Takeover of NatWest puts 18,000 jobs at risk

In February 2000, NatWest, one of the largest banks in the UK, lost its independence, falling victim to a hostile takeover bid from the Royal Bank of Scotland. The merger is certain to lead to thousands of job losses. This feature highlights the implications of the merger, examining the strategies pursued by the banks concerned and the response of the trade unions.

On 11 February 2000, one of the UK's oldest and biggest banks, NatWest, accepted defeat in its campaign to resist a hostile takeover bid by its smaller rival, Royal Bank of Scotland (RBS). The decision marked the end of a bitterly fought takeover battle between the two banks and a third, Bank of Scotland (BoS), which was also trying to secure control of NatWest. Takeovers such as these have profound effects for employment security; reports suggest that as many as 18,000 jobs will go from a NatWest workforce of around 62,000.

Restructuring in the UK banking sector

In recent years, all of the major banks in the UK have significantly altered their operations through the introduction of new technologies:

• many tasks that used to be manual, such as processing cheques, have been automated;

• most services, such as money transfers, are carried out by telephone at centralised call centres (UK9912143N) rather than from a particular branch; and

• internet banking is growing in popularity.

These innovations have lead to significant changes in the nature of work in the banks and, even more importantly, have resulted in a substantial number of redundancies (UK9910135F). Accompanying these technological innovations have been reforms to the ownership structures of many financial institutions. One trend has been for "mutual" building societies, which were previously owned by their customers, to convert into banks owned by shareholders; another has been for banks to merge with one another.

Competing management strategies

Growth through merger was the route initially favoured by NatWest. Specifically, senior management was keen on moving into other areas of financial services, such as insurance and life assurance, in a move towards what is known as "bancassurance". Thus, in September 1999, NatWest announced an agreed GBP 11 billion takeover of the Legal and General insurance company. Since the two organisations operated in different segments of the financial services sector, the scope for cost savings was relatively modest at around GBP 100 million.

Within weeks, however, BoS had launched a hostile bid for NatWest of around GBP 22 billion, closely followed by a similar bid from RBS. Both of these hostile bids were predicated on a quite different logic from the bancassurance idea - to rationalise existing operations through plant closures, removing duplicated operations. Both of the Scottish groups argued that this approach could achieve cost savings of around GBP 1 billion, and announced plans to cut between 15,000 and 18,000 jobs. NatWest was forced to abandon its planned takeover of Legal and General and announced its own revamped cost-saving and redundancy programme. This failed to convince a sufficient number of its shareholders, however, who opted for the rationalisation programme proposed by the Royal Bank of Scotland.

Union responses

The role and influence of trade unions in the financial sector in the UK has changed significantly over the last two decades. The system of multi-employer bargaining collapsed in the late 1980s, and the company-level bargaining which replaced it was subsequently displaced by bargaining at the level of business units within the banks. More recently, the ability of unions to shape pay rates has been eroded by the introduction of performance-related pay schemes. These changes in collective bargaining have been accompanied by a fall in union membership. Employees of the large banks could either join the Banking Insurance and Finance Union (BIFU), affiliated to the Trades Union Congress, or the banks' own staff associations. The danger of the unions being marginalised led to moves to alter the fragmented nature of employee representation, and in July 1999 BIFU and the NatWest and Barclays staff associations merged to form UNIFI (UK9903193N).

One of UNIFI's first tasks was to respond to the hostile bid for NatWest. The union's response was to seek an assurance of no compulsory redundancies and to imply that industrial action was a strong possibility if this was not obtained. "We will campaign vigorously to save jobs and our members' livelihoods", said Rory Murphy, joint general secretary of UNIFI, in November 1999. "Our members are very angry over the way NatWest has gambled with their jobs. We believe they are prepared for a fight." At the time of writing, it is not certain how far the union's concerns to protect jobs will be accommodated by RBS.

Commentary

The NatWest saga has demonstrated that even the largest UK companies are not free from the prospect of a hostile takeover. Advocates of such an active market in corporate control argue that it pressurises managers into operating in the most efficient way possible, keeping them on their toes and preventing complacency. Critics, however, argue that it creates a preoccupation with short-term profitability, often at the expense of long-term goals, as managers seek to fend off the threat of takeover by avoiding any course of action that could depress the share price and by distributing a large proportion of profits in the form of dividends to shareholders. The critics also argue that research into the performance of firms which have been involved in a merger suggests that in the years following merger such firms perform below the average for their sector (UK9807136F). Indeed, NatWest management cited such research as part of its defence. One plausible explanation for this poor relative performance is that the productivity of the workforce is adversely affected by the job insecurity and changed reporting relationships that are apparent in mergers such as that between NatWest and RBS.

The takeover battle has also illustrated the continuing consolidation in the banking sector, something which is occurring across Europe. France, for instance, has recently experienced a protracted hostile takeover battle involving three banks. It is apparent that the tendency for mergers to be associated with substantial numbers of redundancies is something common to banking mergers in many different European countries (BE9806238F and FI9803156N), though in some countries unions have been able to minimise the scale of these redundancies (FR9903169N and ES9903111N).

As yet, the majority of these mergers have been domestic in nature, principally because of the fiscal, regulatory and cultural differences in banking between European countries which restrict the ability of banks to develop standardised services internationally. One possible future development, however, is for European integration in general and Economic and Monetary Union in particular to erode these differences, opening up scope for cross-border mergers and acquisitions in the banking sector. (Tony Edwards, IRRU)