ABN Amro enters exclusive talks with Barclays over possible link-up

ABN Amro executives agreed last night to enter exclusive talks with Barclays. The move follows weekend reports that the British bank had held discussions with the bank about a deal that would rescue it from a campaign for a break-up led by the activist investor TCI.

The talks, at an early stage, would create a new force in world banking with a market value of more than £80bn were they to lead to a combination of the two organisations, vaulting Barclays from 15th to fifth in the league table of the world's biggest banks.

However, there remain several hurdles, including management positions, the location of headquarters and, crucially, price. Were Barclays to succeed, it would represent the biggest cross-border deal in European banking, eclipsing Banco Santander's takeover of Abbey and the takeover of Germany's HypoVereinsbank by Italy's Unicredito to create Unicredit Group.

The two sides are understood to have held intensive discussions over the weekend. After the negotiations, executives at ABN Amro agreed to a 30-day period of exclusive talks.

The two banks are believed to have agreed the basic outline of a deal. Barclays' management team is expected to keep most of the top jobs in the combined bank.

But many believe Barclays may face competition from a counter-bidder.

The company's shares fell 5.5p to 677p yesterday, although that is less than some traders had expected given that the company is attempting a potentially transforming merger.

In a statement, ABN said: "As part of its continuous strategy to explore value creation for all stakeholders, ABN Amro confirms that it is in exclusive preliminary discussions with Barclays concerning a potential combination of the two organisations.

"These discussions are the result of careful consideration to create a highly complementary partnership. The talks are at an early and exploratory stage and there can be no certainty that they will lead to a transaction."

Barclays issued a similar statement after an announcement that it would update the market before the markets open today. It followed the leaking of the discussions over the weekend - the second set of talks Barclays has held with ABN.

Analysts gave the talks a mixed reception, saying that others such as Citigroup or Royal Bank of Scotland would be able to extract more synergies from a merger, although the latter has appeared to rule out a deal as conflicting with the chief executive Fred Goodwin's strategy of focusing on organic growth.

However, James Eden, at Dresdner Kleinwort, said there was "less to fear" from Barclays buying an underperforming bank like ABN than "when it pays top dollar for a highly performing business like Woolwich".