AIB will merge its troubled US subsidiary Allfirst with M&T Bank in a deal that will yield $886 million (€908.44 million) in cash and a 22.5 per cent stake in the upstate New York-based bank.

The deal, announced yesterday, has a total value of $3.1 billion and will give AIB shareholders a significant interest in a top-performing US bank. The merger was welcomed by investors, with AIB shares rising sharply on the news. By close of business yesterday, the shares had gained €1.02 to close at €12.50.

AIB and M&T have described the transaction as a strategic partnership that will create the 18th-biggest US bank with assets worth $49 billion. The deal is subject to the approval of regulators and shareholders, and is expected to be completed by the end of March 2003.

Together, the two banks will have 700 branches in six states. Allfirst branches will be rebranded M&T. The banks expect the merger to yield cost savings of $100 million, $60 million of which will be delivered next year and will inevitably involve some re-organisation and rationalisation of the two businesses.

AIB intends to use $450 million of the cash payment from M&T to buy-back its own shares so it is not left with surplus capital on its balance sheet, which could depress the share price. It will use the remainder of the funds to support its other businesses and possibly make some acquisitions.

AIB chief executive Mr Michael Buckley stressed the merger was a long-term partnership that had been under consideration since October 2001.

AIB has been under pressure to sell Allfirst following the $691.2 million fraud perpetrated by one of its foreign currency traders, Mr John Rusnak, which emerged in February. An investigation showed the fraud had been perpetrated over five years and had not been detected because of a combination of lax management, weak controls and poor communications between AIB and its Baltimore bank.

After the fraud, many of AIB's large shareholders told the bank to sell Allfirst and had given the bank one year to prepare it for sale. The bank had been a poor performer for many years and the fraud inflicted great damage to the already struggling business.

M&T chairman, president and chief executive Mr Robert Wilmers has described Allfirst as the "perfect partner" for its growing presence in the mid-Atlantic region. "We anticipate a smooth integration of our businesses and great service for our new and old customers, while we continue to enhance value for our shareholders," he said.

Mr Buckley, said he believed it would create "compelling value" for AIB shareholders.

Mr Wilmer will join the AIB board while Mr Buckley will take a seat on the M&T board's executive committee, which meets fortnightly.

Mr Eugene Sheehy, the AIB executive who is currently acting as Allfirst's chairman and chief executive, will join M&T's executive management committee and board of directors and assume responsibility for the bank's business in Maryland and Pennsylvania. AIB will nominate two further directors to M&T's board.

AIB will hold the single biggest shareholding in M&T when the deal is completed. Berkshire Hathaway, the vehicle operated by the world's most respected investor, Mr Warren Buffett, owns 5.7 per cent of the bank.

AIB is facing a number of legal actions taken by US investors, who are claiming compensation arising out of the $691.2 million fraud. Mr Buckley said any further costs arising from the fraud had been ring-fenced and would not trigger any liability for M&T.

Both banks completed due diligence examinations on each other's businesses in recent weeks and a value was put on the deal shortly afterwards. International rating agency Moody's has said the merger has no implications for its credit rating.