Outlook: Market lessons for mutuals

MICHAEL JACKSON, chief executive of Birmingham Midshires building society, may well deserve the hard time he's getting from the press and others for agreeing a bid from Royal Bank of Scotland which now looks like a severe undervaluation. But there's another way of looking at it.

What about this proposition? When Birmingham Midshires agreed last August to takeover terms of between pounds 605m and pounds 630m, it signed a no-lose deal. At the time, the price looked reasonable when compared with other building society conversions, the existing Birmingham Midshires board was to be given complete autonomy within RBS, the brand would be preserved, and there was to be a three year guarantee to staff on job losses.

Mutually owned institutions are not like PLC's. When directors consider their fiduciary duties, they are obliged to act in the long-term interests of the society as a whole, including employees, not just the organisation's owners. The deal with RBS seemed to square the circle - a decent windfall for the members and a guaranteed medium-term future for the society.

Since then, share prices among the converted building societies have risen 20-40 per cent and the RBS terms - at 12 times current earnings and 1.7 times book value - have begun to look poor set aside valuations of up to 19 times earnings and 3 times book for Halifax and its like.

OK, concedes Michael Jackson. If he were striking the deal today he would have gone for something higher. Few people anticipated these soaraway share prices, and, in any case, there's nothing in the agreement with RBS to preclude Halifax or anyone else from tabling a higher bid if they want to. Just think what would have happened if share prices had gone the other way, if they had fallen rather than risen. Then the boot would be on the other foot. According to Birmingham Midshires, then, far from cocking up the original negotiation, it has managed to put a floor under the price while at the same time leaving the door slightly ajar to others.

Perhaps unsurprisingly, RBS has a different interpretation. It believes it has a legally watertight lockout agreement with Midshires and that the Midshires board will not be able to consider Halifax's higher offer, far less recommend it.

We'll see. Part of the blame here lies with the cumbersome process of conversion. Unlike bids for publicly listed companies, which have to be completed within 90 days, building society conversions take an awfully long time - up to 18 months. If this takeover had happened when it was first announced, nobody would be grumbling. Nor would anyone be complaining if the terms had been fixed not in cash but in RBS shares, which have enjoyed the same ride as the converted building societies over the last nine months.

But perhaps the biggest lesson here is that there are no half-way houses between the utopianism of the mutual tradition and the slash and burn priorities of the joint stock company. Once the principle of mutuality is conceded, there's no turning back. Once the door is opened, the wolves will be in. It is probably not possible for a building society both to convert and have everything continue in the same cosy way as before, which was the intention of the RBS deal. However, Halifax needs to be a bit careful here. It too might find itself victim of the stock market's appetite for cost cutting consolidation.