RBS – not as clever as they thought they were

Former RBS bosses Fred Goodwin and Tom McKillop admitted, when questioned by MPs yesterday, that the takeover of ABN Amro had been a disaster. The last acquisition of  Sir Fred’s eight-year takeover spree had finally brought the bank to its knees.

It’s a tragic story because, as well as, apparently, being a world-class bank, RBS was also renowned for being good at takeovers. We know because its bosses told us so. Again and again and again.

After the takeover of NatWest in 2000, RBS executives were telling anyone who would listen that the acquisition and subsequent integration of the businesses was one of the most successful mergers in history. For a time, in the early 2000s, they seemed to be everywhere. At conferences, at seminars and in newspaper interviews, RBS was held up as an organisation that had cracked the problems of mergers and acquisitions.

Some people, both in RBS and NatWest, told different stories at the time; stories that sounded more like those you usually hear when companies merge. Managers promoted for political reasons, talented people knifed in the back, executives from one organisation who had no idea how to manage the other and having to recruit extra help to cover the gaps. All standard M&A stuff. Of course, some of this may have been sour grapes. Perhaps those telling the stories were the ones who lost out and the RBS NatWest merger really was a textbook example of how to get it right.

It doesn’t really matter because, regardless of what actually happened, it became received wisdom that RBS was good at takeovers and no-one believed it with more conviction than the company’s own executives. But as Patrick Hosking said last month, hubris soon gave way to nemesis:

NatWest proved to be the first of dozens of deals, as Sir Fred sought to expand. He made purchase after purchase in North America, building Citizens into one of the biggest banks in the US. He bought Churchill Insurance in Britain and a large stake in Bank of China but all the time his reputation with shareholders was losing its shine. Few of the acquisitions made the same kind of sense as NatWest and RBS started to lag behind its competitors.

The people at Churchill Insurance would probably agree:

Some employees accused Royal Bank of “destroying Churchill values” and of “pure incompetence”. One wrote: “RBS have been absolutely horrible. Their brutal takeover is a chilling lesson in corporate impersonality.”

So more like a normal merger then.

Just because you have done something successfully once doesn’t mean that you will be able to pull it off again. But senior executives so often take a single success as conclusive evidence that they are just brilliant leaders. It’s back to that attribution theory again. In the case of RBS, the organisation continued to believe its own hype even after some of its acquisitions began to go wrong. Only after the disaster at ABN AMRO and the subsequent collapse of their bank did they realise that perhaps they weren’t as clever as they thought they were.

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3 Responses to RBS – not as clever as they thought they were

  1. Bina says:

    As I recall from a meeting of professional HR people in the late 80’s or maybe later (I can’t remember now) – a particularly nasty individual from NatWest gave a presentation on the whizzy and very noxious bonus system the chiefs had dreamt up for themselves (yes they were the main beneficiaries – the lower orders were sqeezed). I remember being stunned by the man’s effrontery – a significant proportion of the audience were also outraged – but being polite HR types there was only gentle objection. I guess the guy went on to create havoc at RBS…see, even us non-finance people knew there was rot at the centre.

  2. Helen says:

    Interesting post. I agree that the NatWest takeover wasn’t very good. The reason they all thought that it was such a good deal is because it was so improbable for such a long time, and even when it happened it was a case of David taking over Goliath. The fact that they managed to pull off the deal gave them the confidence to overlook the issues of integration. It is a typical M&A perspective that senior executives measure the success of the acquisition by the success of the deal (and the associated bonuses they get as a direct result of signing the deal), and not by the success of the business integration which happens later, over a long time and no-one has a bonus linked to it! NatWest was (and still is to a certain extent) an oil tanker and takes a long time to change, hence the reason you can’t judge the success of the acquisition for a long time after the deal – as shown in this case. The thrill of the chase and the exhilaration (and big signing bonuses) then led RBS to undertake a series of acquisitions not really linked to strong or rational business strategy. And we all know where that has landed them……

  3. It’s cultural hubris at root I suspect, in part at least. In the markets, financiers had equations (‘Black-Scholes-Merton’ etc) which predicted ‘accurately’ how to properly value stocks and shares, and how to offset risk. In effect, these equations served as ‘magic wands’ which allowed the masters of the universe to believe they had changed reality. Risk was diluted to almost zero through complex – indeed, barely comprehensible – financial derivative trading. Everything was for the best in the best of all possible risk managed worlds. Obviously, our masters of the universe who had cracked this mighty secret deserved rewards above those of us simple mortals.

    So if financiers had conquered risk itself, surely a little matter like mergers and acquisitions wasn’t going to cause them any bother? I mean, a merger is just dealing with mere people, who clearly aren’t as complicated to understand as Black-Scholes-Merton….

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