Are Pru and Halifax the perfect pair?

"LIKE TWO drunks propping each other up" was the way one City analyst described the recent merger talks between Prudential and Halifax.

In truth, the convoluted on-off minuet between Halifax and the Pru is not the only dance in town. The long-predicted consolidation of the financial services industry is gathering pace: high-street banks and insurers are holding exploratory talks.

It is as yet unclear who will be paired with whom when the music stops. But what I believe is that the coming mergers and takeovers will not help profits in the long run unless they are accompanied by a genuine delivery of better value to the consumer. Indeed, if this is not seen as the sine qua non of any link-up, the City would be wise to give the combination the thumbs down.

Take the Pru and Halifax. When it was reported that talks between the two companies were at an embryonic stage, the mood among analysts about a prospective merger between these two financial services giants was lukewarm.

"My preferred deal would have been between Halifax and a big bank," was the main reaction. The logic behind such a comment was that by merging two large retail banking institutions, the potential synergies involved (for synergy, read branch closures and staff redundancies) would have meant substantial cost savings to the unified bank.

Meanwhile, instead of merging with Halifax, the City would like the Pru to participate in the consolidation of the financial services industry by "mopping up" in areas of insurance where it is still under-represented, perhaps by taking over a general insurer, or developing its latest telephone and internet banking project, egg, further.

Bringing together the UK's largest insurer and largest former building society does not appeal to the City because there are few synergies. The news that the Pru and Halifax were in merger talks lifted the share price of the two companies. But this was probably because breaking news about mergers almost always lifts share prices as a first reaction.

So where do matters between Halifax and the Pru stand now? Whether it likes it or not - and it probably does like it - Halifax is almost definitely in play. A year from now it almost definitely will no longer exist in its present form. The Pru may be in play too, although this is less certain. In the face of these facts, the job of Halifax's management is obviously to generate a bidding war for the demutualised mortgage lender. The job of the Pru's management is to stay in the game or bow out and look for a different kind of link - or defend itself against any combination at all.

But there is a more radical route the two firms could take: they could go for a merger, but not on grounds the City conventionally recognises. The Halifax is a mortgage lender operating in a mature market subject to a slowdown. Following its demutualisation last year, the former building society lost a large chunk of its borrowers and savers to a combination of supermarket banks and un-demutualised mortgage lenders. To stop the erosion in sales, the Halifax slashed lending rates. But this is expensive. The most profitable slice of business is the one you already have, not the one you have slashed your margins to attract.

As for the Pru, its prospects look so-so. They are tarnished by the apparent inability of its sales force to deliver quality - either to customers or their bosses. Egg may be the long-term future of financial services. But its launch has come with hiccups. The payback will be a long time coming.

Halifax and the Pru are both under strain, in other words. They should go for a merger. But they should not go to the City talking about the cost savings that would result.

Instead, the they could go to the City declaring they were going to realise the dream of cross-selling a supermarket basket of financial services to customers They could cut prices and increase the transparency of selected products now. On the basis of the increased sales that resulted, they could say they planned to do do the same for their full, combined range of mortgages, loans, bank accounts and insurance policies.

Ask yourself what would happen if Halifax were to tell its 2.4 million borrowers that it was moving them on to monthly interest calculations instead of the annual calculations, thereby allowing customers to save thousands of pounds in interest?

What if the Pru were to take a similar dramatic step? What if the two institutions then told the City they were merging so they could offer customers further savings?

The City's love of "synergies" might be taken over by a new love - the idea of increasing profits by providing value to the millions of customers with appetites for cheap, transparent personal financial services.

And as for the "two drunks propping each other up"? Sobering up is painful, but it's a great way to make a fresh start.