Merger shows the road ahead in post-EMU rationalisation

With the single currency now little more than three weeks away, the confirmation of the £2

With the single currency now little more than three weeks away, the confirmation of the £2.8 billion merger of Irish Life and Irish Permanent is likely to be the first step in a progressive rationalisation of the Irish stock market.

Market sources believe that further mergers are likely, although not on the scale of the Irish Life & Permanent union, the biggest corporate deal in Irish history.

How long the process of rationalisation takes remains to be seen, but there is a general acceptance that in the post-euro investment environment, both domestic and international investors will prefer to invest in larger companies with a substantial presence in the economy in which they operate. With a starting market capitalisation of £2.8 billion, Irish Life & Permanent will have that sort of scale.

From January, investors will generally take their investment decisions on a Europe-wide sectoral basis and will no longer feel required to hold a specific proportion of Irish equities. Irish public companies will then have to compete for investment funds with similar companies in the other members of the euro zone and, in that situation, scale may be a deciding factor in whether a Frankfurt fund manager takes a stake in an Irish company or in a similar company in France, the Netherlands or wherever within the euro zone. Already there has been speculation that the Irish Life & Permanent merger will be just the first of a series of rationalisations in the financial services sector. Many in the market believe that, despite their respective £9 billion and £7 billion capitalisations, neither Allied Irish Banks or Bank of Ireland could be the focus of a take-over in the next few years by one of the European banking giants.

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It is generally accepted that Hibernian will either be taken over by its 28 per cent shareholder Commercial General Union (CGU) or that CGU will sell its stake to another financial service group which would then bid for Hibernian. The likelihood that the likes of Anglo Irish Bank and FBD will be independent entities in, say, three years has probably been significantly reduced by the merger of Irish Life and Irish Permanent. The sale of ICC and the flotation and likely subsequent acquisition of TSB/ACC are other elements in the rationalisation in the sector.

Among the industrial companies, the move to create scale has already begun in the hotels' sector with the likely merger between Jurys and Doyle Hotels. That process is likely to be matched in other sectors as managements accept that, to maintain investors' interest, companies will simply have to get bigger.

If some of the smaller companies in the less glamorous non-technology sectors are unable to merge to create scale, it seems likely many will leave the stock market by being taken private by their management or being taken over by more aggressive Irish or overseas companies. The go-go technology sector is probably immune from this movement, as these are seen as attractive investment opportunities for their strong growth prospects.

Whatever happen, the composition of the Irish stock market in three years time will probably be radically different to what it is now on the eve of monetary union.