M&A: is UK bank bail out thinly disguised state funding of consolidation?

M&A specialists were worried they would have nothing to do in London this autumn but as the financial sector turns into a disaster zone, they are tied to their desks on deals that are almost bound to succeed in what must be the easiest return on success fees that the sector has seen for a very long time.

Think about it. Abbey (owned by Santander) is to be the vehicle by which the Spanish giant chews up the profitable bits of Bradford and Bingley.

Lloyds TSB has agreed to buy HBOS.

Barclays has agreed to take the US operations of Lehman Brothers.

So far, so good.

But today's statement by the UK Treasury says that Abbey, Barclays, HBOS and Lloyds TSB are amongst the recipients of state funding by way of issue of preference shares.

The cost to the UK taxpayer is around GBP2,000 per person.

Aside from political issues (why should banks be favoured in this way when other businesses are abandoned, indeed often driven into insolvency, by the government for whom insolvency proceedings are a preferred method of tax enforcement?) there is a fundamental point at issue.

If the banks that have made the offers to purchase others need support, then surely what is actually happening is that the UK government is providing assistance in the purchase.

No doubt competition lawyers will be able to confirm or deny whether that is prima facie in breach of UK or EU competition law Santander has, interestingly, put the bid for B&B via Abbey, possibly avoiding referral to the EU competition authorities. It received authorisation for the direct take-over of Alliance and Leicester in only mid September.

For HSBC and Standard Chartered, of whom no crisis is mentioned, the support is seemingly more in the way of insurance against the possibility of needing the money. But there is some possibility that it will be available for a war chest if either of them decide to absorb RBS, the only one of the major banks now in a particularly vulnerable position.

The money distorts the market: if HBOS is supported, then its value will be retained, whereas the falls in its share price suggest that Lloyds TSB shareholders would be wise to insist on a reduction of the bid. As prices collapse, the question now is whether bidders are in a Dutch auction, waiting until the price of banks falls low enough for them to be picked up for a small amount.

RBS has lost far more than half of its share value since the market opened on Monday morning. If its shares stop falling as a result of this intervention, then someone, somewhere has a right to complain that any bid they may make has to be more than they would otherwise have to pay.

In the case of HBOS, there is a bid on the table. Perhaps corporate lawyers would like to opine whether the UK's support can be considered illegal share support during a bid process.