Move your cash. Today

Building society mergers will mean cash payouts all round. By Richard Thomson

How much money do you have lying around in your bank account? Since most salaries are paid into banks, and since most of us follow the inertia principal of investment (do nothing unless it looks like the world is about to end), the chances are you've got a fair amount in there. In which case, move it. Now.

This week's message has been that having a deposit account anywhere but in a building society makes little sense. The industry is now in the throes of the biggest upheaval in its history. The idea of mutuality, which has sustained it for 150 years, is increasingly unpopular, if not actually discredited. With Abbey National's purchase of National & Provincial agreed this week, the principle of hostile takeovers of building societies has been established. This will open the floodgates to potential bidders.

At the same time, further mergers are virtually certain, while more societies are likely to follow Halifax and convert to company status.

"The ball is rolling now and we haven't seen the end of it by any means," said one society executive.

What all of these potential deals have in common is that to go ahead they need the agreement of building society members. And the way societies have found of winning such agreement is by handing out hard cash.

The 1.3 million members of N&P, for example, will share the pounds 1.35bn Abbey is paying for their approval. Everyone with a savings or mortgage balance of more than pounds 100 on 28 April this year will get pounds 500 worth of Abbey shares. Even the 15,000 people who opened accounts in the four days between Abbey announcing its interest and N&P blocking further accounts will share in the payout. There is money in them thar hills.

The beauty of the current ferment among societies is that members cannot lose - a delightful situation you hardly ever find in investment. If you have an account or a mortgage with a society that converts, you get a payout. If you are with a society that gets taken over or merges, you get a payout. And if your society does nothing at all, you are still likely to get a payout.

Why is this? Because several societies are already close to offering a "loyalty bonus" to investors who stay with them for years at a time. This will resemble a share dividend in some ways but may differ in crucial respects - it may not necessarily be paid annually, for example, but as a lump sum of several hundred pounds or pounds 1,000 every few years.

Societies are looking for ways to keep their members sweet so they won't sell them out to the first bidder who comes along offering cash. Not to put too fine a point on it, loyalty bonuses will be offered as bribes.

If bonuses become the norm, society members may still have the chance to vote for a further one-off payment if their society decides on a merger or is subject to a bid.

So what is the best strategy to take maximum advantage of all this? Money is likely to come your way whichever society you choose. To make the most of the merger and acquisition activity, however, you can either spread your money around several societies in smaller amounts or concentrate it in one or two societies.

The advantage of the former strategy is, of course, the greater likelihood of landing in one or two societies caught up in mergers or takeovers. The drawback is that payouts are usually structured to give more to investors with larger accounts. Hence the latter strategy.

So which are the societies to go for? The most promising place to look is among the top eight to 10 societies, where most of the recent consolidation within the industry has been taking place. They are under most pressure to do deals, if only to protect themselves against the threat of hostile bidders. Size is crucial in this game, and the larger societies can only boost their size by doing deals with other large societies. Snapping up a few tiddlers simply won't do the trick.

Nationwide (the largest once Halifax converts) is known to like the idea of a merger. It tried to do one with Alliance & Leicester but failed, then it looked at N&P. It almost certainly has to do something big to protect its market position so a merger with one of the other large societies is a virtual certainty. It is also safe to assume that Woolwich is looking for a big merger.

Bradford & Bingley is keen to protect its mutual status. But protecting mutuality does not rule out a merger with another society. It also leaves B&B vulnerable to a hostile takeover from the likes of Midland Bank, TSB or Royal Bank of Scotland.

Even if you don't hit the bullseye with every society you choose, you are still likely to end up better off than if you'd left your cash in the bank. Building societies still offer better interest rates on investment accounts than banks. This is as close to a one-way bet as you are likely to see.

Routes to the loot

Building societies are studying a number of different methods of keeping you sweet. These include:

Cash bonuses to existing members. Customers would be paid explicit profit- related bonuses. However, societies are worried that customers would expect a bonus every year. There might also be speculative flows of savings between societies as customers try to spot the next big bonus.

Loyalty incentives would be an alternative to cash bonuses, targeting customers who stick with the society for a number of years. Incentives could include cheaper mortgage and insurance rates and higher savings rates.

Reduced margins. Societies could squeeze the net interest margin - the difference between the rate they pay on savings and charge on mortgages. But margins are already tight.

Service improvement. Mutual societies are usually rooted in their local communities and are more involved in community and charity work than banks, as their priority is not to earn a profit. Improving service would be easier for them than the banks, but would also be less visible and harder to sell.