Most commentators agree the National Australia Bank (NAB) was fairly ham-fisted in its attempts to acquire a strategic chunk ofAMP Australia. Despite this, NAB boss Frank Cicutto seems unfazed, and talks of NAB being the ‘natural owner’ of AMP.
Most analysts and commentators seem to agree and imply that a NAB/AMP deal could well and should proceed, albeit for a better price than NAB has offered to date.
Shareholders are just one interested party in this equation, and whether or not the price is right, separate analysis shows that a NAB/AMP combination is as unnatural as the proverbial incredible hulk.
I’d argue that a NAB/AMP combo would be very bad for the managed funds industry generally, investment advisers and for managed fund investors in particular.
It was said the initial overtures by Cicutto to AMP chief Andrew Mohl were intended to be friendly, but were interpreted as anything but that by Mohl. Having unsuccessfully sought an invitation to enter via the front door, Cicutto tried to break in through the back door. The trouble was, the dogs caught the scent, alerted the market and the door slammed shut. NAB secured only 2 to 3 per cent of AMP within 24 hours of the raid, instead of the 12 to 13 per cent it was after.
But it was forced to disclose it was the raider regardless, because owners of funds management businesses — and NAB owns MLC — must include any shares controlled by those businesses, when calculating whether any regulatory and/or reporting thresholds are passed.
As it turned out, theMLCfunds management businesses held enough AMP shares (another 2 to 3 per cent) that when combined with the shares gained by NAB in its raid, the 5 per cent threshold at which you are said to be a significant owner and must own up to being so, was just passed by NAB.
The market got excited, a lot of investors sold, including some fund managers looking to make quick gains on the AMP shares they had bought at or near their low point. Just one problem — the NAB-owned fund managers were among those who sold up shares, which took NAB back under the 5 per cent threshold.
The end result? NAB secured 2 to 3 per cent of AMP — the back steps, so to speak — and just a fraction of what it was after.
And now we have Credit Suisse saying there is good reason for Westpac, instead of NAB, to pursue AMP. Neither scenario is a pleasant thought.
The four banking ‘pillars’ are well recognised in the financial services landscape, as is the fact that these four are so materially ahead of the rest in size that if any two were to merge, such a huge business would mean that the two remaining pillars would have to do something similar. The resulting two would dominate to such an extent that there would be a very undesirable lessening of competition. So regulations exist to prevent such a situation.
However, there are no such regulations governing the funds industry — although there are five funds management ‘pillars’ to all intents and purposes.
With the four bank pillars policy inhibiting growth in banking, the four bank pillars expanded into wealth management — savings, investment, superannuation, and financial advice — businesses instead, largely through acquisition and joint venture. And they’ve been so successful at it, that four of the five funds management pillars are… the four banking pillars. Commonwealth/Colonialfirst, NAB/MLC second,ING(ANZ) third, andBT/Westpac fourth.
The fifth funds management pillar is… AMP Australia.
It’s enough to make a banking pillar salivate.
But looking at the facts, a NAB/MLC/AMP combination would control:
* 24 per cent of the retail funds market ($67 billion of a $295 billion total ‘pot’);
* 26 per cent of the wholesale funds market ($46 billion of a $176 billion ‘pot’);
* 30 per cent of the platform market ($51 billion of a $167 billion ‘pot’);
* 37 per cent of corporate superannuation master funds (three times the nearest rival);
* 25 per cent or $116 billion of the total $470 billion Australian public managed funds industry; and
* NAB /MLC (90 per cent) and AMP (81 per cent) are among the best in the funds industry at retaining funds under their investment control irrespective of whether the funds have passed through their respective ‘discretionary’ platforms.*
If you are thinking that a quarter of the total market does not look like dominance, think again. The resulting ‘super-pillar’ would dwarf its nearest rival Commonwealth/Colonial, in every respect and by a long chalk as CBA would have only 15 per cent of the retail funds market, 12 per cent of the wholesale funds market, 12 per cent of the platform market, and just 14 per cent of the total managed funds market.
This point is amplified by the fact that NAB/MLC and AMP are both excellent, ‘best practice’ in fact, at keeping money under their investment control, even after the funds have been subjected to the discretion of the ‘independent’ financial planners using their funds products and platforms. The net result of between 80 and 90 per cent of all funds distributed being retained for investment decision by the combined enterprise provides a very sticky business retention for the dominant player. Little wonder that NAB is happy to be patient.
In fact, Commonwealth/Colonial would have to buy up Macquarie andAXAto catch up, and I’m quite sure the latter’s parent would baulk at the prospect while Macquarie is renowned for preferring to be the master of its own destiny. Failing this, CBA would have to take up most of the remaining top 10 organisations by size.
A NAB/AMP combination should have investors — and the Australian Competition and Consumer Commission (ACCC) — shaking in their boots.
It is akin to allowing Woolworths and Coles to merge and then watching how the remaining retailers — and all shoppers — cope. Our ability to afford to eat would change dramatically.
There are now five players with fairly equal and large shares of the funds management market that together account for about 55 per cent of the industry, while another 150 groups own the remainder. One group controlling 25 per cent would create a seriously significant change to the competitive characteristics of the funds industry.
A NAB/AMP combination would be in a significantly dominant, price-setting position, to the potential detriment of investors in the funds they manage and to the other 150 fund managers, for no tangible benefit to investors in their funds. In fact, I’d argue what we eat in retirement has the potential to change just about as dramatically as under the Woolies/Coles scenario.
And if Westpac/BT was to acquire AMP, the end result would be almost as dominant, albeit that the remaining four wealth management pillars would fall in a different order.
If a partner for AMP is desirable, which may or may not be the case, it should not come from one of the four banking pillars. St George looks a good partner to me, but that’s a story for another day.
* Source: Fund Market Monitor, abrillient!Plan for Life publication.
Graham Rich is publisher and managing editor ofwww.portfolio-construction.com.au.He does not hold shares in NAB, AMP, CBA, Westpac, ANZ or St George.
