Aviva's share price dropped yesterday as it failed to convince investors of the benefits of snapping up insurance and pensions provider Friends Life.

It was the first chance for the stock market to give its verdict on Aviva's intention to take over the firm after details were disclosed on Friday - with Friends Life saying it was ready to recommend it to shareholders.

The stock climbed 5pc following the announcement, which would place a 15pc premium on the smaller company's share value at the close of last week. Aviva shares fell 5pc.

The merger would create a leading insurance, savings and asset management firm with 16 million UK customers - but there has been speculation that the tie-up will mean 2,000 jobs being axed.

Analysts at Exane BNP Paribas expects the deal to trigger a 40pc cut to the Friends Life workforce, which employes 3,500 people in London, Manchester, Bristol and Salisbury.

Chris Starkie, managing director of the New Anglia Local Enterprise Partnership, said Aviva workers should feel encouraged by the move as it could lead to business opportunities and growth.

'Of course it's too early to say what the local impact of any deal could be,' he said. 'But it is important to remember that Norwich is Aviva's general insurance headquarters with a focus on car, home and commercial insurance, so this is not part of the transaction that is currently being negotiated.

'Certainly it is a bold move and shows the company is confident about growth and with a larger customer base, thanks to the potential of additional Friends Life policyholders, there are greater opportunities to cross-sell other insurance products to them. In the long run this could mean a stronger and more powerful Aviva which could have a benefit for all staff, including those based in Norfolk.'

Aviva, which employs around 28,000 staff worldwide including 12,000 in the UK at Norwich, York, Sheffield and Glasgow, has until 5pm on the December 19 to make a firm offer for Friends Life, which has been valued at more than £5.5bn.

Under the terms of the proposed all-share offer, Friends Life shareholders would own about 26pc of the enlarged group.

Shore Capital analyst Eamonn Flanagan said the deal would draw Aviva, which operates in 15 countries, closer to the UK pensions market which has been thrown into uncertainty following Budget changes to pensions annuity rules.

He said the deal looked like 'a rights issue 1/8a cash call on investors 3/8 in disguise', with Aviva buying access to the £2 billion a year Friends Life generates from its UK pensions business - with existing Aviva investors seeing their shareholding diluted.

Experts at Nomura said the deal could result in cost savings of £188m at the end of next year and £255m by the end of 2016.

Aviva has 31 million customers and recently reported a 4pc rise in half-year operating profits to £1.05bn.

The insurer said access to Friends Life's strong level of cash generation was a key motivation for the deal as this should help accelerate growth of its dividend.

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