Over the course of last weekend the pace quickened in the battle for the takeover of Britain's NatWest Bank. Bank of Scotland (BOS) was again first into the fray and increased the value of its bid to £24.3 billion sterling. The Royal Bank of Scotland (RBOS) tried but failed to entice the NatWest board to agree a friendly merger. On Monday, the Royal Bank launched its own hostile bid, which valued NatWest at £15.90 sterling per share.
But the eventual value of both bids depends on their respective share prices because a high proportion of the consideration will consist of the issue of new shares by the victorious company.
Interestingly, RBOS shares fell by more than 6 per cent immediately after the bid was announced automatically cutting the value of its offer to £15.15 per NatWest share. NatWest shares also fell while those of BOS rose marginally. The effect of these share price gyrations is that the value of both bids is roughly the same.
However, that's where the similarity in the two offers ends, and an analysis of the RBOS plans for NatWest if it succeeds highlights a very different approach to that of BOS.
From an Irish perspective the most significant difference is that RBOS plans to retain Ulster Bank. This would be a big blow to Irish Life & Permanent in particular as it seems to be the frontrunner to acquire the Southern part of the Ulster Bank franchise.
Of much greater significance for the Irish banks would be the heightened competition that a more aggressive Ulster bank would bring to the Irish banking market.
A combined RBOS/NatWest would be the fourth biggest bank in Europe and the newly-merged entity would be under pressure to grow market share in all its business units.
If this is the eventual outcome it will further accelerate the process towards lower profit margins in the Irish banking market. Also, it closes an important door for expansion by the quoted Irish companies and raises the risk that the Irish banks will be left behind as the European financial sector consolidates.
The table highlights that despite the rapid growth of recent years the Irish banks are still small in an international context. Also, their share prices now attract somewhat lower ratings than their overseas peers, which may make it more difficult to make major acquisitions.
For all these reasons the boards of the Irish banks have a vested interest in the outcome of the battle for NatWest. A victory for BOS would be greeted with a communal sigh of relief and the battle for Ulster Bank would intensify. On the other hand, a victory for RBOS would be greeted with dismay and unfortunately for the Irish banks, the odds point towards RBOS being the more likely winner.
Firstly, RBOS is the larger of the two Scottish banks and it has enlisted the help of its major shareholder, Banco Santander, to part fund the cash element of its bid.
Crucially, RBOS has a much larger English operation with more than 300 branches compared with 30 for the BOS. This means that RBOS is in a much better position to extract cost savings from the combined entity. Finally, RBOS is taking a "friendlier" approach to the NatWest board and management and is planning to sell a smaller number of businesses.
BOS has already got clearance from the competition authorities whereas its rival has not although it seems unlikely that the RBOS bid would be blocked on competition grounds.
The prospect that Ulster Bank could soon be run by the RBOS and the recent entry of the BOS to the Irish marketplace indicates that the two Scottish banks could well be household names in a very short space of time.
