AMP's cultural deficit

Now, we've frequently admitted that AMP's accounts are all but impenetrable to us but in this review we'll explain why that didn't stop us from issuing a Sell recommendation over a year ago.

Great lesson

It's a great lesson in a basic investment issue and it's to do with trust. A deep understanding of a company's accounts is no more important than a frank and dispassionate assessment of the management team that delivers them. And, on that score, AMP has fallen a long way short for quite some time.

We first issued a sell on AMP way back in issue 98/Mar 02 (Sell/Switch to Suncorp - $19.12) and last reviewed it in full in issue 123/Mar 03 (Hold While Unstable - $7.58). Ordinarily, we wouldn't offer a full review so quickly but, given the latest news, it's appropriate.

Besides, even if you did follow our earlier advice to dump AMP, there are many valuable lessons to be learned from this debacle. And if you still own stock, we'll discuss our opinions on the proposal to split its operations and what you should do now.

To help us assess AMP, instead of recruiting a swathe of actuaries to help us interpret the numbers, we went back to basics, looking for so-called red flags, early warning signs of errant behaviour. And there have been so many that it would be easy to confuse AMP's recent history with a Communist Party march through Tiananmen Square.

Let's start with that letter. Here we have what is presumably a senior company employee admitting that the company's accounts are complex. But a glace at AMP's latest annual report suggests the company has made little attempt to help its shareholders through that complexity. Compare it with Suncorp Metway's and you'll see what we mean.

You'd think that a company that wants to encourage long-term shareholders would attempt to help them understand the business. But no. Better to spend time on trying to influence those who do not toe the company line in accusatory letters to people like us.

Bad attitude

In issue 98/Mar 02 (Sell/Switch to Suncorp - $19.12), we cited another example of an attitude that suggests the company is more worried about managing perceptions of its businesses than the businesses themselves. As we said then, 'AMP shareholders would be better served if the company stopped worrying about 'dual listings' and 'virtual corporate offices' and started delivering results.' Our view has not changed since.

To another red flag, this time waved from the rooftops: the cut in AMP's dividend, discussed in issue 122/Mar 03 (Hold While Unstable - $6.90). Again, the company applied its best public relations spin but there was no hiding the fact that something must be wrong for such a huge company to starve its shareholders of a modest $70m.

Less than two months later, management announced a mind boggling $2.6bn write-off relating to its UK operations and admitted that it desperately needed a $1.5bn cash injection from investors (subsequently increased to $1.75bn). In such circumstances, even the odd $70m helps out.

Now, in a final embarrassment, AMP is to be split in two. The Australian and New Zealand operations will be housed in a company named, unsurprisingly, AMP while the UK-based operations will be separately listed under the name Henderson.

The split is being promoted as an extension of choice: shareholders can now decide whether they want to invest in the UK operations, the Australian businesses, or both. And, if they don't want exposure to the UK market they can sell their Henderson shares.

Clear message

Again, the way this is being presented ('Why we're bringing AMP back home', as the ads say) is a cause for concern. If this is such an obvious move, why didn't the company realise it before embarking upon its ill-fated global excursion? The message is clear - the AMP business is fine; the UK business is anyone's guess.

But rather than take decisive action to offload the UK operations to a 'strategic buyer', AMP's own shareholders will be left holding the pup. In effect, unless they dump their Henderson stock, AMP shareholders will own exactly the same collection of businesses as they do now. The difference will be that AMP's management will be able to distance itself from the flagging UK business and contain any further financial damage.

In our view, it suggests a company less intent on fixing the problem than distancing itself from it. AMP seems to have learnt nothing at all.

The media has concentrated on certain aspects of the recent debacle, such as the nature of the write-offs, the pricing of the $1.75bn capital raising and allegations of insider trading prior to the announcement on 1 May. In our view, such issues are a manifestation of far deeper problems.

AMP has stumbled from one fiasco to another. The fact that it still shows little contrition and persists with dressing up even the grimmest of news with clichéd, feel-good phrases suggests something deeply wrong with the culture of the company. The accounts tell you none of this stuff and yet it is the most important thing to understand.

Takeover target

So, after this criticism, why are we are not again recommending shareholders sell? The reason is that with a relatively small valuation of $7.4bn, this company will be a prime takeover target when its shareholder cap is removed in July. That may make it tempting for speculators but, as a long term investment, it falls short on our most critical measure - competent management.

If you still own shares, you will shortly be asked to stump up another $5,000 under the share purchase plan. Unless the share price falls significantly, we suggest you ignore this plea. We don't expect the pain to ease quickly but, if you've held on this far, it makes sense to hang on and pray for a takeover. HOLD WHILE UNSTABLE.