Bank of Ireland and Alliance & Leicester shares made their expected strong gains on the Dublin and London markets after the confirmation of their merger talks. Both shares fell back, however, from their early 10 per cent gains, as the surge in financial shares ran out of steam later in the day.
In Dublin, Bank of Ireland immediately rose from its overnight €18.60 (£14.65) to a high of €20.30 (£15.99) before easing back steadily to close on €19.40 (£15.28), a rise of 4.3 per cent on the day. The pattern was much for Alliance & Leicester's trading in London, where the share rose from an overnight level of £8.70 sterling to a high of £9.55 sterling before the surge in the British banking sector subsided and left A&L to close on £9.29 sterling, a rise of 6.8 per cent on the day.
The banks issued a joint statement when the markets opened yesterday morning and said they had begun discussions with regulators in both Ireland and the UK. The regulatory position is the biggest single obstacle to the merger going ahead, with both the Central Bank and the UK Financial Services Authority acutely aware of the issue of depositor protection in a company whose ownership straddles national boundaries and legal systems.
The confirmation of the planned merger led to a flood of upgradings for A&L in particular. This was a major factor in the stronger performance by A&L than Bank of Ireland in the market yesterday. After both shares initially rose by around 10 per cent, there was a shift towards A&L in afternoon trading with the result that A&L was able to narrow the gap in market capitalisation between the two banks. At yesterday's close, A&L was worth £5.4 billion sterling (£6.4 billion) while Bank of Ireland was worth £7.9 billion.
Both sets of shareholders will undoubtedly be monitoring both banks' share prices in the weeks ahead. Any significant out-performance by one bank over the other could lead to questions over the justification for the 55-45 split between Bank of Ireland and A&L in the holding company.
In their statement, the two banks said that the merged entity would have had pre-tax profits of £1.18 billion (€1.5 billion) and total assets of £75.6 billion (€96billion). The banks said the merger is expected to achieve cost savings of over £230 million (€300 million).
The statement confirmed the merger would involve setting up a holding company in which both banks' assets will be pooled and which will be 55 per cent owned by Bank of Ireland shareholders and 45 per cent by A&L shareholders, with dividends being distributed to shareholders in that proportion. Bank of Ireland and A&L will retain their stock market listings in Dublin and London, and crucially, Bank of Ireland will retain its membership of the ISEQ Index and A&L its membership of the FTSE-100 index.
The banks state this dual listed company structure will preserve the continuity of both banks' shareholder bases - Bank of Ireland is largely owned by domestic and international institutional investors, while over half of A&L's shares are held by British private investors.
While the joint statement does not go into detail on the management structure of the merged group, it is certain that A&L chief executive Mr Peter White will be head of the merged group while Bank of Ireland's deputy chief executive Mr Pat McDowell will have the same position in the merged group. Other senior management positions will be evenly decided between the two banks.
Bank of Ireland's governor, Mr Howard Kilroy, will be chairman of the merged group and will be succeeded by the bank's chief executive, Mr Maurice Keane, who will become a non-executive director of the merged bank. While the reaction to the proposed merger was enthusiastic, analysts said that it was not as euphoric as some weekend reports forecast, with some in the market taking the view that a lot of questions remained to be answered about the structure of the merged bank and particularly the regulatory obstacles that have still to be overcome.
Another major question mark lies over the likelihood of a share buy-back or special dividend being paid to both sets of shareholders after the merger, with some analysts of the view that the merged bank might be better served by holding on to its estimated £2 billion surplus capital. A buy-back of special dividends has not yet been negotiated between the two banks. Some sources have suggested that the prospects of such a sweetener for shareholders are by no means certain.
And from this side of the Irish Sea, there was some concern among analysts at the expected appointment of A&L's Mr Peter White as chief executive of the joint holding company that will be established following the merger. One analyst commented: "On paper it seems a good deal, but there are some reservations over the appointment of the smaller bank's chief executive as head of the merged company.
"A lot of overseas investors have bought into Bank of Ireland partly on the quality of management story, and they might be a bit concerned to see the top job go to A&L. A&L management are not particularly highly regarded within the British banking sector and Peter White's main claim to fame seems to be as a cost-cutter, not as an innovative bank chief executive," he stated.
NCB analyst Mr Shane Nolan broadly welcomed the merger proposal but, in a research note, he warned that any dilution in Bank of Ireland's management control, especially outside the British mortgage business, would be viewed warily by current holders of the stock.
"Bank of Ireland's current management has been proven successful at running what is an inherently more complex organisation that A&L," Mr Nolan states.
While the cost cuts in the UK will be the most immediate benefit to the merged bank, most analysts believe the diversification of the income stream through greater cross-selling of financial products will be the greater benefit in the longer term. In particular, the merged group will see scope to sell Bank of Ireland's stockbroking services, as well as BIAM's and Lifetime's savings and investments product to A&L's huge depositor base.
