The proposed Irish Permanent/Irish Life merger is not yet a done deal. The two sides have been talking for some weeks, but, as is always the case with such negotiations, some of the more difficult matters to decide will be left until last.

Irish Life will be well aware of how things can fall apart at the last minute; negotiations between the life assurance group and New Ireland last year were well advanced, before running into difficulties which allowed Bank of Ireland to slip in and buy New Ireland.

So far it appears that the two sides have got as far as agreeing that both would be amenable to a merger and to discussing broadly how this might be achieved. Now they must sort out the detail of the respective valuations to be put on both companies, the precise structure of the deal, how the merged entity would look and, crucially, who would be in charge. It is this latter point which was one factor in the collapse in the Irish Life/New Ireland talks.

The fact that the news is now in the public domain will increase pressure on the two sides to decide quickly, one way or the other. Both are quoted on the stockmarket and are likely to have to issue statements today to tell the market what is happening. The logic of the link-up means they will be under pressure to complete it, although it is also possible that other parties could now throw their hat into the ring.

The advantages of an Irish Life/Irish Permanent link-up are clear. Irish Life is the state's biggest life assurer, but needs to find new ways to distribute its products, apart from its traditional salesforce route.

The Irish Permanent's network of 90 branches and 90 agency outlets would provide this outlet, while allowing the Permanent to become part of a larger financial grouping offering a strong presence in the personal finance market. It also allows the Permanent to protect itself; at the end of next year the Permanent's five-year protection period following its flotation ends and the rule banning any shareholder from buying a stake of more than 15 per cent goes.

Already UK giant, Abbey National, holds 9 per cent and has always been seen as a possible bidder. Indeed the link-up could be seen as a partly defensive move by both institutions ahead of the arrival of the single currency, combining to create a single powerful force in the personal finance market.

The euro is likely to lead to a much more competitive environment for the financial institutions, with EU major financial groups set to take an increasing interest here, both seeking business and making acquisitions. A combined Irish Life/ Irish Permanent would be a much stronger player than two separate institutions, in a financial world where size is seen as vital in achieving economies of scale and in being able to sell a large range of products through one or two sales networks.

First, a few hurdles must be overcome by the negotiators. They must find a way to get around the "15 per cent" rule, banning anyone from buying a big stake in the Irish Permanent.

This could be achieved by structuring the transaction as one in which Irish Permanent buys Irish Life by paying its shares to Irish Life shareholders.

Given the relative size of the two groups - Irish Life has a market capitalisation of £1.6 million, twice that of the Irish Permanent - Irish Life shareholders would end up holding a majority stake in the merged entity.

The approval of the Central Bank, which regulates the Permanent, and the Minister for Finance, who still holds a special share in Irish Life allowing him to veto deals, must also be acquired. Before this, the two sides must, of course, agree on the precise terms of the deal. The signs are that they may well succeed. However, some intense weeks of talking lie ahead first.