Converted societies look to expand - at a price benefits and pros and cons of conversion

The free shares bonanza is gathering pace. After the Alliance & Leicester giveaway last month, the next few weeks will see the biggest conversions of all when the Halifax Building Society and the Norwich Union life assurance group change from mutual to proprietary status and join the stock market.

These will be followed by the Woolwich Building Society in July and the Northern Rock Building Society, probably in October. Also this summer, the savers and borrowers of the Bristol & West Building Society will receive their windfall when it is acquired by the Bank of Ireland.

When Halifax shares are listed on 2 June, it will create some 8 million new first-time shareholders - more than were created by any of the past privatisations of the public utilities. In total, this year will see a free shares and cash handout of over pounds 20 billion to some 12 million savers and depositors from the conversion to plc status by the handful of mutuals, with some pounds 12 billion just from the Halifax.

With the average value of windfalls exceeding pounds 1,200 in each of the converting companies, some people will have done particularly well if they invested in more than one of them.

Apart from the windfalls on conversion, will savers see any other benefits? Like all public companies, the companies as they will become after demutualising will pay dividends each year to their shareholders.

But the real benefits will be for the institutions themselves. While the cynical will think that conversion to plc status is all about increasing the value of the managers' salaries and share options, the demutualisers strenuously deny this, arguing that one of the main reasons for conversion is greater flexibility.

Even after the recent Building Societies Act, societies are restricted to having 75 per cent of total commercial assets in loans fully secured on residential property - and have to raise at least half their funds from members.

Once converted, however, the former building societies will be able to raise money through the markets by issuing new shares. This in turn will be available to fund new business developments or acquire others. As the company grows, the new money-raising flexibility will allow it to develop significantly in other areas, maybe by acquiring banks, fund management groups or insurance companies in the UK or overseas.

As well as greater flexibility in capital-raising to fund expansion at home and abroad, demutualisation removes from the policy-holders the risk involved in owning a general insurance business.

Societies staying mutual, however, feel they still have plenty of attractions without the need to change their status.

"It beats us why some societies are converting" said Christopher Rodrigues, chief executive of the Bradford & Bingley Building Society. His society, which will be the third largest in the world, behind the Nationwide and the Britannia, after the conversions this year, is the one trumpeting the loudest about the benefits of mutuals.

The B&B feels that it suffers no restrictions in raising extra funds from the wholesale money markets if rates are advantageous. Nor does it feel inhibited in making acquisitions.

"We do not have to maximise profits to maintain a high share price and increasing dividends. By remaining a mutual, we can give a better deal," said Christopher Holland, the society's corporate affairs manager.

It has already decided to show the way by deciding to peg its retained profits to 5 per cent of its reserves, handing the excess back to its members. Last year, the society returned pounds 43m to it members through lower mortgage rates and more competitive returns on deposits.

This year B&B will return pounds 100m - mainly by cutting 0.2 per cent from its variable mortgage rate (to 6.79 per cent) by way of a loyalty bonus to those who have been borrowers for over two years. This is almost 0.5 per cent below the rate charged by societies converting this year.

The loan rate reduction follows an increase in deposit rates in March, in some case by over 1 per cent. Its basic deposit rate for sums under pounds 1,000 is now 3.1 per cent compared with 2.45 per cent from the best instant access accounts of the demutualisers.

According to a recent report by the Consumers Association in Which? magazine, the likelihood is that depositors and borrowers in the societies which convert will not get the best rates. These will come from the mutuals who do not have to maximise profits.

If you are collecting a windfall this year, remember that it is a one- off. Irrespective of whether you decide to keep your shares or not, you will do better to put your savings into one of the remaining mutual building societies which offer a more attractive deposit rate.