28 September, 2009

Great Britain Bank Mergers & Acquisitions (Nationwide Building Society)

Photo: A Nationwide Building Society branch in York, North Yorkshire, England. The photo was taken during my trip to York and London in September 2007.

A Few Words about Britain’s Building Societies

During the Industrial Revolution, hundreds of thousands of farm labourers were made "surplus" by machinery, and they flocked to industrial towns to find jobs in the factories. Many towns experienced severe housing shortages, which resulted in over-crowded living conditions and chronic outbreaks of deadly, infectious diseases due in part to appalling sanitation and poor water supplies. The situation was at its worst between the 1830s and 1880s. During the this time, many workers barely had enough to pay for rents and food, and were too poor to open a bank account or to qualify for a loan at a High Street or private bank. 
The concept of "building society" was born under which the working men pooled their minimal savings together to form a club where loans were offered to the members to buy their own houses or land, one at a time. Initially, the lottery system was often used to determine who got to access the capital first to buy their property. As the first borrowers gradually repaid the building society and replenished its capital, other members were then granted loans to buy their homes.

There were two types of building societies. Most of the early building societies were of the "terminating building society" form, in which only a certain number of members were admitted in the first place, and the society would be dissolved after the last member had been housed. In the "permanent building society" form, there is no limit on the membership, and new customers are admitted as depositors or borrowers constantly. 
Over time, the permanent building societies have become the norm, offering deposit, mortgage, personal lending, credit cards and investment services as we know today.

Building societies (known variably as co-operative banks or credit unions in other countries) are mutually-owned by its members (customers). This means that a customer (depositor and/or borrower) must first pay a small membership fee and become a member of the building society.  Unlike a joint-stock commercial bank that is owned by shareholders who can buy and sell the shares anytime they want, building society members cannot buy or sell their ownership as the membership shares cannot be traded. 

Another key distinction of building society status is that each member has one membership share and one vote in electing the Board of Directors and making major decisions of the co-operative bank. This "one member, one vote" arrangement is often described as more democratic than a typical public limited company (PLC) format where the level of control for each shareholder is determined by the number of shares owned by that shareholder.

Because building societies don't have shareholders like joint-stock commercial banks (High Street banks), there is much less pressure to maximise profits at the expense of customers charges, for it would be like paying the left hand with money from the right hand of the same person. Quite the contrary, successful co-op businesses often share and distribute some of their surplus (profits) to its members annually in the form of dividends.

Nationwide Building Society

Nationwide Building Society is Britain and the world's largest co-operative bank with 14 million members across the country. Nationwide was built over the years through more than 100 amalgamations of smaller regional building societies; the most important of which were the Provident Union Building Society, founded in 1846 in Ramsbury, Wiltshire; the Northampton Town & County Freehold Land Society (1848); and the Southern Co-operative Permanent Building Society, London (1884).

In 1970, London-based Co-operative Permanent Building Society changed its name to Nationwide Building Society. Then in 1987, Nationwide and Anglia Building Societies merged to form the Nationwide Anglia Building Society. The Anglia part of the name was dropped in 1992.

In 1998, a motion was put forward to convert (demutualize) Nationwide into a joint-stock bank (public limited company). Despite estimated distributions of shares worth GBP 1,000 to GBP 1,500 per member, the members defeated the motion and Nationwide remains mutually-owned today. Because Nationwide has always taken over other mutual building societies, no value can be assigned to the mergers. In such mergers, members of the amalgamating building societies simply become clients of the bigger Nationwide following the merger.

Recent transaction(s):

  • In 2007, Nationwide and Portman Building Society merged.
  • In 2008, Nationwide took over the Derbyshire Building Society when Derbyshire became insolvent due to over-lending in the real estate sector.
  • Also in 2008, Nationwide took over the Cheshire Building Society, which had also become insolvent for the same reason.
  • In 2009, Nationwide took over the “healthy” parts of insolvent Scottish co-operative bank Dunfermline Building Society. As part of the deal orchestrated by the British government, Nationwide received GBP 1.6-billion in cash from HM Treasury to assume control of 300,000 savings accounts held by Dunfermline customers. The accounts held GBP 2.4-billion of deposits. Nationwide also took over Dunfermline’s 34 branches and head office, as well as GBP 1-billion of prime-quality residential mortgages. Dunfermline had been expanding into risky commercial lending as well as speculative buy-to-let (i.e. residential investment properties) at the height of the British real estate bubble. Nationwide promised to maintain the Dunfermline brand for the time being.

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