(updated on July 15 with news that Gillespie won't join as chairman)

Alliance & Leicester had increasingly been looking like a takeover target and Spain's Santander has taken advantage of 75 percent collapse in the mortgage banks' share price over the past year.

The Spanish bank had made little secret of its ambition to expand in the UK banking sector following its acquisition of Abbey in 2004, having already sniffed round A&L last year.

The move shows Santander's faith in the UK banking sector, the Daily Telegraph says, and that prudently written mortgages are still valuable. "Halifax-owner HBOS will take some comfort from that. As will the Government and the Financial Services Authority, who are fed up with rescuing or orchestrating the rescue of Britain's troubled banks," the newspaper's banking editor Philip Aldrick writes.

But what about the shareholders?

To those who stuck with A&L throughout its share price downturn the deal is worth 317p per share - they will be getting one Santander share for every three A&L share that they own, plus a cash dividend of 18p per share - still significantly lower than the 12-month high of 1,170p.

They might be well advised to hold on to their shares. According to thisismoney.com, one of Alliance & Leicester's major shareholders, Standard Life, has given clear advice to shareholders big and small: Don't sell yet. "Santander wants to buy this bank on giveaway terms," Standard Life warns. It predicts a higher counter-offer soon.

Significantly, as part of its 1.3 billion pound takeover bid Santander says it's willing to fund A&L's 42 billion pounds of mortgage obligations. With economists predicting a fall of as much as 35 percent in house prices from peak to trough, A&L's reliance on mortgage business was a key factor behind its share price dropping 75 percent last year as the credit crunch started to bite in Britain.

Simon Maughan, analyst at MF Global, has told Reuters that Santander could use the deal to drive through economies of scale to boost profitability at Abbey, which is low relative to its other operations.

The FT's Alphaville blog points out that apart from obvious cost synergies, Santander's Emilio Botin wants to accelerate expansion at Abbey. Adding A&L would increase Santander's share of the UK mortgage market close to 13 percent.

Bank analysts at Lehman Brothers say that Santander is likely to have been attracted by A&L's 31 billion pounds in deposits, plus the prospect of extracting close to 180 million in cost synergies, the Times said.

On the executive front, one factor that might "oil the wheels" is A&L's recent appointment of Alan Gillespie, a well-respected industry veteran to succeed the late Sir Derek Higgs as chairman, Management Today points out. "The choice of Gillespie (who A&L pinched from Ulster Bank) was widely seen as an attempt to steady the ship ahead of further write-downs," the magazine says on its Web site.

It was announced late on Monday that Alan Gillespie would not join it as chairman next month as previously announced.