Takeover activity has investors flocking in search of windfalls

A wave of mergers means carpetbagging could soon be as big as it was in the 1990s.

Carpetbagging is back in fashion. With a wave of new building society and mutual insurance mergers sweeping the financial services sector, an ever growing number of savers are placing their money with mutuals, in the hope of raking in a free handout should their provider be involved in a takeover or demutualisation.

The practice of carpetbagging first became popular in the 1990s - when the demutualisations of companies such as Halifax, Abbey National and Norwich Union generated handouts of hundreds and even thousands of pounds. Many savers opened accounts with building societies and mutual insurers purely in the hope of qualifying for a windfall, and some made several thousand pounds for very little effort.

However, after a lull in activity at the turn of the millennium, the mutual sector appears to be springing back to life.

Later this year, members of the Portman building society are set to receive windfalls of between £200 and £1,000 when industry giant Nationwide completes its takeover of the society.

And this week's announcement that Royal London, the country's largest mutual life assurer, is in talks to combine with smaller rival Royal Liver, has ignited hopes of further payouts from the insurance sector. Last year, customers of Standard Life received healthy handouts when the company demutualised.

Kevin Mountford, head of savings at Moneysupermarket.com, says people could still make money from the art of carpetbagging - where accounts are opened purely to benefit from future windfalls - to the intense irritation of mutuals.

"It was very prevalent 10 years ago and the industry is trying to paint it very much as a dirty word," he said. "I personally believe there could be more merger activity so from a consumer's point of view there is the potential to earn bonus payments."

Most societies introduced clauses in the late 1990s which forced those opening accounts to donate windfalls to charity, but in many cases these restrictions only last for five years. This means thousands of people could now be eligible to benefit.

Adrian Coles, director general of the Building Societies Association, agrees further mergers are a possibility but he is adamant that the industry's importance is not diminishing - despite the number of societies falling from over 200 to 60 in 25 years.

"I suspect there will be more mergers due to competition, narrowing margins and, in some cases, economies of scale," he said. "However, there will be plenty of societies that think organic growth without a merger is the way ahead and will be successful."

This view is echoed by Simon Walker, a partner at KPMG which produces the annual Building Societies Database. "Societies are now more optimistic," he said. "There's a sense that they're beginning to diversify and face the future with more confidence than they have done for a while."

Mutual societies are certainly keen to promote the benefits of mutuality. Research to be published this week by the Association of Mutual Insurers will show, for example, that 25 year with-profits pay-outs by mutuals are, on average, 33 per cent higher than those delivered by plcs.

According to Shaun Tarbuck, chief executive of the AMI, this illustrates the fact that policyholders get a much better return from a mutual.

"Most are extremely well run organisations and very efficient," he said. "In fact, if you demutualised you'd be doing a disservice to policyholders by adding costs that weren't there previously."

Mutual societies will also have a better chance of growing their businesses - while at the same time getting more protection from carpetbaggers - if the Financial Mutuals Arrangements Bill, introduced by Sir John Butterfill, is eventually passed.

This bill, which aims to loosen restrictions on operating conditions of mutual societies, has already safely navigated its way through the House of Commons and is now being considered by the House of Lords.

Sir John believes the bill would be a boost for the industry as it would not only relax the funding limits currently imposed, but also enable them to merge more easily with one another.

"It will make it easier for building societies to compete on a more level playing field as they'd have access to the capital markets," he said. "They will also be able to merge without losing their mutual status which is very important to them."

Two's company: what members won in recent mergers

* Nationwide and Portman: Merger due to complete in September 2007: Members of the Portman are in line for pay-outs of between £200 and £1,000 after they backed a tie-up to create a lender with assets of more than £150bn.

* Newcastle and Universal: This merger, completed at the end of last year, resulted in pay-outs of at least £400 to the latter's members.

* Leeds and Mercantile: Windfall payments of between £100 and £1,000 for Mercantile's members were triggered by the merger, which was completed last August.

* Portman and Lambeth: These two announced in March last year that they were to tie the knot. Qualifying members of the latter got a windfall of least £400. The merger was finalised in October.

So what should savers do? Ben Yearsley, investment manager at Hargreaves Lansdown, said: "If you have an existing building society account paying a decent rate of interest then I see no problem in staying with them.

"However, if they're only paying a small sum consider moving. You might make £500 if it floats but you have to think what you'll lose in interest."

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

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