B of I merger indicative of Irish market development

The planned merger between Bank of Ireland and the British demutualised building society, the Alliance & Leicester, marks a watershed in several respects. In a British context, it is the largest financial services merger since the takeover of the British TSB by Lloyds Bank in 1995 for £5 billion, and will create the eighth largest bank in Britain. From a broader European perspective, not alone does the merger cross borders, but it also crosses currency zones involving the new euro and sterling. Finally, the merger of Ireland's second largest financial institution with a British company of similar size symbolises an Irish economy that has reached a high degree of maturity and sophistication. Even five years ago it would have been difficult to envisage an Irish bank becoming involved in a merger with a foreign institution such as that mooted between Bank of Ireland and the Alliance & Leicester.

Many financial analysts believe that the spate of European mergers and acquisitions seen in recent years is just the beginning of what is likely to be a long period of consolidation. The launch of the euro has merely given added impetus to a trend that had already begun.

Likewise, the fact that sterling is likely to eventually become a member of the euro will add to the pressures within the financial industry to consolidate. However, even if sterling does not enter the euro, technological developments and competitive pressures will force banks, insurance companies and other financial institutions to radically reassess their long-term strategic options. In Ireland and Britain the Bank/Alliance merger will inevitably lead to a sharpened focus on other financial services companies. The accompanying table shows the Irish financial sector including the soon to be floated TSB/ACC and the currently mutual Irish Nationwide. Also listed are British-quoted companies, which have been mentioned by some commentators as candidates for merger and acquisition activity. Looking at the Irish companies it is likely that most if not all companies will have merged or been taken over on a three to five-year time horizon.

Only AIB seems large enough to be able to satisfy its ambitions on its own, but in the aftermath of the Bank of Ireland deal the possibility of AIB merging with another large institution is something that analysts will be watching.

Irish Life & Permanent has stated that its focus will be on the Irish market, but in the very long term some geographical diversification would seem to be desirable. IL&P looks to be too small to embark on a significant overseas expansion and therefore a link up with a larger international financial services company seems likely at some stage. The rest of the Irish financial services sector are veritable minnows in an international context. Some may well remain as niche players in selected segments of the market but others are likely to be absorbed into larger groupings.

Will the consolidation of the Irish financial sector involve more Anglo-Irish transactions such as the Bank/Alliance one? A glance at the British-quoted sector does not provide any obvious clues. Bank of Ireland's ownership of the Bristol & West building society provides a strong industrial logic to its link up with the Alliance & Leicester. AIB and Irish L&P have relatively small operations in Britain and therefore would not offer any synergies or cost-cutting opportunities to a British suitor. It may well be that the current mooted merger between Bank of Ireland and Alliance & Leicester will prove to be the only one of its kind.