bankers are really arguing is that keeping HBOS independent would save more than 20,000 jobs. So what would the two critics have done had Lord Stevenson and his chief executive improbably said thank you for offering to do our jobs, please take over? They would, they say, create a detailed alternative plan that would "create better value" by keeping HBOS as an independent bank.

They would accept the Government's offer of financing. They would return HBOS to "its core business" using prudent underwriting practices for existing and new customers alike, which means they would be more cautious. And they would seek new investors "globally", which is probably a discreet reference to bringing in Middle East capital.

In reply, the HBOS board noted "there is no money on the table". They added that they do not believe the proposal offers either significant value for shareholders or certainty of delivery. But the board of HBOS retains very little authority. It was responsible for the disaster that led to the need for a rescue. When the deal was struck, it was only a day or two away from a run by its depositors. Its chairman and chief executive have been asked to leave once the Lloyds deal is completed. And the directors have suffered the humiliation of having to agree to a reduction in the price Lloyds is willing to pay.

Power lies in two places – with the big shareholders of HBOS and the Government as supplier of capital of last resort. My guess is that the former will continue to support the deal with Lloyds. In these uncertain times it is the safer course. The Government, on the other hand, has been given a chance to undo the negative consequences of the deal for competition, and also to save Scottish jobs. It is a tempting prospect. I shall not be surprised if the Government reverses course.