M&A: markets gulp as Lloyds swallows HBOS

At the weekend, there were dark murmurs - HBOS was in deep trouble and there were frantic comings and goings of senior officers, lawyers and other advisers at the offices of the FSA and the UK Treasury which continues to protest the fiction that the Bank of England and the FSA are independent.

But unlike so many financial institutions, HBOS was not going cap in hand. They were trying to secure a deal to allow them to be the subject of an immediate and rapid takeover by LloydsTSB a UK leader in personal and SME banking.

LTSB immediately set about explaining how it was going to get some of its money back: in a statement it said that it had identified GBP1 milliard of costs savings, much of it from duplication of branches and services in the next three years.

Much of the leverage for the rapid moves, which are in the face of the usual processes for consumer protection, comes from the fact that Sir Victor Blank is a close friend of Gordon Brown. And one thing the British have learned since 1979 is that whatever friends of Tony Blair and Gordon Brown want, they generally get.

For sure, HBOS - which had been the victim of a market scare several months ago - was in trouble. But in the great scheme of things, it wasn't that bad. LTSB has suddenly leapt from minnow to tiger shark for the relatively paltry sum of GBP12.2 milliard.

And what about those anti-competition rules? John Hutton, Secretary of State for Business waved them aside: the government will intervene in any processes relating to the takeover, saying it is in the national interest.

Otherwise, there is almost no hope that the deal would have passed the competition approvals process.

Alistair Darling, Brown's proxy at the UK Treasury, told the BBC “We have said we would do everything we possibly can. It was clear — and HBOS knew it — that they were going to have to do a deal, so of course we helped"

The word was out on HBOS on Monday: for the second time in a year the target of huge selling down of its stock, and perhaps a victim of Lehman Brother's paranoia-based contagion based on little more than the fact that it has a huge household mortgage book. In three days, its price fell 56%, but today it bounced back more than 38% on news of the deal. Quite why HBOS has been targeted in this way is not known - but it's clear that a catastrophic fall in the share price of the bank left it exposed to liquidity problems.

Most of the combined workforce of more than 140,000 is in the UK, lifting some of the weight from the claim by Loyds TSB CEO Eric Daniels that "This is a landmark day for the British financial services industry. If you think about the company, it really puts us on the global scale."

Well, not really: a massive fish in a small pond for sure but a long way from being, say, a Standard Chartered never mind an HSBC.

Now the once little Lloyds Bank, which has made a virtue out of staying out of the usual market shennanigins, is entering a new phase.

It took over the Trustee Savings Bank (hence the TSB in LTSB which perversely calls itself Lloyds-TSB Bank) and then a large building society, the Cheltenham and Gloucester. It has built its own ancillary businesses rather than buying up many although it did once buy out a firm of solicitors to create its conveyancing service.

Halifax was the UK (actually the world's) largest building society when it converted to a bank. Then it bought Bank of Scotland, which was having trouble swallowing National Westminster - a ramshackle old-fashioned bank that happened to own Coutts, famous for frock coats, attitude and being the Queen's bankers. With that package comes Scottish Widows, an insurance company that had its own problems several years ago.

The deal still has to be put to shareholders. It will form the UK's largest home-loan lender and it will have almost one in three UK retail bank accounts.

It does smack of monopoly.

But it also heralds every chance that HBOS will not be the last bank to be pushed under in this way.

Was it speculators? An inquiry should be mounted - and immediate steps, as in the USA this week, to block all short selling in financial sector shares.