The recent acquisition of funds manager MLC by National Australia Bank (NAB), one of Australia's largest banks, has created some reluctant victims.
First are the banking analysts. They have been fielding calls from journalists asking what impact the deal will have on the country's financial services industry. "It's getting out of hand," complains one analyst, referring not to takeovers but the number of calls he has received.
Second are the other leading banks. The impact of the deal, to the analyst, is blindingly obvious. Westpac and ANZ, the smaller banks among the big four in Australia, will now be scurrying for takeover targets.
Size matters
Australia has a so-called "four-pillar policy" that forbids mergers between the big four banks in the name of consumer protection. As repeated attempts to persuade the government to scrap the rule failed, the banks have shifted focus on to second-tier banks and other financial services providers for expansion. The big four banks are NAB, Commonwealth, Westpac and ANZ, in that order.
But it's unlikely the status quo will last. Commonwealth Bank launched its bid for a second-tier bank, Colonial, in February. If the country's competition authority gives the deal its seal of approval, the $9.4 billion price tag will go down as the largest takeover in corporate Australia's history and Commonwealth its biggest bank. Colonial and its funds investment arm, First State, have performed brilliantly in the past few years with Peter Smedley at the helm.
NAB's $4.56 billion purchase of MLC, the fund investment arm of Lend Lease, will make it the second largest bank and funds manager after Commonwealth.
Acquisition ploy
The share prices of NAB and Commonwealth are neck-and-neck around the A$25 mark, more than double that of Westpac and ANZ's. And the gap is not narrowing.
So on the day before NAB's takeover was announced, ANZ chief, Ian McFarlane, told his top executives they had three months to improve the bank shares' P/E ratio.
Why go for the P/E ratio? A higher P/E leads to a higher share price, and a higher share price usually makes acquisitions less costly.
Westpac, on the other hand, is denying vehemently that it will go for AMP, the country's largest insurer. But calling AMP an insurer is perhaps a misnomer. It did about A$97 million new insurance business last year, by no means large compared to its $7.7 billion new business in pension funds.
AMP's share prices are currently hovering above A$15, about $6 lower after its rebuff to NAB's advance last year.
Analysts say the share prices of medium-sized financial institutions were doing handsomely because of speculation some of them would be snapped up by banks. AMP is no exception.
That might be why Westpac is so anxious not to let the market believe it's a suitor. For all of AMP's boardroom troubles in the last six months, and its disastrous purchase of another insurer, GIO, which, unknown to AMP, has a liability of A$1.25 billion, its share prices may just rebound.
For ANZ, one analyst says AMP is out of its league. St George, ranked fifth on the bank ladder, is a more realistic option.
But whatever Westpac and ANZ do, they have to move quick, or the choices will be taken out of their hands, one way or another.
