Search is on for the next big merger

A City scramble began last night to pick the next big building societies lining up to merge. Yesterday's High Court approval of the link by the Halifax and Leeds created the biggest share payout bonanza on record in Britain.

Speculation immediately centred on Alliance & Leicester, Woolwich, National & Provincial, Bradford and Bingley and Birmingham Midshires as prime candidates.

It is open knowledge in the industry that most of the remaining top ten societies are talking to each other about possible mergers. The fear that the Lloyds deal would lead to a series of bank takeovers has receded since last year's Treasury review of building societies, which gave them access to the money markets and new areas of business and enabled them to compete with the banks head-on.

City analysts said yesterday's ruling had given further impetus to Halifax's strategy - merger with a society to give critical mass, and then conversion to plc status.

The key question now facing societies, reeling under intense competition for mortgage business from the banks, is whether to stick with the new Treasury powers or follow Halifax, Cheltenham & Gloucester and Abbey National by ditching mutuality.

Supporters of the Halifax strategy inside the remaining societies have been strengthened by yesterday's decision. Fears that 2 million Halifax borrowers and half a million Leeds borrowers would not be eligible for free shares following the conversion to bank status were quelled by Judge Sir John Chadwick's ruling.

Last year a similar examination of the Building Societies Act 1986 resulted in over 300,000 Cheltenham & Gloucester mortgage borrowers being barred from receving payments under the proposed £1.8bn acquisition by Lloyds Bank.

City opinion yesterday was that the C&G deal would very probably go through on Friday, but there was still a possibility of a borrower rebellion. The search is now on for the next deal.

According to industry sources the societies keenest for a merger and conversion are National and Provincial, Britain's ninth-largest society, and Birmingham Midshires, the 13th largest. Those seeking a merger at the very least are thought to include the Alliance and Leicester, Britain's fourth-largest, which wanted to merge with the Leeds before the latter was snapped up by the Halifax.

Industry sources say Bradford and Bingley, the seventh-largest, iand Woolwich, third-largest, are also looking for mergers.

Woolwich's chief executive, Donald Kirkham, is a stern traditionalist and champion of the virtues of mutuality. Indeed, industry analysts admit that there is very little pressure from building society members themselves to convert to plc status. Mutual societies have a friendlier image than the high street banks and many savers and mortgage borrowers like the fact that they are the owners as well as customers of the society.

However, Mr Kirkham is due to retire this year and industry sources suggest Woolwich may follow the Halifax strategy. Corporate financiers eager for work are hopeful that public enthusiasm for the Halifax/Leeds share giveaway will sway the societies.

Both the Leeds and the Halifax have their roots in the 19th century savings movement, but are now planning for the millenium and beyond. No one understands that better than Mike Blackburn. Until 1993 he was chief executive of the Leeds, moving "down the road" to a similar job with the Halifax. At that time the Leeds was the fifth-largest building society, while the Halifax was already the industry leader, with almost twice the assets of its nearest rival, the Nationwide. The Halifax is now the UK's largest provider of home mortgages, and also has the largest estate agency chain.