AXA may cost NAB dearly

National Australia Bank boss Cameron Clyne is a former management consultant, so he's probably familiar with the academic research that shows most takeovers turn out to be disappointments.
 
Companies, it seems, tend to be overly optimistic in calculating the likely earnings boost to be had from merging two businesses, and the synergies to be had.
 
And when it comes to National Australia Bank's bid for AXA's Australian and New Zealand operations, Clyne appears to have picked out a very rosy pair of spectacles.
 
Judging from what's happened to NAB's share price since the bid was announced, the share market thinks so too.
 
To recap, AXA Asia Pacific was put in play when its major shareholder, France's AXA SA teamed up with AMP to launch a takeover bid, which they subsequently lifted to $12.9 billion (see AMP, AXA SA make revised bid for AXA APH, December 15, 2009).
 
The plan was to carve AXA Asia Pacific up, with France's AXA SA picking up the lucrative Asian assets, while AMP would grab its rival's wealth management and life insurance businesses in Australia and New Zealand.
 
But in a dramatic last-minute flourish, NAB entered the bidding war. It saw the acquisition of AXA APH's local operations as the opportunity to establish itself as the clear market leader in Australia's $1.1 trillion wealth management industry, and it was prepared to outbid AMP by $200 million for this privilege.
 
At this stage, NAB has the tactical advantage. Its audacious bid means that it, rather than AMP, is now in the process of conducting due diligence on AXA APH's business.
 
But there's still a lot of action yet to be played out. NAB needs to conduct a $1.5 billion equity raising to fund its bid, and the deal requires regulatory approval.
 
What's more, AMP has a detailed, documented agreement with France's AXA SA as to how the various assets and businesses of their target are to be carved up. AXA SA is not even allowed to talk to NAB until its exclusivity agreement with AMP expires on February 6.
 
Beyond the mechanics of the bidding war, however, there is a much more fundamental problem. NAB is simply paying too much for the assets.
 
It only makes sense for NAB to outbid AMP if it is able to wring more synergies out of the business. But this seems near impossible.
 
Let's start with some basics. AMP and AXA APH share a broadly similar business model, although AMP is able to generate much higher margins out of its wealth management business because it is a much more efficient, tightly run operation.
 
On that basis, AMP can justify something of a premium for AXA APH because it knows that it will be able to assimilate the two businesses relatively easily, and will be able to rip into AXA's cost structure.
 
On the other hand, NAB's wealth management business, which is centred on its flagship MLC, is based on an entirely different business model, which makes merging the two operations much more challenging.
 
To complicate matters further, NAB last year spent $825 million buying Aviva's life insurance business, Norwich Union, and its financial advisory network (see What Aviva brings to NAB, June 22, 2009) .
 
That means that if NAB picks up AXA, it will be faced with a three-way integration challenge – particularly in information technology.
 
NAB has already indicated that it is likely to take two to three years of hard work to integrate the Aviva IT system. Adding AXA to the mix means that the integration task will not only be hugely expensive, it will take at least five years to complete.
 
In that time, NAB is likely to be distracted and vulnerable to losing market share in what is a highly competitive market.
 
The other major issue concerns the intractable cultural issues that the big banks face in dealing with independent financial planners.
 
On the whole, banks have failed to convince consumers that they are capable of providing sophisticated financial advice. As a result, many independent financial advisors are extremely wary of being associated with banks.
 
And they are likely to be particularly prickly about being associated with NAB, because Steve Tucker, who heads up NAB's wealth management arm, MLC, has been a vocal critic of commission-based advice.
 
As a result, NAB – which has been losing market share in the external independent financial advisory market for years – could find it difficult to retain the independent financial planners it is paying so much to acquire.
 
It's not hard to understand why NAB wants a bigger slice of Australia's $1.1 trillion superannuation savings industry. But NAB seems to think that you can dominate the market by pulling together different dealer groups, products and platforms. The big risk is  that you simply end up with a high cost, fragmented and inefficient distribution network.
 
And that's hardly the outcome that either Clyne or his shareholders are aiming for.