Biggest Takeover Battle in British Banking History Under Way : Lloyds, Standard Chartered Square Off

The biggest takeover battle in British banking history began in earnest Tuesday when Lloyds Bank disclosed details of its $1.75-billion offer for Standard Chartered, a bank that helped to pioneer trade finance in many parts of the British Empire and remains an important force in Third World business.

Standard Chartered has vowed to fight the bid, which, under British takeover rules, has 60 days in which to succeed.

If the merger is completed, it will catapult Lloyds from the smallest of Britain’s so-called Big Four clearing banks to one of the largest, most formidable forces in international banking.

Based on 1985 figures, Lloyds and Standard Chartered would have combined assets of $104.9 billion (10th largest in the world), pretax profits of $1.2 billion (fifth largest in the world) and a network of more than 5,000 branches, nearly half of them overseas.

A combination of Standard Chartered’s strength in Africa, East Asia and the United States with Lloyds’ in Europe and Latin America would make the new firm a global bank with unusual depth.

“We’d be as well positioned as any U.S. bank and big enough to compete with anyone,” Lloyds Chief Executive Brian Pitman said in an interview. “Citicorp is probably the only bank in the world that could compare itself to us on that score.”

The Bank of England, which is Britain’s central bank, blocked a Standard Chartered attempt to take over the Royal Bank of Scotland five years ago but has apparently given its blessing to the Lloyds move.

With no rival bids announced in the five weeks since Lloyds first signaled its intention regarding Standard Chartered, people who closely monitor Britain’s banking industry believe that it has a strong chance of success, although Lloyds could be required to raise its offer to attract a majority of Standard Chartered shareholders.

“We believe it is a fair and reasonable price,” Pitman said. “Like any other bank, it has positive and negative features.”

Among the negative features is Standard Chartered’s 38% stake in Standard Bank of South Africa, the second-largest commercial bank in South Africa.

Aside from the exposure to political protest inherent in such a holding, the weak South African currency and a government moratorium on payment of foreign debt interest have cut into the bank’s commercial attractiveness.

Standard Chartered has gradually reduced its South African holding, which once was 100%, and Pitman said Lloyds plans to continue that effort.

In an interview last week in his fifth-floor office at Standard Chartered’s new headquarters here, managing director Michael D. McWilliam questioned the logic of the Lloyds bid, emphasized Standard Chartered’s global experience and unique approach to difficult foreign markets. And he dismissed Lloyds’ international operations in tones of a seasoned veteran describing an inept novice.

“They (Lloyds) have an unsuccessful bank in California,” he said, “they had an unsuccessful experience in Hong Kong, they had 20 years of dithering about with Grindlays Bank and finally sold out. We don’t think they have a very impressive overseas management record at all.”

Lloyds agreed earlier this year to sell Lloyds Bank of California to Golden State Sanwa Bank, the California subsidiary of Sanwa Bank of Japan.

‘Language of Federalism’

McWilliam and others at Standard Chartered see themselves as part of an organization that has thrived on delegating a high degree of autonomy to in-country management of its foreign operations, a strategy that offers greater flexibility in dealing with changing local conditions and gives the bank a committed local image.

“We talk the language of federalism,” McWilliam said, taking a framed quotation from Alexander Hamilton on the subject down from the wall to emphasize the point. “That’s our culture.”

He said such autonomy enabled Standard Chartered to be the only foreign bank to survive China’s Cultural Revolution in the late 1960s and forge strong ties in other tough markets.

In California, he said, Standard Chartered’s Union Bank subsidiary is successful, while ventures there by two other British banks, Lloyds and Midland, both failed to achieve desired performances.

“If we were folded into Lloyds, we’d become little more than the international appendage of a domestic bank,” he argued. “It would kill what’s unique about us.”

Analysts Critical

But, according to stock analysts here who follow British banking, slack central management at Standard Chartered has failed to wring the best from the bank’s decentralized empire.

“They operate in difficult markets but have failed to get the strength from the diversity they have,” said Keith Brown, banking analyst at W. Greenwell & Co.

Allistair France of Laing & Cruickshank said of Standard Charter: “There’s a lack of control from the center, no real reinforcement of profit targets.”

Standard Chartered’s profit performance has lagged behind that of other British banks in recent years. Contributing to its difficulties have been a recession in key Far East markets, loan problems in Latin America and sharp declines in the values of the U.S. dollar and the South African rand.

With the London market in the midst of a takeover epidemic, Standard Chartered’s high asset value and low stock value made it an obvious target.

“The shares have underperformed even the banking sector . . . when investment in banks was generally a rather poor choice,” London’s Financial Times has noted.

Standard Chartered has hired Goldman, Sachs & Co., the New York investment banking house, to advise it in building defenses against the takeover, but McWilliam cautioned that he is not prepared to damage his bank in order to block the takeover.

“Some takeover defenses are so successful they end up killing the patient,” he said. “We don’t want to pull a Samson and bring the bank down on our heads.”

Instead, McWilliam talks of more modest measures, such as taking a listing on the Tokyo Stock Exchange and promoting some of the bank’s regional entities that he believes the market undervalues. A glossy new 12-page brochure describing its global operations entitled “Positioned for Growth” is one effort to convey this message.

“Our job is to translate this value into the marketplace,” he said.

Over the past two years, Lloyds has gradually built up a war chest for a major acquisition, selling a 21% share of Grindlays Holdings in 1984 and a similar stake in the Royal Bank of Scotland last year, and then agreeing to the $263-million deal with Sanwa in California.

Lloyds’ senior management explained each deal as part of a corporate plan to divest the bank of less profitable holdings and concentrate on core markets domestically and in Europe. But Pitman indicated that much of this may have been subterfuge.

“Standard Chartered has been in our sights for some years,” he said.

While the Standard Chartered name would remain “where appropriate,” Pitman indicated that its federalist philosophy would not.

“The theme would be freedom within a framework,” he said. “People need speedy lines of communication and operational freedom, but they also need a common purpose. There are global products that must be marketed--private banking, Swiss investment and trade finance--and there must be coordination.”

BRITAIN’S BIGGEST BANKS

PRETAX OFFICES ASSETS* DEPOSITS* PROFITS (U.K.) (overseas) National Westminster 104.8 93.6 1,162 n.a. n.a. Barclays 94.2 79.7 1,234 3,000 1,000 Midland 84.0 75.8 507 n.a. n.a. Lloyds 63.3 56.6 811 2,700 500 Standard Chartered 41.6 35.2 387 27 2,000

*In billions of dollars **In millions of dollars

Money figures are from 1985 annual reports and have been converted to dollars at the Dec. 31 exchange rate of $1.445 to the pound sterling.