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The BBC's Andrew Verity
"If Lloyds had been allowed to buy Abbey National... 9,000 staff would have lost their jobs"
 real 56k

Former Abbey National Chief Executive, Peter Birch
"We should allow British banks to get larger"
 real 28k

Dai Davies, banking union Unify
"We are very pleased they have taken this move"
 real 56k

Tuesday, 10 July, 2001, 16:24 GMT 17:24 UK
Lloyds TSB/Abbey tie-up blocked
Abbey National, Lloyds TSB, Patricia Hewitt graphic
Lloyds TSB's 18bn takeover bid for Abbey National has been blocked.

Patricia Hewitt, trade and industry secretary, said she had followed the unanimous decision of trade watchdogs, and decided that the merger would be against the public interest.

The ruling, which had been widely expected, will come as a setback for Lloyds TSB, which responded by reaffirming its takeover ambitions.

"We will continue to focus on delivering value for shareholders through organic growth and acquisitions," the bank said.

But the decision will be welcomed by union leaders, who feared the deal would have cost significantly more jobs than the 9,000 forecast by Lloyds, and Abbey directors, who rejected two takeover approaches as "inadequate and uncertain".

Abbey on Tuesday said it would "pursue its aggressive growth strategy".

Higher prices

Ms Hewitt's ruling follows a four month inquiry by the Competition Commission into Lloyds' takeover proposals, which were unveiled in December.

Timeline - Lloyds' bid for Abbey National
December 3: Abbey reveals approach from Lloyds
December 12: Abbey directors reject Lloyds' bid
January 31: Lloyds publishes offer details
February 23: Bid referred to Competition Commission
March 30: Public hearing into merger
June 12: Commission passes findings to Patricia Hewitt
July10: Ms Hewitt blocks deal
The commission believed that the merger would reduce competition in the current account market, in which the combined Lloyds/Abbey group would have a 27% share.

It would also hit efforts to boost competition among providers of small business banking services, "with the adverse affects in both markets of higher prices to customers and reduced innovation", Ms Hewitt said.

Although the commission accepted that the merger would lead to efficiency savings, which Lloyds estimated at 1bn a year, it "did not consider that these would be passed on to consumers in reduced prices".

Commission officials said they had considered ideas such the disposal of Lloyds' Cheltenham & Gloucester division, or Abbey's Cahoot, to ease fears of market dominance.

But they concluded that such steps "raised practical problems".

"Prohibiting the merger was the only remedy capable of fully addressing the adverse effects," the DTI said.

Key reports

The commission rated Abbey as one of the few banks able to compete against the UK's big four High Street banks - Barclays, Lloyds, Royal Bank of Scotland/NatWest and HSBC - whose grip on some financial services markets has raised widespread concerns.

Don Cruickshank
Don Cruickshank: influential report
A report by Don Cruickshank, chairman of the London Stock Exchange, in March warned that major UK banks have a monopoly in the small business market, restricting price competition for customers.

And on Monday, DeAnne Julius, a former member of the Bank of England's monetary policy committee, issued a report recommending measures to encourage competition and choice for bank customers.

Fifth force?

Ms Hewitt's decision opens the way for Abbey to become the fifth force in UK banking, analysts said, although it may be overtaken by a merged Bank of Scotland/Halifax group, should the banks' ongoing tie-up efforts succeed.

"[Abbey] has been growing in the market for small businesses, exploring international markets - this decision could allow time for Abbey to fulfil this potential," Mr Centis told BBC News Online.

Nonetheless, Abbey may yet lose its independence, with National Australia Bank (NAB), Australia's biggest bank, said to be interested in entering a bid.

NAB, which already owns Yorkshire and Clydesdale banks in the UK, sold National Michigan Bank for a profit of 1.6bn Australian dollars in March.

"Merger with the NAB could have significant advantages for Abbey, helping it further its aims to develop from the mortgage-based business of old into an international concern," Mr Centis said.

NAB, Australia's largest bank, has declined to comment on the rumours.

Lloyds' options

Lloyds reaffirmed after the ruling its opinion that a merger with Abbey would not have "adversely impacted" competition in UK banking.

Peter Ellwood, chief executive, Lloyds TSB
Peter Ellwood: Lloyds "looking overseas"
"The financial services market in the UK is a highly competitive market," the bank said.

And chief executive Peter Ellwood confirmed the views of City analysts, who believe the bank will now look abroad for a takeover target.

"What we have been doing and continue to do is to look overseas," Mr Ellwood said.

"We have been looking in Europe and also in North America and I think the climate is beginning to be more favourable,"

An analyst told BBC News Online: "The bank has a few options in the UK - perhaps Alliance & Leicester or Northern Rock.

"But the UK bank merger wave is effectively over for the time being."

Market reaction

In the City, news of Ms Hewitt's decision prompted a revival in the price of bank shares, which have been hit in recent days following profits warnings by foreign rivals, although prices fell back in later trade.

Shares in Abbey National closed down 7p at 1,173p on Tuesday, while Lloyds TSB ended up 1p at 670p.

Abbey shares hit 1213p shortly after Ms Hewitt's announcement, with Lloyds stock reaching 696p.

Shares in Northern Rock, which some analysts view as a potential takeover target for Lloyds, were the sector's top performers, rising 5.5% to 607p, their highest closing price since April 1999.

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See also:

10 Jul 01 | Business
Patricia Hewitt statement in full
09 Jul 01 | Business
Banks 'must speed transfers'
02 May 01 | Business
Fifth force might help Lloyds deal
30 Mar 01 | Business
Watchdog hears merger protests
06 Mar 01 | Business
Big banks 'operate monopoly'
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