The market never liked the Bank of Ireland/ Alliance & Leicester deal and showed its relief last night in no uncertain terms.
Within minutes of the announcement that Alliance & Leicester had called off its £13 billion merger with Bank of Ireland, the Irish bank's share price went through the roof.
In an after-hours deal last night, Bank of Ireland traded up €1 to €17.50 (£13.78), and that rise is likely to set the pattern for trading on the market today. Last night's rise has recouped some of the heavy losses in Bank of Ireland over the past three weeks.
But the shares are still short of the €18.60 (£14.65) recorded immediately prior to the merger proposals being unveiled. They are also a long way off the €20.30 (£15.99) reached immediately after that announcement and just before the heavy selling set in. Dealers said last night that the scrapping of the merger was welcome news and will undoubtedly boost the share price further. They see €18 as a realistic target for today's trading.
But they warned that Bank of Ireland management has taken a body blow to its credibility and will have to work hard to restore its standing in the market. "This has been a disaster from day one for Bank of Ireland management, and especially Maurice Keane, who seems to be have been one of the prime movers from the Bank side. He is going to have to show that he has a realistic alternative strategy to grow the bank - it can't just stand still after this sort of setback," said one fund manager.
Institutional shareholders' attitudes to the Alliance & Leicester deal had varied from outright opposition to a wait-and-see position. These institutions, who have seen the value of their shares fall by 20 per cent in the past three weeks, will be looking for reassurance that Bank of Ireland really has an alternative strategy.
"If their whole focus has been on the Alliance & Leicester deal to the exclusion of everything else, then they have problems," said one fund manager who had been one of those willing to give Bank of Ireland the benefit of the doubt until he saw the final proposal.
Another fund manager who opposed the deal from day one was, however, more virulent in his comments: "They've got egg on their face. They allowed the proposal to be portrayed as a `done deal' with Peter White at the top of the pile and a disproportionate amount of the equity going to Alliance & Leicester," he said.
The same fund manager added that Bank of Ireland is now firmly in play as an acquisition target itself, although this view was not shared by other fund managers, who felt that the level of goodwill that would have to be written off will still dissuade most potential bidders.
At last night's closing price, a bidder would have to write off Bank of Ireland goodwill of more than £5 billion, equivalent to £250 million of the bidder's annual profits over 20 years.
Mr Keane maintained that the merger "represented a very good strategic opportunity" for the bank. That view is not shared in the market unless the structure of the merger was fundamentally different from what emerged in the leaks three weeks ago.
He also said that the bank is pursuing a range of further options without going into any details on what these options are and where they will be pursued. But Bank of Ireland has pinned its colours to the mast and its apparent determination to forge a deal with Alliance & Leicester until the market forced it to call a halt indicates clearly that the UK will remain the focus of its growth strategy.
Do these options include bidding for a British building society? Do they include an alternative cross-border merger to the Alliance & Leicester merger? Do they include looking further afield, or is Bank of Ireland content to have its business exclusively focused on Ireland and the UK while AIB's strategy of expansion into Eastern Europe and the Far East develops?
Even after the late rise in the share price to €17.50 (£13.78) last night, Bank of Ireland shares are still comparatively cheap, and are on a discount to other banks in Ireland, the UK and the Eurozone.
At €17.50, Bank of Ireland is on a prospective price/earnings multiple of 14.5 compared to a p/e of 16 for Alliance & Leicester. That disparity between the two banks is a clear indication as to whom the market thought was getting the better of the merger deal. But Bank of Ireland is also cheap relative to British banks (an average p/e of almost 17) and the Eurozone (average p/e of 18.5).
That, together with the dependability of earnings growth from its Irish and British business, should ensure that Bank of Ireland shares recover much of their recent losses. Beyond that, however, the market will be looking for reassurance that Bank of Ireland really has an alternative strategy now that its £13 billion merger has been blown out of the water.
