How to get a slice of the action
Billions have been paid out to investors following flotations and takeovers. Who's next on the list? By Brian Tora
Saturday 28 October 1995
Billions have been paid out. Where has all this money come from? More importantly, how do you grab a slice of the action?
Takeover activity has come principally from banks, building societies and the privatised electricity companies. Cheltenham & Gloucester and National & Provincial are big societies that have fallen to bigger predators. Societies have members. The members agreed to the takeover. The members reap the benefits.
Deposit-holders with these societies before the takeover announcements will have received a bonus based on how much is on deposit and how long they have been with the society. Mortgage- holders, too, can benefit. Building societies, after all, were formed to let people club together, those with surplus cash giving those needing it the chance to buy a house.
Societies have had to change the rules for taking on depositors because of the rush of investors seeking to open new accounts in case a takeover occurs. Yet it was only a decade ago that Abbey National, then the second- largest building society, turned itself into a bank. Before then no one thought that owning a building society share was a way of making a quick buck.
The biggest bonus to building society depositors will be the flotation of Britain's premier building society, Halifax. It announced its intention to go to the stock market as it swallowed the smaller Leeds. This flotation will give many depositors shares in the new bank. Those who wish can sell their holdings to receive a cash benefit.
Flotations may give some of the best opportunities in the future. Recently Norwich Union announced that it would abandon mutual status to become a fully listed public company. Mutual insurance companies are like building societies. They have owner-members. If they decide to opt for a stock market quote, then it is the members who receive the shares, which they can buy and sell. It is not difficult to see why Norwich Union is taking this route. Life assurance has been a difficult market recently. Consolidation has taken place in the industry and more is expected. If Norwich Union wishes to compete on the European stage, it needs access to the stock market to raise money. Issuing its own shares for acquisitions may prove a simpler way of mopping up smaller rivals.
There is still time to benefit from the flotation of Norwich Union, although caution is advised. Policy-holders will benefit and as the plans have not yet been announced, even those who take out a policy today may have a chance to see an extra return on their investment.
But take care! The deal may not go ahead. And if it does, you must remember that the penalties for taking out a life policy and surrendering early are considerable. Also, not every policy-holder will be eligible for shares in the newly floated Norwich Union. With-profits holders should, but unit-linked investors may be excluded.
What Norwich Union is considering, others could soon adopt. Standard Life is the largest mutual assurance company in Europe. Based in Scotland, it enjoys, with Norwich Union, a strong brand image and a good reputation. But the life assurance industry has its problems. According to the latest Bacon & Woodrow survey, some 43 per cent of companies have an expense ratio which places their very existence in danger.
Of course, many smaller mutual companies may provide fruitful pickings for those wanting to be a policy-holder in next year's takeover target. For my mind, though, there are less risky ways of joining the takeover trail. Quoted life assurance companies may themselves come under the hammer. And banks, too.
The Lloyds bid for TSB is just one of a series of moves that could well see Britain's banking industry consolidated into fewer, more powerful groupings. Royal Bank of Scotland is a possible takeover target. Activity need not, however, be confined to domestic mergers. We could well see a growing Europeanisation of the retail market, just as investment banking has become a cross-border business with Deutsche Bank owning Morgan Grenfell, Dresdner buying Kleinworts and Swiss Bank Corporation absorbing Warburgs.
Do not forget utilities. Many of those who acquired electricity company shares when floated have made four times their money through takeovers. Interestingly, many City analysts initially thought the water companies would excite the bidders' interest, but it seems that a greater fear of government intervention deterred buyers.
We may yet see some consolidation in this sector, though. The capital spending needed to bring the water and sewerage pipe network up to date is considerable. Some economies of scale might be justified by greater resources.
Remember one golden rule. City professionals will tell you that profits from a takeover should be a bonus.You should buy on the merits of that share or life assurance policy alone. If, as a result of a subsequent takeover or flotation you benefit, then so much the better.
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