Anglo terminates merger talks with First Active

Anglo Irish Bank has terminated merger talks with First Active following a disagreement over the composition of the board and management team at the enlarged new company. Both banks issued statements to the Irish Stock Exchange yesterday evening confirming the collapse of the negotiations.

First Active said it was disappointed that the terms sought by Anglo Irish Bank in recent days could not permit the transaction to proceed, or to be accounted for, as a merger. First Active acting chairman and chief executive Mr John Callaghan said the proposals it had received in recent days from Anglo could not be accepted. "Even if we wanted to accept it, we couldn't. Anglo wasn't looking for a merger, it was looking for a low-price takeover," Mr Callaghan said.

Anglo Irish Bank chief executive Mr Sean Fitzpatrick said the deal fell because his institution did not feel it was in a position to secure "appropriate control" of First Active.

Sources close to the deal suggest Anglo Irish Bank had revised the board and management structure originally presented to First Active, seeking to appoint members of its board to the three key positions of chairman, chief executive and finance director. First Active was offered the role of deputy chairman and one other executive position.

The board of Anglo Irish Bank unanimously backed this structure, which would have placed Mr Tony O'Brien as chairman, Mr Fitzpatrick as chief executive, and Mr Willie McAteer as finance director. Mr Callaghan was offered the deputy chairman position.

The negotiations were almost complete, with issues such as price having been agreed some time ago. The talks were confirmed to the Stock Exchange a week ago after months of speculation. At the time the news did not receive a positive response from the markets, with shares in Anglo Irish Bank and First Active both turning weaker.

The link-up would have thrown a lifeline to First Active, bringing strong management skills on board. But the benefits to Anglo were questioned. Anglo Irish Bank is very successful, operating in the small and medium-sized business sector, with the First Active deal representing a complete change of strategy. The composition of the board and management structure is a fundamental issue in a deal as complex as the one that was being discussed.

Because First Active is protected from being taken over under Building Society legislation until 2003, it would technically have to begin a takeover bid for the much bigger Anglo Irish Bank. But as a straight takeover would involve a premium payment - and necessitate an expensive goodwill write-off - the two sides hoped the deal would be structured as a merger of equals. This would have protected earnings because merger accounting rules would have allowed them to avoid a write-off of goodwill.

To be treated as a merger, the accounting rules would require both banks to show that the control and management functions in the new company were equally shared. A board structure, which would include seven directors from both banks, had been proposed initially when Anglo approached First Active earlier this year.

Mr Callaghan would have assumed the role of chairman, which would have provided a balance for Mr Fitzpatrick's appointment as chief executive but this proposal was subsequently withdrawn, following a meeting of the board of Anglo Irish Bank.

Anglo's advisers, Ernst & Young and IBI Corporate Finance, told the bank it could take the key positions it proposed and the deal would still qualify as a merger. First Active, which was advised by PricewaterhouseCoopers and JP Morgan, said this could not be achieved.