Costs mitigate against take-over

The old saying has it that "there is no smoke without fire". In the case of the take-over speculation surrounding AIB, the old adage looks likely to be proved wrong, in the short term at least.

Most sources said last night that the speculation linking British bank Lloyds TSB to AIB is likely to prove unfounded - as did last week's reports on a Deutsche or ABN Amro approach for Ireland's biggest bank. Nonetheless, the extent and persistence of the latest rumours have given many in Dublin pause for thought and had a real impact on trading in recent days. AIB's shares are now trading above €18, having started the year at €15.27. The main reason for scepticism about an AIB take-over is that it would be very expensive. Rumours spread around the market late yesterday that Lloyds TSB would offer £15 sterling a share - €21.76 - for AIB.

No doubt AIB shareholders would be delighted. But for the purchaser it would represent a multiple of some 25 times on estimated 1999 earnings per share. Getting a return on such an investment would be no easy task. The financial burden on any purchaser is illustrated by the fact that AIB's market capitalisation puts it at well over five times its estimated book value at the end of last year. This means that any bidder would have to accept a massive goodwill write-off after an acquisition to adjust its accounts for the excess in the value of what it has paid for over the assets of which it has assumed ownership. Estimates are that this could lead to a profit write-off running into hundreds of millions of pounds annually, over a prolonged period of years.

None of this means that a take-over cannot - or definitely will not - happen, of course. For a bank like Lloyds TSB, the acquisition of AIB would have the obvious attractions of an efficient a profitable operator in the fast-growing Irish market - a euro zone area - a profitable US operation and a reasonable British operation with 35 outlets, mainly concentrating on the business sector, which could be integrated with its own operations.

That said, the current trend in Europe is for banking mergers within national borders - such as the recent ones in France and Spain - and most analysts believe that a move to cross-border mergers is some way off. After all, cross-border link-ups do not offer the same savings in terms of rationalisation in one marketplace. However, the very pace of mergers across Europe means that speculation will continue to surround the future of Ireland's financial institutions in the months ahead.