Anglo Irish Bank and First Active are in advanced merger negotiations and a deal could be finalised within the next couple of months.
If successfully concluded, the two banks would create a financial institution with a market capitalisation of around €1 billion (£788 million) focused on the mortgage and small and medium-sized business markets.
The merger would be welcome news for First Active's long suffering shareholders. Shares in the former building society have sharply improved in value over the past couple of days in expectation of a link-up with Anglo Irish. The shares closed at €2.50 in Dublin yesterday, up five cents following a rise of almost 20 per cent on Thursday. Even at these levels, First Active is trading below the flotation price of €3.06 and shareholders have been growing increasingly disillusioned with the bank's performance.
A group of disgruntled shareholders have threatened to block the reappointment of three board members at its a.g.m. next week to highlight their grievances with the bank's management.
Anglo Irish Bank shares have traded only marginally higher over the same period, closing unchanged yesterday at €2.65, with some analysts still sceptical about the merits of the link-up for the highly successful small bank.
Anglo Irish Bank is twice the size of First Active. Together, the two banks would still create a relatively small financial institution, roughly half the size of Irish Life & Permanent, which merged last year.
As First Active is protected under legislation from being taken over until 2003, it would have to make a bid for Anglo Irish Bank following the same format used to bring Irish Life and Irish Permanent together. The bid would be structured as a share swop. Based on their respective market capitalisations, First Active would be expected to offer just over two of its shares for every Anglo Irish Bank share. The exact number of shares to be bid will depend on the share price of each company when the deal is completed, and it will have to be approved by shareholders.
Anglo Irish Bank is a highly successful bank operating predominantly in the small and medium-sized business sector.
Last week it reported a 75 per cent increase in pre-tax profits to €61 million (£48 million) in the six months to the end of March and is predicting another strong full-year performance.
Its headquarters is in Dublin with five branches around the Republic. It also has businesses in the UK as well as deposit taking businesses in the Isle of Man and in Austria.
Its chief executive, Mr Sean Fitzpatrick, has estimated the bank has a 15 per cent market share of the Irish business banking market and four per cent of the deposit market.
First Active is predominantly in the residential mortgage market and is a leading player in the deposit sector. It is its exposure to the intensely competitive mortgage market which has caused concerns for investors, particularly since the arrival of the Bank of Scotland last year. It has added impetus for it to diversify its business through a partnership with another institution.
The bank's management team is also perceived to be weak and lacking the skills to drive it forward successfully. It is currently without a chief executive following the resignation of Mr John Smyth and is being managed on a day-to-day basis by chairman, Mr John Callaghan.
The merger would bring much needed management skills to the organisation, with Mr Fitzpatrick expected to assume the role of chief executive.
Its cost structure is also quite high although it has recently completed a wide-ranging cost-cutting programme, which included 175 job losses and the closure of 25 of its 76 branches.
It has also decided to move from its Booterstown headquarters in Dublin and centralise its administrative, technology and head office functions in a new building in Leopardstown next year.
Anglo, by comparison, operates off a relatively tight cost base and the deal would almost certainly signal further rationalisation of First Active's business.
