The collapse of the proposed merger between Bank of Ireland and Alliance & Leicester represents a serious and embarrassing reversal for the second largest financial institution in this State. It hardly seems credible that such a large institution could have so badly misjudged the mood of its own major shareholders and so misread the response of the markets.
The fact that Bank of Ireland's share price actually increased after the collapse of the deal was announced speaks volumes; the markets were never fully convinced this ambitious merger reflected the strength and stature of Bank of Ireland. The collateral damage is immense; Bank of Ireland, which set out to shape its own destiny through a £13 billion merger with one of Britain's leading banks, has undermined its own credibility and potentially at least now finds itself vulnerable to a hostile take-over bid. In truth, the markets have never been fully convinced of the benefits of the deal which its main architect, Bank of Ireland chief executive, Mr Maurice Keane, trumpeted as a "very good strategic opportunity for the bank". The scale of the project could hardly have been more ambitious - especially for an institution like Bank of Ireland which not always been in the vanguard of change. The new banking group was to be the first merger between an institution in the euro zone with one from a country not yet in the single currency. The merged entity would have made Bank of Ireland a major player in the UK banking market and boosted its status in European banking.
But Bank of Ireland is vulnerable to the charge that the whole merger proposal was not fully thought out. The market reaction, always lukewarm, became more much hostile once it became clear that Alliance & Leicester, the junior partners in the proposed merger, would occupy the most senior management post. For much of the past three weeks, since news of the proposal was first announced, it has been Alliance & Leicester - a former building society - which has made the running.
The markets would have liked to have seen Bank of Ireland, which has experience of running a much more diverse business, emerge as the more dominant element. Bank of Ireland may have made up 55 per cent of the merged entity, but the markets were never fully convinced that its influence would be fully asserted. They simply did not like the idea of the smaller institution apparently taking control.
The long-term challenge facing Bank of Ireland now, after this debacle, is to frame an alternative strategy which will allow it to maximise its own potential. This will not be easy; the proposed alliance with Alliance & Leicester was ill-conceived and badly handed. The whole business turned into a damaging escapade for the bank. But it has the resources and the stature to ride out the storm. It must ensure that it handles its next move - be it a merger or an acquisition - more adroitly.