Paul Tynan

Irrespective of the countless articles that have been written and published on strategies to ensure that sales, mergers and acquisitions are successful and realise their potential, Connect Financial Service Brokers (Connect) CEO Paul Tynan is certain that the financial service industry as a whole will again get the process wrong in 2014.

“The financial planning sector has a 30 year track record of failed acquisitions which today is reflected in the loss of client value, advisers, management and capital investment written off”, said Paul Tynan.

Furthermore, this failure to achieve a successful outcome and get it right was not restricted to one segment of the industry – it was prevalent from the largest corporate to the small one person suburban practice.

Paul Tynan continued, “Large corporate businesses do not have a monopoly on failed transactions, I have also seen small businesses and individual financial planners make the wrong decisions based on their last BDM/PDM conversation or whoever has the biggest cheque book”.

For advisers, wrong decisions include joining a badly chosen Dealer Group, leaving the right Dealer Group, taking on an unsuitable partner, selling when they should not and list goes on.

Reflecting on his extensive experience in this field, Paul Tynan said that the people/businesses that make the wrong decisions have one or more of the following factors in common:

• Thinking only in the short term
• Lack of industry knowledge and insight
• Lack of networks and resources
• Did not have M&A experience or expertise
• Did not plan properly
• Focussed only on the bottom line
• Personal or unforeseen circumstances saw them rush to do the deal

Another critical factor can be attributed to those instances where the financial planner or dealer group principal is simply not mentally engaged in the process and as he / she wants to exit and move on as quickly as possible.

Paul Tynan said another reason for sale, M&A failure can be attributed to an overemphasis on the transaction and bottom line and not enough attention placed on the very important cultural and staff fit – the things that are hard to measure!

In the past buyers have focused on FUM or bottom line numbers and neglected to factor in the non-measurable issues such as:

• Key person risk
• Business culture
• Management issues
• Compliance
• Is the owner ‘ready’ for sale

These are the soft people issues that are so important to the success of any sale, merger or acquisition.

Paul Tynan also pointed out that Australian companies have a particularly bad track record with overseas acquisitions – again reflecting this lack of understanding and appreciation for the non transactional aspects of a business such as the impact of ‘cultural issues’ and has led to commercial disasters in this area.

Experience has confirmed for Connect that the best outcomes can be seen when firms have enlisted professional help to assist them throughout this process. The cost of engagement is a small price to pay compared to the loss of capital, clients, business disruption, etc.

Paul Tynan concluded, “Whether selling, merging or acquiring, it is important to understand that the process takes time in order to achieve the desired outcome and in many cases, the parties will only have a single opportunity to do it right.”

“So irrespective of size, businesses would be better off outsourcing their selling, merging and acquisition activity as the cost of engaging a consultant can never match the loss of shareholder capital and opportunity cost for bad decisions”.

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AXA APH is now wholly owned by the AMP Group.

The cash component of the share scheme consideration has been dispatched and new shares issued to the AXA APH minority shareholders under the share scheme.

Share scheme participants will receive the equivalent of A$6.431 per share comprising 0.73 AMP shares and A$2.5464 cash for each AXA APH share. They have also received AXA APH’s 2010 final dividend of 9.25 cents per share.

To provide the share component of the share scheme consideration, AMP issued 695,262,564 new ordinary fully paid shares in the capital of AMP Limited. AMP now has 2,789,686,764 ordinary shares on issue.

Trading of the new AMP shares commences on 31 March 2011 under the ASX code ‘AMP’.

Completion of the sale of AXA APH’s Asian businesses to AXA SA is expected to occur by Friday 1 April 2011.

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Each month NakedFunds directly engages with its Members (investors and potential investors) while conducting detailed research and analysis on a particular industry segment which they call their Investment Focus. The Investment Focus for February, selected by Members via NakedFunds’ state of the art website (www.nakedfunds.com.au), was agriculture.

Commenting on the investment, NakedFunds CEO, Tim Bryden said Graincorp has changed significantly over the last several years. “These changes have given the company more flexibility and greater earnings diversification,” he said. “Graincorp has maintained a dominant position in grain storage and logistics and they are very leveraged to years where grain volumes are up. 2011 is shaping to be a record year and given recent high rainfall the likelihood of the next wheat crop being good is also high.”

Agricultural Overview

Mr Bryden said agriculture is, for obvious reasons, a very seasonal and highly variable sector. “Fundamentally though it continues to enjoy underlying growth momentum driven by continuing global population growth and rising living standards, especially in the major emerging markets,” he said. “Those companies who can manage their seasonal risks while positioning to maximise value from good years are well positioned to provide excellent returns in the medium to long term.”

• Some of the findings included: According to the Australian Bureau of Statistics the gross value of Australian agricultural production was over $41 billion in 2008-09. Close to 55% of this value related to crops while about 15% related to livestock products such as milk and wool, with the balance relating to livestock slaughtering. Interestingly, preliminary estimates for the 2009-10 year suggest a fall in gross value to below $40 billion mainly driven by reduced prices for major crops and livestock products.
• The world’s population is currently approaching 7 billion people with some estimates suggesting this will increase by 30% to reach 9 billion by 2050. During this time it is also estimated that average levels of consumption will rise as living standards increase. The result, some commentators suggest, is that by 2050 global food demand will increase by about 70%. The majority of Members, over 70%, thought these forecasts are reasonable.

Industry Trends

• With respect to mergers and acquisitions activity within the agricultural industry, just over half the Members think this will likely increase in 2011, while most others think it will be at least similar to 2010, which was a reasonably active year. One of the potential drivers of this activity will be companies seeking to increase their level of vertical integration. Most Members believe that vertical integration makes sense within the Agricultural sector.
• Given recent weather events it was not surprising that most Members thought that the biggest risks facing agriculture are ‘drought/water security’ and ‘climate change’. Mr Bryden said that drought has been a significant factor in most of the Australian agricultural landscape over the past decade, although recent levels of rainfall in many parts of Australia (but not all) have largely addressed this issue in the short-term. “What this highlights is that companies need to have good risk management capabilities while ensuring they are positioned to extract maximum value in the good years,” he said.

Consumer Preferences

Members were asked which factor would most influence their eating habits over the next 5 years.  The choices included: Convenience, Ethics, Health, Price/Value, and Quality/Flavour/Taste.  About half of Members selected Price/Value while a quarter selected Health and 15% Convenience. These results certainly suggest that price competition will continue to be a major influencer of consumer behaviour although we can expect to see a continuation of efforts to differentiate products and/or food groups on health and quality.

The NakedFunds Investment Process

NakedFunds reviews all listed Australian companies within the chosen focus and publishes a shortlist. During the month Members, who can sign up for free, are invited to share their opinion on likely trends and changes within that Focus via simple multiple choice questions. The question process gives NakedFunds unique insights and has the added benefit of letting investors and potential investors really engage with NakedFunds and learn more about how their money is being managed.

Transparency is the Key

By being transparent NakedFunds allows investors and potential investors to ‘see everything’. This means that Members can invest in the fund and then see exactly what underlying shares are held, participate in the overall process and learn more about those companies. Members also have a NakedFunds status which measures involvement and can lead to significant fee rebates on the Funds already competitive Fees.  Commenting on this Mr Bryden said “this is great for people who want to get a better understanding, and have an interest in, where their money is being invested. We have a mix of younger investors and also people running their own self-managed super funds. That diversity is also really useful in the question process and results”.

The questions and related analysis relating to this month’s investment focus can be viewed on the NakedFunds Website at the February 2011 – Agriculture Questions Page

Before making any decision to invest, consult the PDS available at www.nakedfunds.com.au

For more information visit www.nakedfunds.com.au

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Head of the Office of the AXA Chief Executive Officer Darryl Mackay will join the AMP leadership team as Company Secretary and Head of Secretariat, reporting to Brian Salter, AMP General Counsel.

AXA’s Group Chief Financial Officer Geoff Roberts will join both the AMP Life and the National Mutual Life Assurance boards as a non-executive director but will be leaving his executive role.

AXA’s General Manager Group Strategy and Chairman of ipac Arun Abey will continue as Chairman of ipac but will step down from his Group Strategy role.

AXA’s Group Chief Actuary and Chief Risk Officer Mike Thornton will be Director Group Risk Management in the merged company, reporting to AMP Chief Financial Officer Paul Leaming.

The appointments are in addition to AXA Chairman Rick Allert and Director Patty Akopiantz, joining the AMP board effective 31 March 2011.
AMP Chief Executive Officer Craig Dunn said the appointments represent an important step in maintaining the growth momentum for the combined business.

“We are pleased to welcome senior members of the AXA management team to AMP and look forward to the significant contribution they will make.”

AMP Financial Services Managing Director Craig Meller today announced new appointments to his leadership team from 31 March.

AMP Financial Services (AFS) will be responsible for the combined AXA and AMP superannuation, investments, banking, insurance and financial adviser businesses.

Most direct reports to AXA’s Chief Executive Australia and New Zealand, Warren Lee will report directly to Mr Meller. These include:

• Ian Campbell, General Manager Product
• Andrew Waddell, General Manager Financial Advice Networks
• Neil Swindells, Chief Executive ipac and Head of Advice

The exceptions are AXA’s General Manager Sales & Marketing Adrian Emery and AXA’s Chief Operating Officer Wendy Thorpe. Mr Emery will join the integration program reporting to Paul Sainsbury, the leader of the integration team. Barry Wyatt will take up Mr Emery’s role in an acting capacity reporting to Mr Meller. Ms Thorpe will report directly to AMP’s Chief Information Officer Lee Barnett and will also be a member of Mr Meller’s leadership team.

“We are pleased to welcome our AXA colleagues to AMP and look forward to working with them,” Mr Meller said.

In New Zealand, AMP Financial Services Managing Director Jack Regan will lead the merged business. The senior managers who currently report to the AXA New Zealand CEO Ralph Stewart, will report directly to Mr Regan.

Mr Meller also said today that AXA’s North product and platform will continue to be available to AXA financial advisers, independent financial advisers and their customers.

“We have looked closely at both the North platform and products, and have been impressed by what we’ve seen. We’re delighted to confirm that AMP will continue to support and develop North,” Mr Meller said.

AXA’s Chief Investment Officer Mark Dutton will join the AMP Capital Investors leadership team and will report directly to Managing Director Stephen Dunne.

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City Super, the superannuation fund for current and former employees of Brisbane City Council, has appointed J.P. Morgan Treasury & Securities Services (TSS) as custodian and administration provider.

Bryan Gray, Head of Treasury & Securities Services Sales and Client Management said the new $1.5 billion mandate further strengthened J.P. Morgan’s position in the investment and administration sector.

“Although custody and administration is increasingly becoming a scale driven business, clients are continually seeking tailored solutions. As a provider, we are constantly looking for ways to meet these needs and believe this was a determining factor in winning the mandate,” he said.

City Super has already announced it will merge with an existing client of J.P. Morgan, Local Government Super (LG Super), on 30 June 2011 and therefore will require an investment administration provider with a strong transition management offering. J.P. Morgan was able to demonstrate its substantial experience in executing large scale transition management projects, including those driven by fund mergers or by major changes to a fund’s asset allocations.

Our previous experience with fund mergers definitely worked in our favour, as we could show real world examples of our discipline in this area. With industry consolidation expected to continue, J.P. Morgan’s fund merger experience will continue to position us as a leading service provider,” Mr Gray said.

Once the two funds are merged, J.P. Morgan will also look at ways of optimising the custody and administration process.

“We are currently in discussions with LG Super and City Super to find ways to optimise the custody and administration offering. We are committed to ensuring our services are the best possible fit for the new fund including providing tax propagation, currency overlay and securities lending services,” he said.

The mandate win reinforces J.P. Morgan Treasury & Security Services’ commitment to the Australian & New Zealand market after hiring more than 100 additional employees during 2010, many in senior positions. The hires were not only in line with increased growth expectations but also to better service existing clients.

“Our prospects in 2011 are strong and we have the right team in place to continue the growth we have seen locally and in Asia Pacific. We will continue to develop strong partnerships, elevate our client service offering and enhance our range of market leading products,” Mr Gray concluded.

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In one of the most significant moves in the superannuation industry, AustralianSuper, Australia’s largest industry fund, and fellow industry player, the 200,000-plus member WA-based Westscheme, today announced that they plan to merge.

To take effect on 30 June 2011, after the completion of the due diligence process, the merger will take AustralianSuper to over 1.7 million members, 150,000 employers and over $40bn in funds under management (FUM). One in four West Australian workers will be members of the fund.

In a joint statement, AustralianSuper Chief Executive, Ian Silk, and Westscheme CEO, Howard Rosario, said that, above all else, the merger is about securing members’ retirement futures through AustralianSuper’s size, scale and capability to lead the industry on long term investment performance, low fees and net benefit for members.

It also reflects the strong alignment between the funds’ respective philosophies and, in particular, their shared goal of better outcomes and advocacy for members.

“By merging into AustralianSuper, Westscheme members will benefit from our size and expertise which will make a real difference to their retirement outcomes,” said Mr Silk.

Mr Rosario revealed that Westscheme’s ‘member first’ focus led them to look at a merger as a way to secure the best possible long-term outcomes for their members.

“AustralianSuper is a fund that has shown the potential to deliver our members strong, long-term investment performance and low costs. Members will also benefit from  the enhanced services and products that AustralianSuper provides, including a market-leading insurance offering,” he said.  “And, in a changing landscape in which funds are facing increasing challenges, the Westscheme Trustee were attracted by the advantages of joining with Australia’s leading industry super fund.”

Mr Silk said that, fundamentally, the decision to merge with Westscheme was an easy one.

“AustralianSuper has a very strong vision about the future of superannuation in this country and we are determined to play a leading role in shaping that future in the interests of our members,” he said.

“Our vision includes expansion to enable us to deliver the best prospects for secure retirement to the greatest possible number of Australian workers. This merger offers us the chance to do both, and to demonstrate our very strong capability and commitment in this regard.”

With merger talks progressing throughout the industry, Westscheme has leapt ahead of the pack in making the decision to secure its members’ futures by joining with AustralianSuper.

The merger will see the creation of a new, separate division within AustralianSuper, servicing both Westscheme members and most AustralianSuper members in WA. The new Westscheme division will service more than 35,000 employers and 310,000 members with $5 billion in funds under management. The division will be serviced by the funds’ combined staff – West Australians providing services for West Australians, in Western Australia.

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The Australian Exchange Traded Fund (ETF) market is expected to grow to more than A$6bn in assets under management (AUM) in 2011 Russell Investments said in an analysis of ETF market trends released today. According to Russell, the surge will be driven by providers taking advantage of broader investor community understanding of ETFs and more flexible regulatory conditions.

Since their first appearance in Australia in 2001, ETFs have really begun to experience strong growth in the past year, with almost A$4bn in AUM as of December 2010 (see figure 1 in attached document).

Up to 15 new ETFs and at least three new providers are predicted to hit the market in 2011, Russell said. There will also be more asset classes available and more customised options.

“A year ago ETFs were still regarded as a new product, but we are now seeing a lot of interest from a range of users,” said Amanda Skelly, director ETF product development at Russell Investments. “In addition to their continued popularity in the core market of SMSFs, ETFs are likely to win more acceptance from advisers and investment platforms in 2011, and also make inroads into institutions.”

A more focused approach

Russell believes the trend for ETF in 2011 will be for more focused, targeted products. For example ETFs will continue to expand across different assets such as bonds and currency.

ETFs based on equities will continue to target exposures to specific sectors and sub-sectors. There should also be new implementation methods for ETFs, such as derivatives-based approaches, where a greater portion of the ETF is invested in instruments such as futures, forwards and swaps. Whether Australian investors embrace this type of ETF will be something to watch. While derivative based ETFs have seen strong growth in Europe, growth has slowed in the U.S. More customised approaches will also be popular, for example the use of ETFs in income-based strategies which became popular last year, the first of which was the Russell High Dividend Australian Shares ETF.

“The market is evolving quickly, there is not only a wide range of ETFs but ETFs are increasingly being used to implement more sophisticated strategies,” said Ms Skelly.

Potential global entrants to the Australian ETF market are likely to be assisted by more flexible rules allowing them to enter the local market.

“The success of newcomers will be driven by their ability to leverage existing capabilities and develop relevant solutions for Australian investors,” said Ms Skelly.

Meanwhile within the top 15 existing ETFs, secondary market liquidity is likely to improve.

Asian exchange mergers could be game changer

ETF providers will also be watching developments with regards to proposed exchange mergers, which Russell believes will have a positive effect on the local market, by delivering secondary market liquidity and product diversification as well as cost and operational efficiencies.

“If the proposed Singapore Stock Exchange (SGX) takeover of the Australian Securities Exchange (ASX) succeeds it will be an absolute game-changer for the ETF market,” said Ms Skelly.

“However if the takeover does not go ahead, Asian-based exchanges will continue to expand their ETF capabilities, attracting larger institutional investors which may potentially limit the longer term growth of ETF assets in Australia.”

“In the year ahead, we are likely to see a lot of activity in the ETF space and the increased variety and competition will hopefully broaden the appeal of ETFs,” Ms Skelly concluded. “Russell is planning to capitalise on this activity and is actively investigating how to build on the success of our first ETF to bring more products to market.”

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The proposed transaction is a joint proposal with AXA SA under which AXA SA would acquire 100 per cent of AXA APH’s Asian business.

AXA APH’s independent directors have unanimously recommended the proposal to minority shareholders in the absence of a superior proposal.

In addition, the independent expert Grant Samuel has concluded that the value delivered to AXA APH minority shareholders under the proposal is compelling and that, in the absence of a superior proposal, the proposed merger is in the best interests of AXA APH minority shareholders.

AMP confirms it still expects the proposed merger between AXA APH and AMP to achieve economic synergies of approximately A$120 million per annum and for one-off integration costs to be A$285 million, both amounts post tax.

In the event the proposed merger proceeds, AMP intends to continue its dividend policy of paying out 75 per cent to 85 per cent of underlying profit to shareholders. The franking capacity of the merged company is expected to be less than AMP’s interim 2010 franking level of 60 per cent in the near term, given AXA APH’s current franking position.

It is expected that AXA APH shareholders will have the opportunity to vote on the proposal on 2 March 2011. Assuming shareholders vote in favour of the proposal and subject to court approval, it is expected that the implementation date for the merger will be 30 March 2011.

In addition to receiving shareholder and court approvals, the merger also remains subject to various regulatory approvals, including from the Federal Treasurer.

Paul Sainsbury, formerly AMP Financial Services’ Director Product Manufacturing, has been appointed to the role of Integration Director and will report directly to AMP Chief Executive Officer, Craig Dunn.

Assuming the proposed merger proceeds, Mr Sainsbury will have responsibility for managing the integration planning and implementation. AMP will involve AXA APH employees in the detailed integration planning and implementation, ensuring the merged company draws on the strengths of both AXA APH and AMP.

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In addition to receiving shareholder and court approvals, the merger also remains subject to various regulatory approvals, including from the Federal Treasurer.

It is expected that the transaction will be put to the AXA APH minority shareholders for their approval by the end of the first quarter of 2011.

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The proposed transaction is a joint proposal with AXA SA under which AXA SA would acquire 100 per cent of AXA APH’s Asian business.

The proposed merger will bring together two of Australia’s longest standing businesses, creating a new force in financial services.

Under the proposal AXA APH shareholders will receive A$6.431 per share, consisting of cash and AMP shares, as well as the receipt of AXA APH’s 2010 final dividend of up to 9.25 cents per share.

AXA APH shareholders will receive some protection against movements in AMP’s share price and the opportunity to receive some benefit from any increase in AMP’s share price.2

AMP Chairman Peter Mason said the proposed merger will deliver significant value to AMP and AXA APH shareholders.

“This is a unique opportunity to deliver greater value for both sets of shareholders, while maintaining financial discipline and providing the opportunity for shareholders to participate in the ongoing earnings of a stronger and more competitive group.”

The merged businesses will have a significant share in one of the world’s fastest growing and most successful wealth management markets.

AMP CEO Craig Dunn said the merged company will have the market position to be a stronger competitor in financial services.

“The merged company will have the scale and expertise to provide Australian and New Zealand consumers with an improved range of low cost, simple options to help them prepare for a comfortable retirement, protect their families and buy their own home.”

Mr Dunn said the combined company will have a multi-brand planner strategy.

“One of the attractions of this merger is the diversity of financial planner models that AXA APH brings to the table. The combined company will have around 2,900 financial planners who will provide Australians and New Zealanders with a whole range of different financial planning choices,” Mr Dunn said.

The proposal is still subject to satisfactory due diligence, execution of final transaction documents, approval by AXA APH minority shareholders and further regulatory approvals.

It is expected that the scheme of arrangement will be put to the AXA APH shareholders seeking their approval by the end of the first quarter of 2011.

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