Confidence in the senior management of Bank of Ireland has been seriously damaged after its planned £13 billion (€16.5 billion) merger with Britain's Alliance & Leicester (A&L) collapsed last night.
Analysts said the breakdown left both banks discredited, and one suggested they were extremely vulnerable to becoming take-over targets.
The stock market showed its relief at the demise of the deal by sending Bank of Ireland shares sharply ahead. Fund managers and stockbrokers said the credibility of senior Bank of Ireland officials had been seriously undermined. The bank, they added, would have to show clearly that it had an alternative strategy.
Bank of Ireland's group chief executive, Mr Maurice Keane, strongly defended the merger talks and insisted that the deal was well thought out and soundly based.
But market sources said the standing of Bank of Ireland management, which was apparently keen enough on the merger to cede the chief executive's job to A&L's Mr Peter White, has taken a battering. In particular, the credibility of Mr Keane has come into question. But speaking on RTE radio's business news yesterday, Mr Keane said he had no concerns about his position.
The merger, which would have been the biggest deal involving an Irish company, was called off by A&L, which claimed that Bank of Ireland sought to alter the terms of the original merger proposal. Mr John Windeler, A&L's chairman, called Mr Howard Kilroy, Bank of Ireland's governor, to break off the talks only minutes before the withdrawal was announced at 3.45 p.m. yesterday.
The debacle came at the end of a bad day for the Irish financial services sector as £425 million (€540 million) was knocked off the value of AIB as a result of fears that a restructuring of a key index of European shares might see it excluded from the top 50. Inclusion ensures demand across the euro zone for the shares of the listed companies.
Alliance & Leicester, following the merger collapse, said that Bank of Ireland had progressively introduced new demands, eventually totalling seven, for changes in a structure agreed in April. "None of these in isolation was a deal-breaker but, put together, it was a sign of bad faith," an A&L adviser said last night.
A Bank of Ireland adviser described the statement issued by A&L as "a more unilateral action than we were expecting", and said the UK bank's description of the breakdown misrepresented the facts.
Bank of Ireland has refused to comment on the terms of the merger, but it is understood to have demanded a number of fundamental changes, including retaining the chief executive's position for Mr Keane, and altering the proposed 55-45 split more in Bank of Ireland's favour.
Bank of Ireland sought to change the original terms after its share price fell over the past three weeks by almost 20 per cent as institutional investors indicated clearly that they believed the merger terms proposed unduly favoured A&L. In the same period, A&L shares have stood still.
It is also understood, however, that apart from the reservations of some non-executive directors, some senior Bank of Ireland management below board level had voiced their concerns about the merger, particularly about the installation of Mr White as chief executive. One source said: "There was a feeling that what the board was doing was like selling the family silver. Bank of Ireland is a far more successful and diverse operation than Alliance & Leicester but still we were effectively handing control to them."
Bank of Ireland shares soared in late trading last night by €1.00 to €17.50 (£13.78) and brokers expect further gains today as the market shows its relief that the merger has not gone ahead on the terms indicated.
Analysts said the breakdown left both banks discredited and likely targets for take-over. "They're both extremely vulnerable," said one banker.
Irish fund managers were divided on the likelihood of Bank of Ireland becoming a take-over target. One felt the bank was now very much "in play" and another felt it would be difficult for any group to make anything other than an agreed bid for it.