Market success comes with staying alert

Both were mutual building societies. Both persuaded their members that they would be better off converting into public quoted companies.

In one case, that of the Irish Permanent, those members were rewarded with significant increases in the value of their shares in the new publicly quoted company.

In the other - the former First National Building Society, now First Active - the members who became shareholders must now be wondering why they ever agreed to the demutualisation.

Irish Permanent (IP) was floated on the stock market on October 27th, 1994, with the shares introduced at a price of £1.80 (€2.29). As the first Irish building society to demutualise, it brought many new shareholders to the stock market. Their positive experience - IP shares had jumped from €2.29 to €10.16 by the time of the First Active flotation in October 1998 - probably encouraged many First National Building Society members to go for the demutualisation route.

But, as is now quite clear, going public is of itself no guarantee of success. The keys to success appear to lie in establishing and sticking to a clear strategic plan, together with a good awareness of changing market conditions and appropriate strategic responses to threats and opportunities.

There are a number of key differences that stand out in any assessment of Irish Permanent and First Active which go a long way to explaining the differences in performance:

Irish Permanent recruited its chief executive, Mr Roy Douglas, externally whereas First Active appointed Mr John Smyth from within its existing ranks. Externally recruited management are often more conscious of the external environment and of potential competitive threats.

As one top banking executive suggested: "If you move around in business you develop a better perspective of the market and what's going on. Whereas people who stay in the same company for many years can become very internally focused and miss the signs of change. Of course it is not always the case but it can be an important factor."

Among the top team at Irish Permanent were Mr Peter Fitzpatrick who came from Irish Food Processors, Mr Peter Ledbetter from GPA and Mr Billy Kane who is now head of retail banking at Irish Life & Permanent and who came to Irish Permanent from Woodchester to set up its car finance business.

Irish Permanent acquired a life assurance operation (the Irish operations of Prudential Life), whereas First Active failed to move into this market which is a natural extension of deposit-taking.

First Active's main strategic expansion was into the difficult UK mortgage market. Irish Permanent never took more than a toe-hold in the UK on the grounds that it would not have the power to become a major player there.

Flotation timing favoured Irish Permanent. After it floated financial shares were in favour in a generally rising market. But shortly after First Active floated -almost four years later - the market started to turn sour for financial stocks. At the same time the competitive environment for financial institutions particularly the smaller ones concentrated in the mortgage/deposit-taking market started to intensify.

Irish Permanent managed to merge with a larger financial services player. First Active remained a stand-alone operation.

Well before its flotation, the then Irish Permanent Building Society had outlined a clear strategic plan for its future development. In February 1994 its chief executive, Mr Douglas, stated:

"We have a clear picture of the markets we want to serve. We know what we want to do and we have a clear set of precedents warning us about what to avoid. People who moved out of their chosen markets had problems."

He outlined his position: his strategy was to provide a full range of services for the personal financial services market and small business. He would look for acquisitions which fitted well with the strategy of servicing that market. A life assurance operation was a priority target - that would allow IP to offer its customers long-term savings and would extend its range of savings products beyond short to medium-term products.

Mr Douglas, who came to Irish Permanent from AIB, wanted to capitalise on his strong customer base and spread his costs by expanding the range of products on offer in the domestic market. As well as savings products, there would be an extension of unsecured lending for cars and other consumer durables.

Even in 1994 with interest rates starting to fall, it was clear that the building societies needed to change. In a report Davy Stockbrokers forecast that cost reductions plus a move away from dependence on two products in one geographic market would be crucial for future profitability.

In July 1994, just before its flotation, Irish Permanent moved. It acquired the Irish operations of life assurer Prudential Life for £30.5 million (the companies already had a close relationship through a joint venture operation Irish Life and Pensions). In September it acquired the Guinness and Mahon private bank for £6.7 million - it planned to add new products and services and run this bank as an independent subsidiary generating higher margin business.

Then just after the flotation the British bank Abbey National - a converted building society - bought 9.9 per cent of Irish Permanent. This move, seen then as the precursor of a bid by Abbey once the five-year protection period expired, underpinned the IP's rising share price.

By 1995 both IP and First National (still a building society) were facing tightening profit margins in their traditional mortgage lending and deposit businesses in a low-interest rate environment. But they were also benefiting from increasing business volumes boosted by a strengthening economy and favourable demographics.

In 1996, IP expanded into the UK mortgage market buying London-based residential mortgage lender Capital Home Loans for £12.6 million. The plan was to boost profits by amalgamating its two deposit-taking branch operations in London with CHL giving CHL access to cheaper funds. The acquisition was part of a strategy to grow its mortgage business in Britain in line with improvements in that market.

At the same time First National moved with much larger acquisitions of mortgage businesses in Britain and Northern Ireland. In August 1996, it paid £51 million for the The Mortgage Corporation. The strategy was to merge the operation with its existing Mortgage Trust to get economies of scale and to target niche market sectors. It hoped to hit the UK market on a rising curve. At the time credit rating agency Moody's questioned its strategy of deepening its involvement in the difficult UK mortgage market.

For Irish Permanent perhaps the most astute deal was the £2.8 billion merger with Irish Life in early 1999 to create the State's third-largest financial services group. Through that deal Irish Life got a new distribution network for its life products but Irish Permanent became part of a much broader and therefore stronger financial services group.

At the same time it protected itself from take-over by Abbey National or any hostile bidder at the end of 1999 when the five-year protection period provided for under legislation would expire. And as part of a larger group with the benefits of economies of scale, the bank is in a better position to weather the increasing pressure on both mortgage and deposit margins driven by the arrival of foreign competitors. As Irish Life & Permanent, the group is an acquisitive player in the market with ambitions for further expansion - it is currently bidding for Ulster Bank.

At First Active the main strategic focus was expansion into the UK, developing alternative distribution methods and cost cutting. But cost cutting without an obvious growth dynamic led to industrial unrest and damaged staff morale. Back in February 1999, staff voted for industrial action claiming that a policy of enforcing redundancies was in place.

In October 1998, First Active was floated on a stock market that had already fallen sharply. At £2.25 (€2.86) the opening price was 40p (51 cents) lower than the lowest level predicted by the company just one month earlier. On the first day's trading the shares closed 65p stronger (83 cents) at 290p (€3.68), which lead to sharp criticism that the shares had been sold off too cheaply.

Soon afterwards, with the Irish Life /Irish Permanent merger, First Active lost its lucrative commissions deal for selling Irish Life products. While this was later replaced with a deal with Friends First, there was some surprise in the market that First Active had not tried to carve out its own merger deal with Irish Life.

The new bank began to be criticised for a passive approach to growth opportunities and with the markets already starting to turn negative on financial stocks the share price started to slide.

But perhaps the greatest damage to chief executive John Smyth's position came when he appeared to be non-plussed about the arrival in the Irish mortgage market of the Bank of Scotland. With the bank still heavily dependent on the mortgage market, his apparent lack of concern about further pressure on mortgage margins lead to questions about his awareness of the competitive environment.