Money Talk: It's blowing up for fresh windfalls

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The Independent Online
THE Royal Bank of Scotland might seem to have the inside track in the battle for control of the Birmingham Midshires building society that opened up this week.

It looks as if it has the right to prevent Halifax having access to the confidential financial information it would need to mount a proper bid, and in the meantime the directors of the BM are obliged to put the RBS proposal to a ballot of their members, who would have to reject it before the Halifax could even start the process of making a counter-offer.

This would necessarily be a long-winded and risky process, which ordinary members of the society are not best placed to embark on. But whoever wins the battle for control of the Birmingham Midshires, there is one irresistible conclusion. There are at least two big buyers out there, Royal Bank of Scotland and the Halifax, who want to add a medium-sized building society to their business portfolio, and only one target. The loser will certainly want to find an alternative.

Almost inevitably they will be running the rule over those societies that have already converted, including the Alliance & Leicester, the Northern Rock and the Woolwich.

However, these three are protected by the rules that prevent anyone launching a hostile bid for them within five years of conversion - providing they in turn do not forfeit protection by making an acquisition of their own.

Since all three have refrained from making acquisitions, it follows that they can only be taken out for a fancy price which their directors agree to recommend to the shareholders.

The remaining building societies may actually be easier targets, and carpetbaggers now have fresh hope of a new round of windfalls. All the survivors have made a strong commitment to remaining mutual societies. Last year the mutuals, with only 22 per cent of the existing mortgage market between them, chalked up a dramatic 40 per cent of the new loans market, and so far no vote has ever gone against the recommendations of the directors.

But directors have a fiduciary duty to put realistic offers they receive to a vote of the members.

When Abbey National made an attractive takeover bid for National & Provincial public, it obliged the board to put the proposal to a vote of members, who promptly accepted it. Birmingham Midshires members seem certain to do likewise. If they do refuse the RBS offer now, it will only be so they can await a better offer from the Halifax.

The Nationwide board won a resounding majority last summer over Michael Hardern and other outsiders who stood for election to the board on the single issue of voting to demutualise the society and unlock a windfall for members. But no actual money was on offer then. Whether the vote would be so supportive if the issue was simply whether or not to take a chunk of free money from a bank is more doubtful.

The other remaining mutuals - the biggest of which are the Bradford & Bingley, the Britannia, Yorkshire, the Portman, Coventry, Skipton, Chelsea and the Leeds & Holbeck - are too small to convert to banks on their own, and all have so far managed to avoid a vote on new directors committed to selling up. But they might find it just as difficult to persuade members to reject a firm offer of hard cash.

One thing which might save them would be the inertia factor, because takeovers need a higher turnout of voters than a simple conversion to a public company. Members are less likely to vote for a takeover if, in the 18 months or so currently needed to complete the entire process, the stock market in general and the financial sector in particular fall so sharply that the windfalls on offer begin to look unattractive.