Bad news if A&L goes it alone

ALLIANCE & Leicester has not delivered much in the way of good news recently. Earlier this month, it abandoned the fine-sounding growth targets trumpeted in its three-year recovery plan. Two months ago, it announced the departure of managing director Peter McNamara after just a year in the job. Results for 2000 disappointed and interim figures in the summer were lacklustre.

Yet the shares have outperformed the banking sector for most of the past 12 months, boosted by persistent takeover speculation.

The bank is too small to be a bighitter yet too large to be a niche player. The five-year protection plan afforded the group when it converted from a building society will run out next year. The obvious conclusion is that A&L is not long for this world.

But the conclusion may not be right. Banks that would be keen to snap up A&L are not doing so because they believe its executives are unwilling to do a deal. At one time, this apparent reluctance would not have been an insuperable obstacle. A hungry predator would simply have let it be known that there was an interest and if the approach was spurned, ways would have been found to let shareholders know what was going on and allow them to decide.

But banks dare not do that these days. Government ministers and competition authorities have made little secret of their antipathy towards key players in the industry and the big banks fear that if they embraced A&L against the will of management, directors could kick up enough of a stink to ensure a deal was axed and the predator's reputation suffered long-term damage.

This does not mean they are not interested. Financiers calculate that A&L could merge with any big bank and achieve several hundred million pounds of cost savings without closing branches or losing front-of-house staff. The savings could be found in improved buying power, more efficient IT and more streamlined back offices.

Knowing this means a predator could afford to offer A&L shareholders a healthy price. But management needs to be willing. Under current circumstances, there is every chance that A&L will trundle along on its own. After a while, the share price may begin to reflect this realisation.

Alien invasion
WHILE Enron's staff, creditors and counterparties grieve over the demise of the US energy group, some investment banks are gloating.

Their glee does not stem solely from the belief they will earn millions of dollars in fees from advising the firm and those affected by its collapse. They are also prompted by rather more strategic thoughts.

Enron's leading lenders were Citigroup and JP Morgan Chase. Both loaned the company hundreds of millions of dollars and are thought now to be in line for losses of $400m (£276m) apiece.

The revelation of the duo's involvement follows a period during which commercial banks have increasingly been trying to muscle in on investment banks' territory. They have been succeeding too.

Whereas before they were happy to lend money and let the investment banks do the glamorous and lucrative advisory work, they have in recent times demanded a share of that work in return for handing over cash to clients.

Investment banks have watched this development with some alarm, fearful that it could lead to their being taken over by predators with alien cultures.

Enron, they believe, has arrested the process. Its collapse is thought to have unnerved the commercial banking industry and forced those at the top to channel their energies in a diffferent direction.

In the long term, this may be wishful thinking on the part of investment banks. In the short term, the theory is bound to be right.