British bank Barclays and Dutch rival ABN AMRO aim to agree a tie-up within 30 days, a source close to the matter said on Tuesday, as shares of both firms jumped on news of the takeover talks.
Barclays and ABN said they were in "exclusive preliminary discussions" late on Monday. No details of the structure of any deal were released, but Barclays is likely to have to pay more than $80 billion for its rival, creating a $168 billion financial services group at current values.
A source familiar with the matter said ABN entered talks with Barclays after studying proposals from several banks and the exclusivity period will last for 30 days, but that could be flexible.
That could take the talks close to ABN's annual shareholder meeting on April 26, when it is due to address calls by British hedge fund TCI to consider a sale or break-up.
ABN shares were up 3.2% at 30.91 euros, after hitting an all-time high of 31.33, to value it at about 59 billion euros ($78.5 billion)
Barclays shares jumped 4.4% to 707 pence, valuing it at more than 46 billion pounds ($89.5 billion).
How Much is ABN Amro Worth?
Analysts said a deal would make strong strategic sense, but there was limited scope for Barclays to pay a significant premium for ABN as cost savings from a deal would be limited, which could see another European bank counterbid for ABN.
"The potential transaction is primarily about growth and not about cost savings," said Mike Trippitt, analyst at Oriel Securities.
The growth opportunity would come from combining the international and commercial banking businesses, while cost savings would mainly come from investment banking, asset and wealth management arms, he said.
Based on Barclays offering 33 euros per ABN share, Trippitt said the deal would require cost savings of 1.5 billion-2 billion pounds to achieve earnings neutrality by 2009. "Tough, but probably do-able," he said.
JP Morgan estimated Barclays could bid up to 33.5 euros per share for ABN, although it said this would be 7% dilutive for the U.K. bank's shareholders.
Merrill Lynch said it was unlikely that ABN would consider an offer below 35 euros per share, at which level Barclays would require 5.3 billion euros in synergy benefits to make the deal neutral for its earnings by 2009.
Merrill raised its price target on ABN shares to 33.5 euros.
"Since we see several possible suitors waiting in the wings should the Barclays talks fail, we think it reasonable to ascribe a 60% probability of a deal at 35 euros a share," it said in a research note.