First Active and Anglo Irish Bank are keen to establish a formidable banking force and may quickly launch bids for ICC and TSB once the merger is completed. The banks are expected to turn their attention to the State-owned banks, which are being prepared for sale at the moment, and it is this longer-term strategic objective which they will be keen to emphasise to the markets.

Together the two financial institutions have the resources to expand in the short term, with more than €1 billion in surplus capital but they will face stiff competition in realising this objective.

The grand plan appears to be that First Active and Anglo Irish Bank will continue to drive their respective businesses forward under a new management team and board of directors. In this scenario, First Active could launch a bid to become a strategic partner for TSB Bank with Anglo making a play for ICC.

TSB Bank has already advertised for a strategic partner with indicative bids due to be lodged by June 16th. It is likely to attract interest from the entire Irish financial sector. TSB and First Active would be a good fit. The two businesses could be combined and there would be scope for cost reduction. But just how much potential exists is questionable.

First Active already operates off a much higher cost base than Anglo Irish Bank even after a sweeping rationalisation plan which shed staff and closed branches. A second round of cost cutting can be expected at First Active as a result of the merger which would seek to further reduce staff numbers and restructure its branch network. Meanwhile First Active's relatively successful foray into the Internet mortgage providers market in the UK is likely to be used as a model here and would offer further potential to cut costs.

The addition of TSB would on the face of it offer even further potential to drive out costs in the longer term although the scale of any cost savings are limited by the commitment being sought from potential bidders to guarantee existing staff numbers at the bank.

Anglo was also among the institutions which considered ICC Bank when it came on the market last year. With its mix of small business banking and venture capital activities, the bank would sit well with Anglo. The latter failed to make a bid for ICC at that time primarily due to the high price tag it carried while the onerous conditions of the sale, which also included a guarantee in relation to retaining staff, was unattractive.

Since then the value of all financial institutions has fallen with investors switching funds into high technology companies. In the current climate, Anglo's merger with First Active is opportunistic, with the bank moving to add on an acquisition for a relatively cheap price. But it is this entirely new direction for the bank which is causing concern in the market. The high growth bank has delivered handsomely for its shareholders in recent years by concentrating on niche markets.

There are fears that a move into the highly competitive mortgage market at a time when margins are declining could depress the bank's earning growth capabilities going forward. The addition of ICC and TSB in the longer-term is an ambitious undertaking and if achieved will be a great testament to the management skills of the enlarged company.

For now though the market is still digesting the potential merger of First Active and Anglo Irish Bank and has yet to decide on the merits of such a union.