BoS and Halifax agree merger

The new bank will "deliver significant additional opportunities for growth"

Chiefs at the Bank of Scotland and Halifax have agreed terms over their £30bn merger.

The new bank, called HBOS, will have its headquarters in Edinburgh, where Bank of Scotland is based, while High Street banking activities will be focused in Halifax itself.

The Big Five of banking

RBS/NatWest

HSBC

Lloyds TSB

Barclays

HBOS

But in a surprise move the two top management posts will be filled with Halifax executives.

Negotiations over the headquarters and executive appointments are thought to have held up an earlier agreement of the deal, which will create the UK's 11th largest listed company.

The latest round talks had lasted all night, until 0600 on Friday morning.

Investors cheered the news, and as the share price of both banks surged, the value of the combined company soared from £28bn to £30bn.

Job cuts

The merger will allow the banks to challenge the 'big four' UK High Street banks, and muscle in on the "profitable" market of offering banking services to small businesses.

HBOS in numbers

Staff: 55,180

Branches: 1,125

Combined market value: £28.4bn

Pre-tax profit (2000): £2.97bn

It will also allow savings of £620m to be achieved, through measures including the axing of 2,000 jobs.

There are opportunities in particular to achieve "sizeable savings" in back offices serving High Street operations, the banks said in a joint announcement.

But there are expected to be few compulsory redundancies.

"Three times this number of employees left Halifax and Bank of Scotland last year," Friday's statement said.

Compared with other banking mergers, employees have been spared the worst. When Royal Bank of Scotland and the NatWest merged 18,000 jobs were cut.

The banks last year employed a total of more than 58,000 people, and between them earned pre-tax profits of about £2.97bn.

'Exceptional fit'

Peter Burt, group chief executive at the Bank of Scotland, said there was an "exceptional fit" between the two banks.

Peter Burt: Halifax and BoS have "shared strategies"

"We have complementary businesses and shared strategies and cultures."

Bank of Scotland is seen by analysts as being an expert in business banking while Halifax, a former building society, is the UK's largest mortgage lender.

The lack of significant overlap presents significant opportunity for the merger partners to cross-sell products to each others' customers.

"Not only will this merger accelerate the existing prospects of both groups, it will also deliver significant additional opportunities for growth."

He later told City analysts he thought that HBOS would be the "best balanced business" in the UK financial services sector.

Mr Burt's opposite number at Halifax, James Crosby, said that HBOS would deliver "value and transparency to customers and sustained growth for shareholders".

Stumbling blocks

Under the merger terms, which have yet to be agreed by the banks' shareholders and competition watchdogs, Mr Burt will become deputy chairman of the new bank - in charge of making the merger work - with Mr Crosby taking on the chief executive role.

HBOS will be based at the Bank of Scotland HQ in Edinburgh

HBOS will be chaired by Lord Stevenson, currently the chairman of Halifax and also chairman of Pearson, which publishes the Financial Times.

Agreement over the leadership positions was said to be one stumbling block during merger negotiations between the banks.

Bank of Scotland's Peter Burt said he was due to retire in a couple of years anyway, and did not want to become a "lame duck" chief executive and risk causing more upheaval in the newly formed group by forcing it to search for a new boss in two years time.

But most controversy is reported to have centred on the siting of HBOS's headquarters.

Both Halifax, founded in 1853, and 306-year-old Bank of Scotland are seen as business icons in their regions, and closing of either bank's head offices would have been likely to provoke controversy.

'Merger of equals'

Friday's agreement would see shareholders receive one HBOS share for every Bank of Scotland or Halifax share currently held.

But, while the deal was billed by the banks as a "merger of equals" when it was trailed last week, Halifax shareholders will in fact own the majority of HBOS.

Thanks to greater number of Halifax shares in circulation, Halifax shareholders will own 63% of the new bank.

Bank of Scotland shareholders will own the remaining 37%.

Future concerns

Bank of Scotland also on Friday unveiled pre-tax profits up 12% to 1.08bn, based on strong growth in business banking.

While statement recognised the threats to the profitability of UK firms posed by the slowdown in the US economy, the bank expressed optimism that central banks were acting to "prevent a serious cyclical downturn".

"The market is becoming more challenging, but we have the strength and flexibility to grow assets and profits," said Sir John Shaw, Bank of Scotland governor.

"We look forward with confidence."

In the City, Bank of Scotland shares stood 32.5p higher at 843.5p in midday trade on Friday.

Halifax shares stood 27p up at 820p.