Jeremy Warner's Outlook: Merger mania returns as Barclays lobbies for a deal with underperforming ABN Amro

Merger mania is back with a vengeance. You only ever know for sure that the fever has returned once the first big banking merger gets wheeled out of the hanger. Banks are always the last to catch the bug because they know how difficult these things can be, and will therefore only attempt them once all other growth opportunities have been fully explored.

All that surplus capital, never in the history of banking more bountiful than it is now, has to be used up somehow. The "transformational" deal looks as good a way as any. With the bull market still in full flood, investors have dropped their guard, and might even be prepared to allow it. Managements are off the leash and all too keen to prove themselves on the field of global consolidation.

For Barclays to be trying to merge with ABN Amro is a particularly fine example of the genre. Banking mergers are always fraught with difficulty. Cross-border mergers are doubly more problematic, for there is inevitably the question of where the new bank should be domiciled and headquartered, who should regulate it, and more so than in virtually any other business, whether differing corporate and national cultures can be viably crunched together at all.

In Barclays' case, there are a wealth of other questions too. The most prominent of these is the difference in valuation, with Barclays on a rather lower earnings multiple than ABN. This is for the very good reason that ABN is a quite inefficiently run bank, and therefore has plenty of scope for improvement.

All the same, Barclays has a mountain to climb in making the deal value-enhancing for its own shareholders. According to one estimate in the City yesterday, even assuming as much as 15 per cent can be taken out of the ABN cost base, the merger would still be earnings dilutive for Barclays after three years. The bigger the premium that ABN extracts, the more of a problem these valuation differences become.

Shares in ABN have risen strongly since Christopher Hohn's TCI Fund Management emerged with a 1 per cent stake, demanding that the bank either merge or break itself up. Barclays has, meanwhile, been going in the other direction, unnerved by rising delinquency rates in consumer lending markets. It's not going to be easy.

On the upside is that the cultural barriers to a successful deal are perhaps rather lower with a Dutch bank than they would be with almost any other. ABN also has an American chairman, who may be keener than predecessors to talk turkey. In Britain, the new Barclays chairman, Marcus Agius, is a veteran M & A practitioner. Some say he was hired for the very purpose of ensuring that the ABN deal, tried on a number of occasions in the past, actually happens this time.

Yet the biggest plus is the most obvious of all. ABN is one of the few big league players it is obviously possible to buy. This is the strongest reason for thinking the Barclays approach might not presage a wider outbreak of consolidating mega-mergers in the banking sector. Nobody else seems to be available.

The upshot is that, notwithstanding the perceived need for any banking takeover to be on an "agreed" basis, ABN might end up the object of an auction. Sir Fred Goodwin, the chief executive of Royal Bank of Scotland, will be champing at the bit, but having said at his last results that he wouldn't be doing any transformational deals in the near future, he'd find it difficult to back track. The valuation hurdle would also be even more of a problem for him than Barclays.

Yet that doesn't rule out Continental rivals. John Varley, the Barclays chief executive, is hot to trot, and for the first time in years, he senses that the City might even have the appetite for it. A British company acquiring an overseas one? My goodness, that does mark a reversal of trend. The chances of Barclays overpaying are high.

Travel U-turn will puzzle regulators

For heaven's sake, make up your mind. Just weeks ago, Peter Long, the chief executive of First Choice, was arguing the future for his company lay in specialist, niche holiday markets. Now he's proposing to merge with the biggest traditional tour operator of the lot, the German controlled Tui Travel, owner of Thomson Holidays. What's more, he's completely sold on the idea of creating a global powerhouse that combines both the traditional package holiday with the niche. To put it mildly, that's a bit of a U-turn.

It is not, however, one brought about of his own choosing, and assuming he can get this latest proposal through regulators - a big if - it ought to be a brilliant deal for him, much better, in fact, than the one originally contemplated.

There were a very limited number of potential buyers for First Choice's mainstream business when Mr Long was trying to sell it. When the frontrunner, My Travel, announced a merger with Thomas Cook instead, it was pretty much game over. There was no one left to pay an acceptable price for the business he wanted to sell. Mr Long's new approach to the problem of consolidation is summarised by the old adage, "if you cannot beat them, join them".

Before the My Travel/Thomas Cook announcement, Tui's chief executive, Michael Frenzel, was uninterested in talking to First Choice about any sort of a deal. Thomson has been struggling in recent years, and he may have thought he already had enough on his plate. The My Travel transaction changed the landscape and forced him to think again. It also provides the template for the proposed new Tui company - a London-listed venture with a controlling German shareholder.

Yet Mr Long has extracted quite a price for this structure. First Choice contributes little more than a fifth of the combined revenues of the new group, and less than 40 per cent of the profits. For that, it gets 49 per cent of the equity. Assuming Mr Long can improve Tui's margins to something approaching his own, it should prove enormously earnings-enhancing for First Choice shareholders. Mr Long also has the opportunity to feed his own, high value-added, specialist holidays through the Tui distribution network.

Yet there's the rub. Will the competition authorities allow him that chance? Four into three for Europe's major tour operators looked dodgy enough from a competition perspective.

Four into two looks seems even more of a try-on - so much so that a secondary purpose of this transaction is surely that if the competition authorities have a problem with this merger proposal, it ought to prompt them to find fault with the other one too. Mr Long denies it vehemently, but looking beyond the guff about global powerhouses, he's surely also saying: "If I can't do it, then nobody else is going to be allowed to either".

His case for being allowed rests on the idea that the world of travel has been changed fundamentally by the rise of low-cost airline operators and online intermediaries such as expedia. Holidays have been at one and the same time de-packaged and then repackaged by others in more flexible form.

Even so, I'd be amazed if regulators buy it. There are an awful lot of people in the UK, possibly still the majority, who buy their annual holidays from one of the main tour operators. What's more, they do it not via the internet, but through high street stores. Combined, First Choice and Thomson have 1,100 of them.

The internet is indeed changing the world we live in fundamentally, but whether it has yet changed it enough to justify what would even a few years back have been widely seen as a monstrously anti-competitive merger is an interesting question.

Echoes of South Sea bubble in Indian float

Roger Parry, the chairman of Johnston Press, heads a star-studded cast of characters who have signed up to serve as directors for the Aim-listed flotation of India Media, an investment fund seeking around £80m for investment in the Indian media industry. No doubt they've got some splendid opportunities up their sleeves, but whenever a project like this is proposed it puts me in mind of the defining flotation of the South Sea bubble, which was for "carrying on an undertaking of great advantage, but nobody to know what it is". In that case, nobody ever did, either.

j.warner@independent.co.uk