The fallout from the ACCC's veto of NAB's acquisition of AXA

As the dust settles on the ACCC's decision to veto NAB's acquisition of AXA Asia Pacific, Mike Taylor writes that many have noted the degree to which the regulator's views have changed since it approved Westpac's merger with St George.

The Australian Competition and Consumer Commission’s (ACCC’s) decision to block National Australia Bank’s (NAB’s) acquisition of AXA Asia Pacific was born of one thing — a more detailed understanding of the financial services industry and the central role played by platforms.

What few people would have known is that the ACCC’s gaining of a greater understanding was not an epiphany — it was the product of some intense canvassing of a number of key players in the financial services industry, including interviews with a number of chief executive officers.

Allied to those discussions was the fact that the competition regulator also obtained the research findings of companies intimately familiar with the Australian platform industry such as Wealth Insights and Investment Trends.

It appears that while the Wealth Insights and Investment Trends data delivered the ACCC personnel a broad outline of the evolution and workings of the platform industry, their interviews with the chief executives helped to fill in the gaps.

Thus, while a number of daily newspaper commentators and columnists dutifully pronounced that NAB’s acquisition of AXA Asia Pacific was a foregone conclusion, there were those in the industry who believed it might well be vetoed by the ACCC or, at the very least, be subject to some strict caveats.

As the dust settles on the ACCC’s decision and NAB contemplates its options, the banking group’s chief executive, Cameron Clyne, has every right to believe his company has been subject to the regulatory equivalent of a rugby referee’s ‘square up’ — the euphemism for a referee who, believing they previously got something wrong, delivers a second, different, decision to balance the ledger.

In the case of the ACCC’s veto of the AXA Asia Pacific acquisition, there are many in the financial services industry who believe it represented a ‘square up’ for the ACCC’s decision to approve Westpac’s merger with St George.

According to data collected by Wealth Insights, the merger of Westpac with St George had a far more fundamental impact on narrowing the ownership of Australian platforms than would have been the case if NAB had gained control of AXA Asia Pacific.

Wealth Insights managing director Vanessa McMahon earlier this year told Money Management the merger had been “inspired” because it delivered control of one of the leading platforms for “non-aligned” planners in the form of BT along with a platform for “aligned” planners in the form of Asgard.

“It may not have been obvious to everyone at the time but it proved to be very clever because it has had the effect of delivering the Westpac Group control (of more than) one-quarter of the primary market,” she said.

While the ACCC has based its veto of the NAB bid for AXA Asia Pacific on the question of control of wraps, its analysis with respect to the Westpac/St George merger made only passing reference to platforms and was far more focused on planner numbers.

One of the conclusions to be drawn from comparing the two analyses is that, nearly three years’ after the event, ACCC personnel held a deeper understanding of the financial services industry.

No doubt recognising this would be an industry perception, the ACCC made clear that its decision was not based on the ownership of platforms per se but on the narrower issue of the ownership and control of wraps.

ACCC chairman Graeme Samuel sought to place his organisation’s decision into a context far removed from suggestions of a ‘square up’ or notions of complying with a broader political agenda.

“At the heart of the ACCC’s decisions are concerns about innovation and, as a consequence, future rigorous and effective competition between retail investment platforms,” his initial statement said.

He said the ACCC had extensively investigated both the AMP bid for AXA Asia Pacific and that of NAB over the past four months and had “received information from a wide range of sources, including fund managers, financial advisers and other market participants, as well as various industry research reports”.

“In addition, the ACCC scrutinised a substantial number of internal company documents from the merger parties and their competitors,” Samuel said.

The ACCC reviewed competition effects across a range of markets including superannuation, insurance and banking, and following extensive investigation it had not identified any competition concerns.

The key focus, the ACCC chairman said, had been on retail investment platforms that provide a central hub for investors to access a range of investment products and allow for consolidation of client information and reporting on these assets.

“The ACCC found that a merger between NAB and AXA would result in a substantial lessening of competition in the market for retail investment platforms for investors with complex investment needs.” However, the ACCC found that an independent AXA or a merger between AMP and AXA would not have this effect,” the statement said.

“The ACCC found that NAB is a significant competitor in the provision of retail investment platforms for investors with complex needs. The ACCC also found that AXA is on the cusp of delivering an innovative platform that is likely to provide aggressive competition for investors with complex investment requirements. As a result, the ACCC considered that a merger of NAB and AXA would remove competitive tension.

“By contrast, the ACCC found that AMP [is] not a significant competitor for retail investment platforms for investors with complex investment needs.

"The ACCC concluded that because AMP does not own its own wrap platform it is constrained in its ability to compete aggressively,” Samuel said.

His statement continued: “Innovation in retail investment platforms is primarily driven by financial adviser dealer groups, particularly non-aligned advisers. Functionality of the platform, and how it integrates with the financial adviser’s software, is a key factor on which platform providers compete.

“Allowing NAB and AXA to merge would significantly diminish incentives to compete for retail investment platforms used by investors that have complex financial needs.

“In the absence of the proposed acquisition by NAB, AXA on its own or an AMP-owned AXA would continue to drive innovation, particularly with respect to platform functionality, and deliver the benefits that flow in the form of enhanced services to financial advisers and their clients.

“As described above, the ACCC is aware that AXA is advanced in the implementation of a strategy to develop a low cost full function retail investment platform. The ACCC considers that this evidence increases the likelihood of AXA, or a merged AMP and AXA, competing strongly in the future.

“In the absence of competitive pressure from AXA’s platform, the ACCC considered that existing platform providers were either unlikely to have the incentive to drive innovation in the foreseeable future, or lacked the capacity to do so.

“New entrants were unlikely to emerge because of the high barriers to entry. Potential entrants need significant scale and established relationships with financial advisers to justify the initial and ongoing investments to enter with a platform,” Samuel said.

The essence of the ACCC’s analysis was that with NAB having acquired control of the Navigator platform as a result of the acquisition of Aviva, there was likely to be a diminution in competition if the banking group controlled both Navigator and AXA’s North product.

Given the relatively nascent state of the North platform, there were many who questioned the regulator’s logic, but that does not alter the bottom line for NAB’s bid.

But if control of the AXA platforms was not central to NAB’s strategy then the banking group should have no hesitation in seeking to find an accommodation with the ACCC.

As things stood at the close of last week, NAB had three choices:

• seek an accommodation with the ACCC;
• contest the regulator’s decision in the courts; or
• abandon the bid.

Finding an accommodation with the ACCC is probably a more desirable strategy for NAB than a legal challenge in circumstances where the matter is likely to be locked up in the courts for many months, leaving the future of AXA Asia Pacific in virtual legal limbo.

As well, there have thus far been few people willing to suggest that the ACCC’s decision was in any way legally flawed.

A University of NSW competition and consumer law specialist, associate professor Frank Zumbo, suggested the decision would withstand scrutiny and said the regulator made the right decision in opposing a NAB takeover of AXA.

“The ACCC’s opposition is well founded on legal grounds and puts the NAB on notice that the ACCC is prepared to go to court to stop it from buying AXA,” he claimed. “It’s clear that the ACCC is saying to the four major banks that enough is enough and that from now on, the ACCC won’t hesitate to stop them from acquiring innovative competitors such as AXA.”

While AMP has every right to feel buoyed by the ACCC’s decision, the most deeply-affected loser in the exercise is the AXA Asia Pacific board, which ran counter to the wishes of its French parent by rejecting AMP’s initial bid and then embracing the NAB overture.

In the words of an analyst report issued by Credit Suisse early last week: “AMP need do nothing until NAB exhausts its options (or has its agreement terminated by AXA SA/[AXA Asia Pacific]).

“AMP stated it believes that it can put forward a ‘financially disciplined’ proposal which AXA APH directors can recommend to their shareholders, but we note minimal break fees payable in the NAB/AXA agreements ($35 million payable by AXA APH).”

The Credit Suisse analysis noted that the last, “best and final” offer made by AMP on 13 December, 2009, equated to $6.33 per share ($1.90 cash), and is accretive in year two.

“We note that [AXA Asia Pacific] directors only rejected the offer on 17 December, 2009, as the NAB bid was deemed superior (due largely to its minimum $6.43 cash offer component),” the analysis said.

In other words, in the event that NAB exhausted its options, the board of AXA Asia Pacific would find it very hard to resist what AMP chief executive Craig Dunn describes as AMP’s willingness to “put forward a proposal that is financially disciplined and will create value for its shareholders, and which the independent directors of [AXA Asia Pacific] will be able to recommend to their minority shareholders”.