Shareholders of Dublin-based Depfa Bank yesterday agreed to a €5 billion merger with German property investment bank Hypo Real Estate, despite the value of the deal falling by 12 per cent in the past two months.

The merger was initially worth €5.7 million in a cash and shares deal, amounting to €16.14 per Depfa share. However, shares in Hypo have fallen by 20 per cent since the offer was announced in July.

Hypo offered €6.80 in cash and 0.189 of its own shares for each Depfa share in the Republic's largest ever corporate transaction. Depfa specialises in financing public sector projects.

Financial stocks have fallen sharply in the last two months due to a liquidity squeeze in the international money markets caused by the collapse in the US subprime mortgage business. More than 90 per cent of Depfa's shareholders supported the merger.

Matthias Mosler, deputy chief executive of Depfa, said its share price had risen by 2 per cent because of the interest in the proposed merger, while German bank stocks had fallen by 12.5 per cent since the deal was announced.

He said the merger still represented a premium of 17-18 per cent to Depfa shareholders. "We think the premium is still close to the premium we saw at the time of the announcement because we would have lost value as well," said Mr Mosler.

Hypo's 180 staff will move to Depfa's Dublin headquarters, which will become the centre for the enlarged Hypo group's public sector financing division. Depfa already employs 300 people in Dublin.

Mr Mosler said the bank was still raising finance and generating new business despite the turmoil in the markets.

"We are very comfortable in terms of funding and we are comfortable in terms of new business," said Mr Mosler. "For trading operations the market environment has been more difficult, as for any other bank."

One of Hypo's German shareholders has filed a lawsuit against the company, challenging the merger.