The Bank of Ireland's decision to negotiate a merger with Alliance & Leicester in the UK is the most significant development in the financial sector in recent years. The deal is not yet done. But all the indications are that Ireland's second largest banking group will tie up an agreement with what ranks as one of the middle-sized UK institutions. The merged institution would, on current market valuations, be worth over £13 billion, giving it a scale which would make it a significant player in the UK market, while also remaining a major force in Ireland. Crucially, the joint financial resources of the two organisations would make possible further expansion, most likely in Britain or possibly in Continental Europe.
It is a brave move by the Bank of Ireland and, while not without risk, represents an attempt to control its own future rather than risk facing a hostile bid in a few years time, or resigning itself to becoming one of the smaller regional banks in the euro zone. The financial markets will almost certainly greet the news positively this morning. Investors in Bank of Ireland will welcome the diversification it will bring in earnings, as one of the strategic problems facing the bank has been an over-reliance on the buoyant Irish economy. For both institutions it is an opportunity to be part of a larger, more powerful, group, selling a broad range of financial products. Savings should also be possible in areas of the British market where the two banks currently have competing operations, boosting profits in the short term.
What of the Bank of Ireland's customers, its staff and the wider public interest? The move has few immediate implications for consumers here, who will continue to be served by the bank's existing network. And the cutbacks relating to the merger are likely to be concentrated in Britain, with no obvious impact on its Irish staff. There are issues of more general concern. Some will no doubt be unhappy with one of Ireland's major banking groups throwing in its lot with a British company, thus effectively turning itself into an Anglo-Irish institution. The new group will be 55 per cent controlled by Bank of Ireland shareholders and 45 per cent by Alliance & Leicester, although it will earn more of its profits in Britain and could expand further in that market.
As with all such mergers, the structure and location of the management team will be closely watched. If the merger goes through, the Alliance & Leicester chief executive, Mr Peter White, is to head the new institution, while the Bank of Ireland will appoint the chairman and the deputy managing director. This planned transformation of one of our most important business entities away from being controlled solely from Ireland will be much debated. But the internationalisation of business is inevitable. Like any other Irish company, the Bank of Ireland must look overseas to develop the kind of scale needed to be a significant player in the international arena - or risk being taken over itself. The job of its officers and its court of directors is to ensure that the deal is completed in a way which safeguards its influence in what is effectively a merger of two almost equally sized institutions.
Meanwhile a proper way of regulating the new institution must be worked out between the Financial Services Authority and the Central Bank of Ireland. In a matter of weeks it should become clear whether all the outstanding issues have been dealt with, allowing the merger to go ahead, subject to the approval of shareholders in both groups. Then, like all commercial marriages, its success will depend on the ability of management to run the merged entity and on whether the initial reasons for the link-up - one of which in this case is an optimistic view of the British economy - prove correct.