Modelling building societies takeovers: A non-cooperative game

Takeover and acquisition of corporations is a well-researched area and has been becoming increasingly important. Much less research emphasis has been devoted to takeover activity within the general area of financial services with this particularly the case for the building society sector. The building societies being mutual companies have special characteristics. The building societies and other financial mutuals like the corporations do encounter an acute agency problem. This opens up a potential application of Grossman and Hart theory of takeovers bids as the individuals have option to free ride, securing knowledge that the regulatory process renders their deposits de facto risk-free investment. This free-rider problem, like the corporations can be overcome by inducing hostile takeover. Some empirical studies of mergers activities within the building society sector have dealt with only intra-sectoral mergers. However, they have not looked at inter-sectoral mergers and have not addressed efficiency issues in a general equilibrium frame work using game theory. In this paper I suggest a mechanism for merger at par with sales of stocks of a corporation to organise building societies' takeovers. I develop a two-stagegame between the members of building societies and the raider. Analysis of non-cooperative voting behaviour of members of Cheltenham and Gloucester building society shows that the actions of the members of the building society may also give rise to less than optimal results as they may not be acting in their best interests. The members of the building society can gain if a hostile takeover is induced rather than a friendly takeover. The paper also examines the free rider problem and ex-ante efficiency in a general equilibrium framework. © 2000 Kluwer Academic Publishers.