Building society bonanza goes into retreat

City & Business
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The Independent Online
Angela Knight does surely not want to go down in history as the Treasury minister who lost the Conservative Party the 1997 election.

Her endeavours to redraw the legal landscape for the building society movement appear, however, to be edging her towards that dubious accolade. Well-intentioned though these endeavours may be, they do unfortunately have the potential to hold back a pounds 20bn injection of feelgood factor that is due to hit the economy next year. That injection will come from the various handouts due to be passed from the four building societies that are headed down the conversion road to their members.

The problem is that said injection may not appear if Ms Knight's plans to reform building society legislation are pursued with any vigour.

The difficulty for the building societies shedding their mutual status and moving into the brave new world of the plc is not so much the contents of the new legislation but its timing. The Alliance & Leicester, Woolwich, Halifax and Northern Rock are all at various stages in seeking their members' approval for conversion. The very prospect of new legislation is enough to force a complete review of the mountains of paperwork that have to be vetted and approved to ensure they comply with the strict regulations governing the conversion process. The worry is that now Ms Knight has started the legislative ball rolling, albeit in a most tentative and unclear fashion, the converting societies will have to wait to see where it stops so that any changes can be incorporated in the documentation they send to members.

The Alliance & Leicester is better placed than the others in that its documentation is already with members who are happily voting by post, no doubt in favour of receiving a handout. Both the Woolwich and the Halifax are in a real pickle. Their documents are being prepared with a view to despatch early next year. They either press ahead regardless, ignore the prospect of new legislation and flout every rule in the regulatory book. Or they delay and incorporate in their documentation the new legislation that with the best will in the world would only hit the statute book just before an election.

That delay would push back the physical receipt of the handouts and - more importantly - defer the feelgood moment when members receive confirmation that some booty is on the way. The anticipation of new wealth is as effective a fillip as the cash itself.

Timing is the key issue but there are also questions about the substance of the mooted legislation. In particular, there is concern about the proposal that would deprive newly converted building societies of their five year protection from takeover if they themselves acquired another financial institution. This does not protect the remaining mutual building societies from takeovers by other financial institutions, makes no allowance for an agreed deal and puts converting societies at a profound strategic disadvantage. The proposed legislation is therefore not only badly timed but also defective.

There is a way out of this problem for Ms Knight. She has set three criteria for passage of a Bill. There must be industry consensus, cross-parliamentary support and time in the legislative calendar. She may secure the last two but the first clearly does not exist. There is no industry consensus.

On that basis, she can say with a clear conscience that she did her best to secure that consensus but that it was not forthcoming. She can blame the building societies for the Bill being dropped and at a stroke remove the risk that she might stand accused of losing an election.

Power play

THE CHEERING mob which urged CalEnergy to make a hostile bid for Northern Electric has suddenly gone quiet. Contested takeovers are great fun and extremely lucrative for advisers but they are not necessarily the most effective means of securing a particular end. CalEnergy, having watched Dominion Resources smoothly secure the backing of the East Midlands board for its bid last week, must now be wondering if it might have been better served by adopting a less confrontational stance.

What Dominion and East Midlands demonstrated so eloquently is that there is indeed a price to be paid for agreement but it is one that can be channelled into the hands of shareholders rather than advisers. Credit here must go to both sets of managements, which had the foresight to recognise the importance of putting the shareholders' interests above all others.

Had Dominion followed CalEnergy's template it would have brusquely made an initial 610p hostile offer and after much rhetoric upped it to 650p a share, a level that East Midlands would have struggled to oppose. In the process the combined takeover costs could conceivably have risen to pounds 40m. That equates to 20p per East Midlands share.

By seeking and securing agreement that 20p did not slip into the hands of advisers of both camps but went straight to East Midlands shareholders. The total cost of the bid is unchanged but investors are 20p a share better off.

In return, Dominion not only secures its objective more efficiently but also buys an important ally in the battle to keep the bid out of the hands of the Monopolies and Mergers Commission. Word is that Dominion and East Midlands have already become extremely good friends. That is important, given that referral of one or both of the current power bids on the table remains a distinct possibility. There is little doubt that Dominion, aided and abetted by East Midlands, has a better chance of being given the all clear than CalEnergy, which is up against a very grumpy Northern board.

It is hardly surprising then that CalEnergy is now extremely keen to talk again with Northern. Unfortunately, the bid cost meter has been running at a cracking pace for some time. The opportunities then to hand savings on fees and the like to investors have already been squandered. CalEnergy could still buy agreement that would assist it in the race to escape the MMC's clutches, but it is getting a little late in the day.

An agreed bid requires constructive thinking on the part of both bidding and target company managements from the outset. Once the initial opportunity is missed it is extremely difficult to recapture.

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