The audacious bid by Bank of Scotland for its much larger rival, NatWest Bank, has thrown the spotlight firmly back on the ongoing consolidation of the European Financial Services sector.
So far, the majority of mergers and acquisitions have occurred within national boundaries and, despite recent Scottish devolution, the current corporate bid is clearly continuing in this vein.
From an Irish perspective this particular corporate raid has greater than usual significance for a number of reasons. Firstly, Bank of Scotland has stated that if it succeeds in acquiring NatWest, it will sell off what it deems to be non-core activities. One of the most valuable of these is Ulster Bank and a sale would have enormous implications for the Irish banking market.
Furthermore, the recent aborted foray by the Bank of Ireland through its merger attempt with the Alliance and Leicester, highlights that the Irish banks have more than a passing interest on current developments.
Curiously, the bid announcement for NatWest has had only a limited impact on the quoted Irish banking sector. AIB's share price has risen somewhat, but Bank of Ireland's price has declined. Meanwhile, Irish Life & Permanent's share price is steady and it is being touted as the frontrunner for Ulster Bank if it is eventually put up for sale.
As the table below shows, if either of the Scottish bank's takeover of NatWest succeeds, it will radically alter UK banking. The vulnerable position of NatWest was in part the result of its own bid for the large life insurer, Legal and General. Many analysts believed NatWest was paying too high a price and they questioned the industrial logic of the now aborted deal (the bid from Bank of Scotland is contingent on NatWest dropping its bid for Legal and General).
NatWest's share price slumped as concerns mounted enabling the Bank of Scotland to pounce with its predatory bid. There are clearly some parallels here with the Bank of Ireland's aborted merger proposal with the Alliance and Leicester. Since the failed merger, BoI's share price has been relatively weak, and despite buying back 5 per cent of its own share capital the shares have declined further. The contrast between a Scottish bank taking over a much bigger rival with that of BoI's failed merger attempt has led to concerns about Bank of Ireland's future strategic direction.
The likely sell-off of Ulster Bank suggests that UK banks increasingly view the Irish market (North and South) as peripheral to their core activities. If this is indeed the case, Irish financial shares are unlikely to see a bid premium develop in their share prices. For the managements of Irish banks this has serious implications since their relatively depressed share prices will make it much more difficult for them to launch large-scale mergers and/or acquisitions.
The consolidation of the Irish financial sector has much further to run. Negative implications of intensified competition seems are currently dominating sentiment towards Irish stocks, but in the long term, buyers of Irish financial stocks at current prices should enjoy attractive returns.
