Alliance & Leicester, currently the third-largest, declared that it was actively seeking its own merger partner. Peter White, chief executive, said: 'We are interested in mergers. I think most other societies are.'
John Wriglesworth, building societies analyst with UBS, described the Leeds/N&P deal as 'one and one makes three'. He backed the management's claim that cost-cutting would allow economies of scale, leading to keener rates for customers and better profitability for the new society.
The merger, producing a society with assets of pounds 32bn and reserves of nearly pounds 1.5bn, needs approval by 75 per cent of investing members and 50 per cent of borrowers at an extraordinary general meeting, which will probably be held in the late autumn. The proposal will then go before the Building Societies Commission, which the Leeds management is confident will give the go-ahead next spring.
Savers and borrowers did not view the development so positively, and it is possible there could be significant opposition, especially as there is unlikely to be a payout to customers.
Malcom Barr, chairman of Leeds, who will be chairman of the new entity, said that the society had interviewed four possible chief executives to replace Mike Blackburn when the latter left recently to join Halifax. He said they plumped for David O'Brien of N&P 'and he brought his society with him'. City sources confirmed that Leeds had also talked to a number of other societies before choosing N&P for the merger.
Mr Barr said that Leeds and N&P first discussed a possible merger six years ago. Three years later Leeds again approached N&P but N&P's chief executive at the time, Ben Thompson-McCausland, rejected it. Three months ago N&P approached Leeds.
Mr O'Brien, who will become chief executive of the new group, said that there was 'quite a lot of compatibility' between the two societies' computer systems, the Achilles' heel of previous mergers like Nationwide Anglia. The merger would allow processing of unit trust and insurance business, currently contracted out, to be brought in-house with a big saving in costs, he said.
The 453 Leeds branches and 316 N&P offices will be pruned by a total of 119. The new society will maintain a total of 97 estate agencies connected to the societies. Branches would be closed where there were duplications, but the new society would be a truly national group, Mr O'Brien said. 'The Leeds has branches in the South-east, and the N&P in Scotland. The gaps we have to fill are in the Midlands, South-west and East Anglia.'
The new group will inherit a number of disparate life operations. N&P has its own life company, which uses General Accident to process its business, something that could be brought in-house, said Roger Boyes, chief executive of Leeds, who will become finance director and deputy chief executive of the new group.
Leeds is tied to Norwich Union but is planning to launch Leeds Life next year - plans that will go ahead under the merger, although Mr Boyes admitted that this duplication would have to be looked at again.
Halifax, the largest building society in the country, also refused to rule out mergers. David Gilchrist, Halifax general manager, welcomed yesterday's merger announcement. 'Rationalisation in the mortgage industry is needed and this is a welcome step.' Adrian Coles, director-general of the Building Societies Association said: 'We will have more mergers in future.'
Both societies said that converting to plc status was an option for the future, although they had no plans to do so.
Mr Coles said that this was the third building society merger to be announced this year. The others were between Surrey and Northern Rock and Heart of England and Cheltenham & Gloucester. At the turn of the century there were more than 2,000 societies: after the marriage between Leeds and N&P there will be 102.
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