Midland Bank plc

1836–1923

Midland Bank plc is one of the leading deposit banks in the United Kingdom. Following its heyday in the first half of the 20th century, when it was the largest bank in the world, Midland flirted with disaster in the 1980s due to an ill-conceived international expansion and then recovered some of its luster after its acquisition by HSBC Holdings plc.

Rapid Growth in the 19th Century through Acquisitions

The Birmingham & Midland Bank was founded in 1836 as a joint-stock company. The leading figure among its founders was Charles Geach, a 28-year-old Bank of England clerk stationed in Birmingham who quit his job to become the new institution's general manager, which he remained until his death in 1854. Midland's starting capital was a very modest £28,000, but the bank quickly proved to be a successful enterprise. It prospered until 1851, when it acquired Bates & Robins, a Stourbridge private bank. In 1862 it added Baker & Crane, another private bank. These two acquisitions marked the beginning of a long series of amalgamations that would turn Midland into a banking powerhouse by the early years of the next century.

Despite its early success, Midland remained a relatively small institution for the next 20 years, its operations limited to Birmingham and the immediate area. But the bank expanded in the 1880s, beginning with the acquisition of Union Bank of Birmingham in 1883. Amalgamation with Coventry Union Banking Company and Leamington Priors & Warwickshire Banking Company followed in 1889, as well as Derby Commercial Bank, Leeds & County Bank, and Exchange & Discount Bank, Leeds in 1890.

Edward Holden became Midland's general manager in 1891, and it was under his guidance that the bank experienced its greatest rise in stature. Perhaps the most momentous decision of his career as the head of Midland was also one of his earliest: in 1891, Midland acquired Central Bank of London. In one leap, the bank transformed itself from a provincial institution with a presence limited to the industrial Midlands to one with nationwide ambitions and a strong presence in the financial capital of the world. Midland moved its headquarters to London that year and renamed itself London & Midland Bank (it would drop the first half of the name in 1923, giving it its current form).

A further wave of acquisitions in the 1890s established Midland's presence throughout England, from the Scottish border in the North to the Channel Islands in the South. By 1898, it had 250 branches in England and Wales and £32 million in deposits. Holden's expansion policy was nothing if not aggressive; a contemporary cartoon portrayed him as a hunter bagging hares labeled with the names of Midland acquisitions. He would make an unsolicited takeover offer for a bank and, if it refused, open a Midland branch to compete with it as soon as possible.

Continued Expansion in the Early 20th Century

Midland's expansion continued into the early years of the 20th century. The acquisition of North & South Wales Bank in 1908 was one of its more important acquisitions, giving Midland stronger Welsh connections. In 1914 it took over Metropolitan Bank, a substantial institution in its own right with deposits of almost £12 million. In that same year, Midland expanded its presence into Northern Ireland with the purchase of a large interest in the Belfast Banking Company. And in 1918, the bank made its largest acquisition to date when it bought out the London Joint-Stock Bank, with more than £60 million worth of deposits.

In 1981, Midland acquired a 57 percent stake in Crocker National Bank, the fourth largest bank in California and twelfth largest in the United States, for $820 million.

1898–1967

Midland also took an increased interest in foreign loans and underwriting during this time. After assuming the title of managing director in 1898 and delegating much of his authority to senior executives, Holden traveled to North America and became convinced that his bank ought to do more overseas business. His straightforward manner won him friends in the American banking community, and he once considered opening Midland branches in New York and Chicago. At Holden's instigation, Midland opened a foreign exchange department in 1905 and was the first British deposit bank to do so. His London colleagues criticized the move as unconventional, but it proved so successful that all of Midland's major competitors eventually followed suit. The bank's traveler's check business and its installation of branch offices on Cunard ocean liners in 1920 both stemmed from this interest in foreign business.

Sir Edward Holden (he had been made a baronet in 1909) died in 1919. He had started out as a bank clerk and worked in the banking business all of his life; it was a sign of the stature that Midland Bank had achieved during Holden's reign that his successor as chairman was a Cambridge graduate who had served as first lord of the admiralty, home secretary, and chancellor of the exchequer in the liberal government of Prime Minister Henry Asquith. The Rt. Hon. Reginald McKenna left politics in 1917 to become Holden's heir apparent, but remained an outspoken authority on economic matters all of his life and was a noted ally of John Maynard Keynes.

Under McKenna, Midland stopped its practice of expansion through acquisition, but only because treasury regulations in the 1920s made mergers virtually impossible. The purchase of North of Scotland Bank in 1924 would be Midland's last acquisition for more than 40 years. Despite these difficulties and the political and economic instability of the interwar years, Midland still prospered and expanded through its branch network. By 1939, it had more than 2,100 branch offices. By 1934, it had become the largest deposit bank in the world, with more than £457 million in assets.

Reginald McKenna died in 1943. During the 1940s and most of the 1950s, Midland was comparatively dormant, at first because of the disruption and destruction caused by World War II, and after the war had ended, because of tight credit restrictions. Expansion of its branch network stopped.

Falling Behind Competitors: 1950s-1970s

The government eased credit restrictions in 1958 and expansion resumed, but Midland found that it had fallen behind its major competitors--Barclays, Lloyds, National Provincial, and Westminster formed the Big Five deposit banks along with Midland--in developing its foreign operations, an area in which it had once blazed the trail. To rectify this situation, Midland combined with the Commercial Bank of Australia, Canada's Standard Bank, and the Toronto-Dominion Bank in 1963 to form Midland and International Bank. The new institution was designed to engage in both merchant and development banking activities, and it also marked the first time that a British bank participated in an international banking joint venture.

In 1967 Midland scored another first when it purchased a 33 percent interest in the merchant bank Samuel Montagu. This marked the first merger in Britain between a merchant bank and a deposit bank and was taken as a sign that the Bank of England was willing to blur the traditional lines between financial companies. Midland wanted to diversify its activities and also sought Montagu's expertise in international markets, and Montagu felt that it would gain business among Midland customers.

During the late 1960s, as Midland shed its image as a banker's bank and a correspondent bank, it cofounded Bank Europ&eacute-e de Credità Moyen Terme and several other consortium banks, with Deutsche Bank, Amsterdam-Rotterdam Bank, and Société General de Banque, but later divested itself of these consortium banks.

1974–1988

In 1974 Midland increased its stake in Samuel Montagu to 100 percent. It also acquired another merchant bank, the Drayton Corporation, and merged it with Montagu. This stronger commitment to merchant banking did not work entirely to Midland's advantage, however; Montagu's financial performance had been solid, but Drayton came with many questionable real estate investments, causing Midland's position in merchant banking to slip somewhat after the acquisition. In 1982 it sold a 40 percent stake in Montagu to Aetna Life and Casualty, only to buy it back in 1985.

International Ventures in the 1980s

Despite its international ventures, Midland still lagged behind its rivals in establishing an overseas presence in the late 1970s. The problem was that Midland had done all of its foreign business through correspondent banks, consortiums, and joint ventures and had little direct representation abroad. Midland promptly tried to make up for lost time, but with mixed results. In 1979 it acquired 67 percent of Banque de la Construction et les Travaux Public, a French mortgage and real estate bank. That year it also made a bid for the American financial company Walter E. Heller, but called it off after discovering that Heller held an unusually high number of problem loans in its portfolio. In 1980 Midland purchased 60 percent of Trinkaus und Burkhardt, West Germany's largest privately owned bank, from Citicorp. And in 1982 it acquired a 69 percent interest in Handelsfinanz Bank of Geneva from Italy's Banca Commerciale Italiana. These acquisitions gave Midland a substantial expertise in foreign markets.

But the centerpiece of this strategy was an unqualified disaster. In 1981, Midland acquired a 57 percent stake in Crocker National Bank, the fourth largest bank in California and twelfth largest in the United States, for $820 million. It was the largest foreign takeover, ever, of an American bank. Midland, of course, sought to establish a large direct presence in one of the most prosperous regions in the country through the deal, and Crocker felt that the increase in capital would allow it to expand. Midland, already the third largest deposit bank in Britain, became the tenth largest banking organization in the world when the deal was consummated.

But the honeymoon did not last long. Crocker's financial performance began to falter almost from the moment Midland took it over, and it collapsed in 1983 when it posted a loss of $62 million for the fourth quarter. Plagued by bad real estate loans and a substantial share of Latin American debt, it went on to lose $324 million for its parent company in 1984, causing The Economist to exclaim in one headline, "What a big hole Crocker is making in Midland's pocket." Nevertheless, Midland stuck by its beleaguered subsidiary, even buying out the rest of Crocker's stock in 1985 after it hit its rock-bottom price of $16.25 per share, down from $90 in 1983. Before long, however, Midland decided that it had had enough. In 1986 it sold Crocker National to one of its California rivals, Wells Fargo & Company, for $1.1 billion, roughly the same amount of money that Midland had sunk into Crocker.

But the Crocker debacle did not end there. Five years of nursing a major acquisition had stunted Midland's capital base while its competitors increased theirs. So when Sir Kit McMahon, an Australian-born former deputy-governor of the Bank of England, became chairman and CEO in 1987, his first priority was to bolster Midland's capital by means of a rights issue and by selling assets. Profitable regional subsidiaries in Scotland, Ireland, and Northern Ireland were divested in 1987. In the same year, Midland Montagu was established, combining the group's treasury, global corporate, international, and investment banking businesses. Midland Montagu was the result of the merger of Samuel Montagu & Company; Greenwell Montagu Gilt-Edged, the leading British government bond primary dealer; and Midland's international corporate banking operations. Overall, the bank aimed to concentrate on its core domestic banking business, deemphasizing international operations.

Optimism about Midland began to surface again in the securities markets, and its depressed stock looked like a bargain. In 1987 several parties purchased substantial interests in the bank. Hanson Trust acquired 6.5 percent, tabloid publisher Robert Maxwell acquired 2.5 percent, and Prudential Insurance Company bought two percent. In 1988 the Kuwaiti Investment Office disclosed that it owned a 5.1 percent stake in Midland. All of this led to speculation in the financial press that Midland might itself become a takeover target. Midland reacted in late 1987 by agreeing to let the Hongkong and Shanghai Banking Corporation acquire a friendly 14.9 percent of its stock. Hongkong agreed to hold the stake for a standstill period of three years while the two banks consolidated and rationalized their international businesses, with Hongkong to concentrate on Asia and Midland on Europe.

Acquisition by HSBC

1987–1995

Midland's 1987 results illustrated that the bank was recovering from, but still seriously affected by, its disastrous international forays. Operating profits before provisions increased 18 percent over the previous year to £511 million, but because the bank was forced to take a huge provision for bad debt (primarily to guard against defaults on shaky Third World loans undertaken earlier in the decade), it posted an overall operating loss of £505 million. On the positive side, the asset sales, rights issue, and outside purchases of Midland stock had improved the bank's capital strength.

The three-year agreement between Midland and Hongkong was an important component of Midland's newfound domestic focus. For example, in 1988 Midland Bank Canada was transferred to Hongkong Bank of Canada. Although the agreement was not renewed in 1990, Hongkong retained its large stake in Midland. The two companies entered into merger talks in 1990, but the talks broke off late in the year because of what were termed "financial difficulties."

In 1991 Midland was still struggling to recover when McMahon resigned in March; he was replaced as chief executive by Brian Pearse, who had been finance director at Barclays. The same week as McMahon's departure, the bank announced that its dividend would be reduced from 18p to 9p, the first time in history Midland had cut its dividend.

Meanwhile, Hongkong reorganized itself in 1991, creating a new holding company, HSBC Holdings plc, and making Hongkong a subsidiary of HSBC Holdings. HSBC stock was set up on both the London and Hong Kong markets, showing the importance Hongkong placed on Europe (and London) for its future. This emphasis was borne out the following year when the long-anticipated merger of Hongkong and Midland finally occurred.

In March 1992 HSBC Holdings made a friendly takeover offer for Midland, amounting to 378p for each share of Midland stock. The next month Lloyds contemplated entering into the bidding with a hostile takeover offer of 400p per share. For Midland, a merger with HSBC would keep its domestic operation fairly intact; HSBC planned to earn back its investment from synergies that would develop between the two largely complementary operations. By contrast, merging with Lloyds would mean the end of the Midland name and huge reductions in branches and employees; Lloyds planned to cut costs dramatically to make the takeover pay off. The sharp differences between these choices quickly became moot when HSBC upped its offer in June to 480p per share, leading Lloyds to decide not to pursue Midland anymore, concluding that the price had grown too high. HSBC ended up paying £3.9 billion (US $7.2 billion) to acquire Midland. About the same time this deal was being concluded, Midland continued its focus on banking by divesting its travel agency subsidiary, Thomas Cook Group Ltd., through a £200 million (US $363.9 million) sale to the LTU Group, a German travel operator.

Over the next few years, HSBC worked to revamp Midland and bring the bank under HSBC control. Management was almost immediately shaken up, as Midland's two management boards were reduced to one, an entire layer of management was eliminated, and HSBC executives were brought in to take over key slots. In July 1992 two senior Midland executives--Gene Lockhart, head of domestic banking, and George Loudon, head of international banking--resigned, and Keith Whitson, who had headed up HSBC's Marine Midland (no relation to Midland Bank) subsidiary based in New York, was brought in as deputy chief executive reporting to Pearse. Whitson soon moved into the top spot, replacing Pearse, who took "early retirement." HSBC placed its own people in the other key positions as well. Another change was the merger of Midland's corporate and institutional banking operations.

Overall, a few years after its completion, the merger was viewed positively by most analysts. Thanks to its improved capital base, Midland's market share was improving because the bank could seek out younger, riskier customers who bring in more profits. Companywide, profits recovered and grew steadily: £844 million before tax in 1993, £905 million in 1994, and £998 million in 1995.

Midland Bank, although no longer an independent firm, faced a much brighter future in the mid-1990s than it did just a few years earlier. Backed by the deep pockets and international strength of HSBC Holdings, Midland was well positioned to regain some of its past glory.