Winners in the bidding war
30 May 1995
Unprecedented merger mania facing the building society sector, reaching a head after several years of market uncertainty, is creating significant demand for lawyers' services.
The leading regional commercial firms are benefiting, yet also feeling a cold draught of anticipation as to whether clients considering merger will be able to retain them.
City firms have been retained for the last few years as merger and conversion issues have materialised. Now, many societies are seeking advice and in some cases running for cover as bid rumours mount.
And now the rumble of top City guns - Slaughter and May, Freshfields, Allen & Overy, Linklaters & Paines and Clifford Chance - is increasingly heard as the societies square up for what many of the altruistic mutuals have dreaded: a bidding war.
Ron Armstrong, deputy director general of the Building Societies Association (BSA) said at the recent BSA conference in Birmingham: "There is a growing role for City lawyers on mergers and conversions, and even if it's just a question of a smaller society having a fresh look at its constitution and the position of its members. The smaller the society, the greater the need for good, completely objective advice."
Abbey National is using Freshfields in its play for National & Provincial (N&P) - the sector's first hostile bid, thought to be valued up to £1.6 billion. The Abbey normally uses Slaughter and May, but the firm is apparently conflicted out because it is advising N&P, for which it has acted for a number of years. N&P says it has received "a number of proposals from potential partners" apart from the Abbey. These are thought to include the Alliance & Leicester.
Meanwhile the merger and conversion of Halifax, the biggest society, with the Leeds Permanent, using Linklaters & Paines and Allen & Overy respectively, received "overwhelming" support from voting members last week.
And with the rumour mill working overtime, most societies seem to be consulting lawyers on their future options.
What has brought this about?
After all, two of the big mergers in the mid-1980s between Nationwide and Anglia, and Alliance and Leicester, followed by Lloyds Bank's £1.8 billion bid for Cheltenham & Gloucester (using Linklaters and Slaughters respectively) last year went unremarked.
And media interest in flotations of big societies like Abbey National, for which Cameron Markby Hewitt and Slaughters acted, focused mainly on the cash benefit for the man in the street.
But now the societies are having to face major questions over the future of their sector. They fear the parlous state of the property market is long term and they have largely failed in establishing strong income streams from alternative types of business.
A quickening process of mergers, takeovers, and conversion from mutual to 'plc' status is now stimulating fear and need in a big way and the sector is alive with rumour as to which society may move next.
Tony Garland, N&P's manager of legal and tax, says societies are considering the full range of solutions available in the light of market changes.
"The societies are now more open to new innovative ideas than they were three or four years ago," says Garland.
"There is a lot of advice needed in this area, which is one of the main reasons why corporate lawyers have been retained in the last six years. What they need is advice on how to defend a bid," he says.
N&P had already taken detailed advice when considering a flotation in 1988-89, later shelved because of market uncertainty. The knowledge acquired then is likely to prove useful in its current situation.
"Given the City firms' links with regulators and banks, it's difficult for regional firms to rival them. Expertise resides firmly in firms like Slaughter and May, Freshfields and Allen & Overy," says Garland.
Another reason for this lies in the complexity of such cases. Takeover rules do not apply to societies, they have no public quoted valuation, and the Building Societies Act contemplates no hostile takeovers.
"They are entering into unknown legal territory, so everything they do could make new law," says one lawyer.
While societies like N&P use City firms for merger advice and treasury/capital markets work, they still prefer to source other corporate/commercial advice regionally.
Meanwhile, regional firms are picking up a wide variety of work falling out of the recession and some of the corporate instructions have been the envy of City firms.
Delegates at the recent BSA conference were impressed by the number of lawyers present "profile-boosting".
Among the dozen firms attending - all with substantial teams of partners and senior partners - some report rising levels of work, particularly in the corporate advice and litigation sector's.
At the conference, Roy Brown, partner at West End firm Hamlin Slowe, said his firm had made "tremendous strides in capturing clients centralised lenders, building societies and banks" for a range of commercial work.
Brown's team has recovered "millions" of pounds' worth of losses in professional indemnity litigation for mortgage lenders, largely against solicitors who failed to comply with lenders' instructions in breach of trust and contractual obligation cases.
"The building societies are doing trawls of cases on their files and checking where there are substantial discrepancies between the original advance and selling price, mainly with repossessions," says Brown.
Church Adams Tatham partner Tom McKeown said his
firm's five-strong fraud and negligence team is handling similar amounts of indemnity litigation. On lenders as a client sector, McKeown said: "It's an area where we see big scope for expansion."
Leeds-based Booth & Co, the leading regional corporate firm for the sector with 35 of the 77 societies and 15 of the top 20, was also there in strength for "client relations and developing contacts".
Booth & Co's corporate business for the societies exemplifies the type of quality work that is the target for many regional firms and the envy of the City.
Purchase of highly-prized mortgage books by business-hungry societies, taking advantage of foreign banks' and centralised lenders' disappointment with the property market, is a big source of work for Booth & Co.
Booths' lawyers also advise syndicates of smaller societies clubbing together to buy such mortgage books. "I was approached this morning to see if I could put together a syndicate arrangement," said Anthony Ruane while on the exhibition stand.
Larger firms were also present including Wragge & Co and newly merged Pinsent Curtis. The firm is currently giving "strategic advice" - including bid defence - to a number of societies.
Partner Steven Clifford, previously head of legal at the Woolwich, said that "once City firms have blazed the trail with the first flotations and mergers, there's no reason why firms outside London shouldn't undertake this kind of work".
Frank Kraus, Dibb Lupton Broomhead consultant and previously Nationwide Anglia's chief solicitor, agreed: "There's no reason why major players shouldn't have a role."
Solicitor Neil Upton, who recently joined Wragge & Co from Slaughter and May, summed it up at Birmingham: "If I was trying to identify the principal feeling here, it would be one of excitement. There are thousands of rumours, but every society is considering merger, or conversion, and lawyers are advising them."