Last Monday has been dubbed "Merger Monday" in the investment markets due to the coincidental announcement of several large-scale mergers on Wall Street.
British American Tobacco announced it was merging its US subsidiary, Brown & Williamson, with RJ Reynolds in a $6.2 billion (€5.3 billion) deal. In the healthcare sector, Anthean agreed to buy Wellpoint Health Networks in a deal worth $16.4 billion to form the largest US health insurer.
The biggest deal, however, was in the banking sector, with Bank of America's agreed takeover of the large east-coast regional bank FleetBoston Financial. The all-share transaction values FleetBoston at $47 billion and will transform Bank of America into the second-largest US bank (behind Citigroup) measured by assets.
This return to large-scale merger and acquisition activity will be interpreted by many as further confirmation that equity markets are likely to continue to rise for the foreseeable future. Not surprisingly, share prices of companies in the sectors involved were generally strong immediately after the various announcements.
For Irish investors, the activity in the banking sector is of particular relevance given AIB's 22.5 per cent stake in the US regional bank M&T. The share prices of some of the large US regional banks, such as SunTrust, rose by 6 per cent on the day, although M&T's shares rose by a more modest 1.5 per cent.
The price being paid by Bank of America is viewed by analysts as quite high and equates to a 42 per cent premium to the last closing level of the FleetBoston share price.
The 10 per cent fall in the Bank of America share price on the day indicates that investors' knee-jerk reaction is that the bank is paying too much to gain strategic market share in the northeast of the US.
On completion of the takeover, the combined entity will have a 9.8 per cent deposit market share in the US. Regulatory restrictions prevent any one bank from holding more than a 10 per cent market share of deposits.
However, it is expected that there will be no regulatory obstacles to the deal closing on time due to the fact that there is very little geographic overlap between Bank of America's and FleetBoston's current operations.
For shareholders in AIB, the deal is positive given that it would seem to underpin the current value of its US associate. M&T accounts for approximately 15 per cent of AIB's profits and, therefore, is an important part of the overall Group.
M&T is headquartered in Buffalo, New York and has strong market share in New York, Pennsylvania, Maryland and West Virginia.
AIB's stake was the result of M&T's takeover of Allfirst. Effectively, AIB swapped its wholly owned Allfirst subsidiary for a minority stake in a larger bank.
M&T has an impressive track record and has consistently been one of the better-performing US banks. Therefore, AIB shareholders should benefit over the longer term since the combined Allfirst/M&T business should grow much faster than Allfirst could have achieved on its own.
However, a major drawback of holding a minority stake in another company is that the stock market tends to value such holdings at a discount to the full market value.
In part, this reflects the fact that AIB Group does not have day-to-day management control over the M&T business.
Therefore, if there is further strength in the M&T share price it would not necessarily have a large impact on AIB's share price.
This is consistent with investment theory, which states that the stock market will not put any extra value on a company that simply diversifies its investments.
In today's sophisticated global equity markets, investors can easily achieve diversification themselves by purchasing stocks in different sectors and different geographic regions.
For example, an investor who wishes to gain exposure to Irish and US banking can purchase an Irish company and an American company, or indeed a selection of companies in both markets, to create a diversified portfolio that exactly matches his requirements.
In theory, this is more efficient than purchasing shares in one company, such as AIB, which provides direct exposure to Ireland but indirect exposure to the US market.
Applying this logic rigidly would point to AIB eventually distributing its stake in M&T to its shareholders on a pro rata basis. AIB shareholders would then hold shares in AIB (ex M&T) and shares in M&T.
This would free investors to make individual decisions about how much money they wish to have invested in each business.
As long as AIB shares are fairly valued by the stock market, there will be little incentive to engage in such a distribution. However, if AIB's shares were considered to be undervalued by the market for a prolonged period, this could become an option that would be seriously considered by AIB's management.
