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* Talks with a European investor failed
* RBS unwilling to retain stake in M&A unit
* Bankers eager to take time off amid gloom outlook
By Sophie Sassard
LONDON, Jan 30 (Reuters) - Royal Bank of Scotland is finally pulling the plug on its mergers and acquisitions unit after no white knight investor emerged to keep it afloat, two people familiar with the plan said.
The bank, 81 percent owned by the British government, decided a year ago to exit M&A, bowing to pressure from the UK government to shut down risky operations and prepare for tougher international regulations, as part of a restructuring plan to scale back on activities deemed non-core.
Chief Executive Stephen Hester has already shrunk RBS by 700 billion pounds ($1.1 trillion) since he began repairing its balance sheet four years ago.
At the height of the 2008 financial crisis, RBS came within hours of running out of cash, and Britain had to pump in 45.5 billion pounds to prevent a potentially catastrophic failure of what at the time was the world's fifth largest bank.
Around 40 of the top M&A bankers at RBS, led by head of corporate finance John McIntyre were hoping to find an investor to support a spin-off advisory boutique as reported by Reuters in April, but that plan did not succeed, resulting in the closure of the unit.
"It's dead. Most people have left", one of the people left behind said.
RBS declined to comment.
The M&A division made around $790 million from completed transactions in the past five years, data from Thomson Reuters estimates.
The remaining RBS M&A team were hoping the business could attract interest from a rival bank and that RBS would retain a stake in the unit as an investment. But gloomy prospects for M&A activity derailed such a scenario.
The value of mergers and acquisitions globally edged slightly higher last year, rising 2 percent to $2.6 trillion according to Thomson Reuters/Freeman Consulting data.
But a reduction in the number of large deals translated into a drop in fees, down 13 percent to $24.7 billion - bad news for investment banks facing higher costs from tougher capital rules and regulatory probes.
"We held discussions with a European player but we failed to agree on terms," the person familiar with the plan said. "No one is really keen to invest in M&A at the moment".
Some junior bankers have already found jobs with other banks while senior bankers are expected to take some time off after a busy though stressful year, the person said.
RBS advised GIP (Global Infrastructure Partners) on its 807 million pounds ($1.30 billion) acquisition of Edinburgh airport in 2012 and had won a mandate to advise Spain on its privatisation of Madrid and Barcelona airports, which was then put on ice due to a government change.
The firm also helped engineering firm Charter International in its defence against turnaround firm Melrose before it was sold in January to U.S. engineering group Colfax for 1.53 billion pounds.
RBS sold its corporate broking business, Hoare Govett to American investment bank Jefferies last February, which was subsequently acquired by its biggest investor Leucadia for $2.8 billion.
RBS has come under pressure from the coalition government in Britain to focus more on retail banking rather than its riskier investment banking arm.
On Tuesday, the bank was criticised by British trade union Unite over a report in the Financial Times saying it planned to pay its investment bankers bonuses of as much as 250 million pounds at a time when branch staff are being laid off.
The government has stepped up the pressure since the start of the year on RBS, which has come to symbolise for many in Britain the worst excesses of the financial crisis.