Creating a financial services colossus

AMP’s continued dominance of theMoney Management/Dexx&rTop 100 underscores why it represents such an attractive takeover target for institutions such as National Australia Bank (NAB) and why any such acquisition would have difficulty passing muster with the Australian Competition and Consumer Commission (ACCC).

AMP’s size, if combined with that ofNational Australia Financial Planningand NAB’s wealth management arm,MLC, would give rise to a financial services behemoth that would arguably dominate virtually every sector — retail, wholesale, superannuation and platforms.

The NAB slid under the ACCC’s regulatory bar when it picked up MLC, but the competition watchdog has made it clear it will be examining all acquisitions and mergers within the financial services sector, particularly those involving banks, on a case-by-case basis.

The ACCC laid down the ground rules for acquisitions in the financial services sector back in 1996 when, in a submission on the proposed Financial Services Regulation regime, it said it held the view that mergers in the financial services sector should continue to be covered by the substantial lessening of competition (mergers) test.

It said mergers in the sector would continue to be considered by the ACCC on a case-by-case basis.

“Considering mergers case-by-case allows the ACCC to fully take account of changes in product design and delivery, changes to the structure of the market, the impact of new technology and changes in consumer behaviour.”

The ACCC last looked in depth at AMP’s dominance in the financial services sector back in 1999 when it was considering the implications of the group’s acquisition of GIO and, at that time, the competition regulator concluded there was little danger of market concentration because ample strong competitors remained in the marketplace.

“While the acquisition consolidates AMP’s number one position in life insurance and elevates it to second in retail investment products and third in general (non-life) insurance, there remains a substantial number of strong competitors and there do not appear to be any problems with concentration in all of these areas,” the ACCC said.

However, there is a general acknowledgement that the picture is very different in 2003 and that a combined NAB/ MLC/AMP entity would give rise to issues of market concentration and domination.

According to Deutsche Bank figures, a combined NAB/AMP would hold 35 per cent of the retail superannuation market, 32 per cent of the allocated pensions and annuities market and 25.5 per cent of retail funds under management. In risk or traditional life products, combined market share for most products would not exceed 30 per cent.

“With combined market shares generally below 30 per cent and the industry still relatively fragmented, we doubt there would be competition issues,” the Deutsche report said.

However, theMoney Management/Dexx&r Top 100 data reveals in stark detail the level of dominance that would be exerted when the entities variously controlled by the groups are taken into account.

It is worth noting that when the ACCC approved the NAB acquisition of MLC, it suggested that the National simply didn’t have a significant presence in the financial services product categories.

“The Australian Competition and Consumer Commission will not intervene in the proposed acquisition of the financial services businesses of Lend Lease Corporation Limited, including MLC Holdings Ltd, by the National Australia Bank,” the ACCC announcement said.

“The ACCC considered the effect of the transaction in broad product categories such as retail insurance products, retail investment and superannuation products, and wholesale funds management.

“The ACCC noted that its concentration thresholds, used as a measure of the extent to which the merged entity has the potential for unilateral or coordinated conduct post-merger, were not crossed in any of the product categories considered.”

The ACCC noted that in many of the product categories, “the NAB is a relatively small player”. Hence the ACCC concluded that the transaction is unlikely to lead to a substantial lessening of competition.

However, with the reach provided by its acquisition of MLC, NAB now rates as a very different entity with respect to an acquisition of a group with the size and reach of AMP.

Of course, everything will depend on price and value when it comes to NAB relaunching a bid for AMP, and Deutsche Bank, while down-playing the competition implications of an NAB acquisition of AMP, released research in early September that estimated the total number of advisers in the AMP distribution force at about 2,200.

After compiling a list of transaction multiples for the financial planning business, Deutsche came out with a value per planner range of $300,000 to $6.2 million, averaging $2.8 million.

Deutsche mid-point valuation for ‘New AMP’ — the post-demerger entity, as it is planned — is $7.6 billion, implying a value per adviser of $3.5 million, a 25 per cent premium over the average.

One thing is certain with respect to the future of AMP, the NAB will not be moving to the next stage of its strategy until the demerger is complete.

National Australia Bank’s chief executive Frank Cicutto has played his cards extremely close to his chest but gave a glimpse of the bank’s intentions in a recent session with fund managers in New York.

While dismissing the notion of any NAB interest in AMP’s UK assets he said NAB had purchased a stake in AMP because it believed the company “could be the subject of consolidation forces in the near term”.

“We believed it was important the National has a seat at the table and participate in any consolidation activity that may happen in the Australian market place,” he told the analysts.

“That approach is consistent with the strategic investment we have had in St George in the past five years.

“Can I say we are not locked into any one particular course of action as we move forward,” Cicutto said.

AMP has received regulatory approval in both Australia and the UK to split the company into two pieces — an Australasian business and a UK business — with the demerger document scheduled to be released before the end of October.

And it is that event that is clearly a factor in the NAB strategy.

“We’ll wait for the demerger documents and then consider our options ... the devil is in the detail,” Cicutto said in New York.

“We have a small strategic stake, we have a history of being patient and very disciplined in terms of our strategy.

“We’ll wait for the demerger documents.”