Questions are being asked about why the airline has taken such an audacious step, writes Emmet Oliver

For possibly the first time in his recent career Michael O'Leary was not the only man in the room without a tie yesterday.

Such was the unexpected nature of Ryanair's announcement that few of the stockbrokers, journalists, public relations executives and corporate advisors who gathered in Jurys Hotel had time to put on a tie.

Over recent days Davy Stockbrokers had been quietly building up a stake in Aer Lingus on behalf of Ryanair, but despite ordering shares in relatively large chunks the buying activity had remained a well-kept secret. However, the point of disclosure was approaching so O'Leary clearly decided a press conference was the best way to make his pitch to Aer Lingus shareholders.

While a small circle were aware of Ryanair's intentions, it is clear that Aer Lingus itself, market analysts, the Government and the unions were wrong footed by the announcement. The prospect of a trade buyer like British Airways or Emirates purchasing a chunk of shares was often mentioned during casual conversation, but nobody appeared to think Ryanair would ever decide to become an acquirer.

As recently as last week, O'Leary was still dismissing Aer Lingus as a "small regional airline" with high fares and tiny passenger numbers. After he submitted a planning objection to Fingal County Council, objecting to Terminal 2, the conventional wisdom was that Ryanair would slow down Aer Lingus by simply holding up infrastructural developments at Dublin airport. The conventional wisdom was wrong.

O'Leary admitted yesterday he realised some time ago that Aer Lingus was finally going to be floated by the Government and an opportunity might arise to either buy it outright or at least take up a substantial position.

When the advisors to Aer Lingus floated the airline at €2.20, the trigger for Ryanair's move was pulled. With almost €2 billion of free cash on its balance sheet, the airline must have realised that a €2.20 price gave it the opening it was looking for.

By close of trading last night it had acquired an almost 20 per cent holding, although advancing beyond this point could prove difficult.

Earlier yesterday most analysts and corporate advisers were still reacting to the sheer audacity of the move. But after the shock wore off, questions started to arise about why Ryanair was taking audacious step.

There were plenty of reasons to question the wisdom of the whole enterprise. Why would Ryanair, for so long a firm sceptic on long-haul air travel, want to expose itself to an airline with a substantial presence in that market? Why would Ryanair sign up for a deal that was likely to exert downward pressure on margins? Why would Ryanair go for an acquisition when its history was based on organic growth? It is worth remembering that the only airline Ryanair has ever acquired is Buzz three years ago for a bargain price of approximately €20 million.

The final question raised by many after the airline's senior managers left was: can this deal clear all the regulatory and competition hurdles? This question has earlier been quickly batted away by O'Leary who said Ryanair would hardly have spent €200 million gobbling up shares if it thought the whole project was a non-runner.

Despite some of the negativity and scepticism there was overwhelming agreement the offer was a generous one. Ironically small investors, many of them investing just over €10,000 in the airline have been the winners so far. Based on the original IPO price of €2.20 these investors are now sitting on gains of over 30 per cent. Admittedly these gains may prove transistory, but based on the Ryanair offer a premium of 27 per cent is at least available right now.

Will Ryanair's generous offer be generous enough in the long term though? Sceptics point to the readiness of US hedge funds to pile into the shares yesterday evening, even paying above the Ryanair €2.80 offer price. Clearly this group believes either Ryanair is going to have to cough up some more, or other white knight investors are going to make a counter bid. Either way, Ryanair's audaciousness may have to stretch even further.