Modelling Building Societies Takeovers a Non-Cooperative Game

Takeover and acquisition of corporations is awell-researched area and has been becomingincreasingly important. Much less research emphasishas been devoted to takeover activity within thegeneral area of financial services with thisparticularly the case for the building society sector. The building societies being mutual companies havespecial characteristics. The building societies andother financial mutuals like the corporations doencounter an acute agency problem. This opens up apotential application of Grossman and Hart theory oftakeovers bids as the individuals have option to freeride, securing knowledge that the regulatory processrenders their deposits de facto risk-free investment.This free-rider problem, like the corporations can beovercome by inducing hostile takeover. Some empirical studies of mergers activities withinthe building society sector have dealt with onlyintra-sectoral mergers. However, they have not lookedat inter-sectoral mergers and have not addressedefficiency issues in a general equilibrium frameworkusing game theory. In this paper I suggest a mechanism for merger at parwith sales of stocks of a corporation to organisebuilding societies' takeovers. I develop a two-stagegame between the members of building societies and theraider. Analysis of non-cooperative voting behaviourof members of Cheltenham and Gloucester buildingsociety shows that the actions of the members of thebuilding society may also give rise to less thanoptimal results as they may not be acting in their bestinterests. The members of the building society cangain if a hostile takeover is induced rather than afriendly takeover. The paper also examines the freerider problem and ex-ante efficiency in a generalequilibrium framework. Copyright Kluwer Academic Publishers 1999