B of I shares fall further on A&L link-up reaction

Bank of Ireland shares continue to suffer from selling pressure in Dublin and London as the negative reaction to the proposed merger with Alliance & Leicester showed no sign of dissipating.

Bank of Ireland shares fell another 15 cents to €18.00 (£14.18), a long way off the €20.30 (£15.99) high of last Monday after the merger talks were confirmed. It is also below the €18.60 (£14.65) at which the shares were trading last Friday before the Alliance & Leicester (A&L) merger story broke.

A&L shares fell slightly yesterday but are still well above last Friday's level.

The volume of trading was substantially lower than on Tuesday and Wednesday but fund managers have warned that the final details of the merger will be scrutinised in detail before they are endorsed by institutional investors. "This proposal has colossal implications for the Irish market and our portfolios, and Bank of Ireland needs to be aware that we will expect them to explain the rationale for the deal and the structure," said one fund manager.

Another fund manager was more blunt and said: "I want to know why Bank of Ireland is apparently ceding management control to A&L. The market has said over the past three days that it doesn't like this deal and the question has to be: `will Bank of Ireland get the 75 per cent [acceptance of the deal from those holding its shares] it needs?'

"Remember, 40 per cent of Bank [of Ireland] shares are held by non-residents and they're the ones who have been voting with their feet in the past few days. I don't think that Bank of Ireland can take it as read that Irish institutions will automatically line up behind them."

Other Irish fund managers are still prepared to give Bank of Ireland the benefit of the doubt before they pass final judgment on the Alliance & Leicester link-up.

One fund manager, who declined to comment publicly on the merger proposal, said there had been a huge negative comment about the deal, "not an awful lot of it based on official information". He said: "A lot of assumptions have been made and Bank of Ireland has suffered because it can't tell its side of story."

This fund manager said the leak of the merger proposal seemed to have been a deliberate move to put Bank of Ireland on the defensive and was heavily biased towards the Alliance & Leicester position, particularly the proposal that A&L chief executive Mr Peter White should get the top job, with Bank of Ireland chief executive Mr Maurice Keane becoming nonexecutive chairman.

"Apart altogether from the way the story emerged, there are legitimate concerns and questions that have to be answered. How exactly are these cost savings going to be generated? More detail is needed on the revenue synergies and we need to know more about the management structure.

"The management structure depends on the whole set-up, not just the top job. But if that top job does go to A&L, it needs to be balanced at a very senior level by Bank of Ireland people. I wouldn't automatically condemn Peter White getting the top job and I'll keen an open mind, but we need to know a lot more," the fund manager said.

Another fund manager pointed out that, irrespective of the 55-45 equity split between Bank of Ireland and A&L, Bank of Ireland brings a far more diverse management at a senior level, with experience in all levels of banking, while A&L senior management is still very much mortgage-based.

"And it cannot be ignored that Peter White's relationship with the City has not been good. On that basis should he be heading up the merged group?," he asked.

Most agreed that there was some cause for concern at Bank of Ireland becoming more exposed to the British mortgage market, where volume growth is at best sluggish and at worst non-existent, and where margins are under ferocious pressure. Even the merged group would be a second division team in the British mortgage market, they say. Another fund manager said one of the key issues was Bank of Ireland diluting its exposure to the profitable Irish economy and expanding further into the British mortgage market. "There's intense pressure on margins over there and that's a real concern."

This fund manager was, however, more critical of the proposed management structure and commenting on the proposed appointment of Mr White as chief executive, said: "That might be see as the tail wagging the dog." "This whole idea of a dual listing also tends to cause confusion, especially among overseas investors. People don't like to be confused. They like it to be nice and simple and will put their money some place else if things are made too complicated for them," this fund manager added.