Shares in HBOS, the British bank that has accepted a bid from rival Lloyds TSB, fell as much as 26 per cent today amid market talk Lloyds could renegotiate the deal.
By 1.10pm, Lloyds shares were up 3.6 per cent at 225 pence, giving its bid a value of 186-3/4p under the recommended offer which will see HBOS investors get 0.83 Lloyds shares for every HBOS share they own.
By contrast HBOS shares were down 10.3 per cent at 127.4p, making them the biggest faller in the FTSE 100 share index and putting them at a 31 per cent discount to Lloyds' offer price. The stock had earlier fallen as low as 113 pence.
Several dealers cited talk Lloyds could revise its offer to 0.6 of its shares per HBOS share.
Both banks declined to comment on the talk of a possible renegotiation, but said they were pressing ahead with the acquisition process.
"Given extreme market volatility, the market is pricing in an increased risk that the Lloyds acquisition either won't go ahead, or that there'll be an attempt to renegotiate in Lloyds' favour," said Exane BNP Paribas analyst Ian Gordon.
HBOS, dependent on expensive wholesale borrowing for almost half of its funding, has seen its share price fall 86 percent since the onset of the credit crunch in September last year.
Exane BNP Paribas' Gordon said concerns over the deal centred on the combined group's funding structure, with the turmoil in the banking industry further dampening enthusiasm for an acquisition that is not expected to boost earnings until 2010.
"I think Lloyds are probably finding it a slightly harder sell than normal," he said.
The Lloyds-HBOS tie-up, announced on Septmber 18th, was facilitated by a government waiver of competition rules after several days of confidence-sapping declines in HBOS' share price.
The deal would create a lender with a 28 per cent share of the UK mortgage market and controlling a quarter of the country's current or checking accounts.