The Anglo File: Barclays Leaderless but Not Rudderless

Barclays shares rose on merger hopes after the CEO departed. That's ironic considering they surged a few months ago on the same hopes when he was appointed.
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Traders have no problem with contradiction.

Just two months ago they bid up

Barclays

(BCS) - Get Report

, arguing the British icon's newly signed CEO would lead it into a merger. And when

Michael O'Neill

suddenly resigned Tuesday before he had even started, they continued to buy for exactly the same reason.

O'Neill, who said he couldn't take up the post because of an arrhythmic heartbeat, would have succeeded

Martin Taylor

, who abruptly resigned in November last year after disagreements with the board.

If the CEO-go-round is strange, the reaction of the market is downright perplexing. Barclays shares rose 2.5% Tuesday to close at 1919 pence on speculation Barclays' empty top slot left it open to a merger or takeover. They closed 1.4% higher Wednesday in London at 1944 pence.

The irony: The exact same speculation swirled when O'Neill's appointment was announced in February. At the time, the market concluded that because this American had been involved in two mergers during his time at

BankAmerica

(BAC) - Get Report

, Barclays was looking for a partner.

This time around, however, the speculation is the once-again-leaderless bank is a "wounded animal," a perfect target for a takeover, says Keith Baird, an analyst at

Enskilda Securities

.

If Barclays "can't find a CEO, they're wounded and vulnerable," says Baird. "At least that's the theory."

In fact, the opposite is true. While Barclays' shares have outperformed the local market by only 0.4% over the last 12 months, compared with 3.2% for the U.K. banking sector as a whole, they have soared in the past three months. Over that period, Barclays has outperformed the local market by 30%, compared with 16% for the sector.

Indeed, after Taylor's departure in November, Barclays shares stood at 1370 pence and the bank rebuffed offers from several sides, most notably the

Royal Bank of Scotland

. Why the bank should look more vulnerable with the shares at 1919 pence and a market capitalization of about $50 billion is anybody's guess.

Some of the improvement in Barclays' share price may lie with the rise of the market as a whole. The

FTSE

closed 1.1% higher on Tuesday, and it's risen almost 11% since the beginning of this year. However, there are hopes in the investment community that after a pretax loss of $437 million and a growth in costs of 5.4% in 1998, Barclays is beginning to address these problems and it has stated its intention to hold down costs to zero growth this year.

Steady as She Goes

Barclays was at pains on Tuesday to stress that while O'Neill's departure was a setback, the bank was already trawling though a list of suitable replacements and there was no change in strategy. And denials aside, there remain a number fundamental reasons why a merger is unlikely anytime soon.

There has been talk in the past about a possible get-together of Barclays and

National Westminster

(NW)

. This would be a merger between the U.K.'s second- and third-largest banks, and while it may look good on paper for its cost-savings and other synergies, the British government has made no secret of its dislike for concentrating so much market power in one bank.

Another merger possibility is with the Royal Bank of Scotland, which would be more amenable to the authorities because it is only a regional institution. Although the management of the Royal Bank is held in esteem and would solve Barclays' current CEO woes, the Royal Bank is a much smaller enterprise and it's unlikely Barclays would want to be taken over by a regional player.

Sir Peter Middleton, the long-serving interim chief of Barclays, noted that the bank remains interested in Europe, but this is unlikely to happen any time soon. Barclays, and indeed most other U.K. banks, have spent the large part of this decade getting out of Europe principally because the low margins on the Continent were diluting earnings from the very profitable retail business at home.

Although consolidation in the banking sector is picking up in countries like Spain, Italy and France, there is still some way to go before these countries will produce anything like the margins in the U.K.

An interesting possibility mooted could be

Prudential

, the large U.K. insurance firm. Not only would this placate the antitrust authorities, but Prudential has stated it is interested in pursuing banking further banking opportunities following the success of its retail banking arm, Egg.

While the departure of O'Neill is certainly a setback for Barclays, the idea that because the bank is headless it is also rudderless seems a bit erroneous.