Strategy

Westpac’s bid for St George starts consolidation tussle: Kohler

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Westpac’s bid for St George Bank has put the four pillars policy preventing bank mergers back on centre stage at a time when it’s probably the last thing Prime Minister Kevin Rudd wants to think about.

But the question is: If St George, why not ANZ? Why isn’t it five pillars? And if the ACCC is capable of dealing with a bid for St George, why can’t it deal with the others.

In fact if Westpac – or NAB for that matter – now gets St George, the four legs of Australia’s banking table suddenly look very uneven.

Westpac/St George would be clearly the biggest in terms of market capitalisation at $64 billion, followed by CBA at $58 billion and NAB at $53 billion. Then bringing up the rear would be ANZ at $44 billion.

With that industry structure the four pillars policy would be nonsensical, and would leave ANZ at a clear disadvantage.

All the banks have been carrying a flame for St George for years, but ANZ and NAB have been the keenest, both building strategic stakes in the company – NAB 10% and ANZ 8.5%.

ANZ’s then chief executive John McFarlane gave up on the idea and sold ANZ’s stake in March 2001, having built it steadily over the preceding three years, starting as soon as he became CEO in 1997.

But NAB’s Frank Cicutto joined the chase, and by all accounts became obsessed with grabbing St George.

That idea crumbled into dust along with Cicutto’s career in January 2004 when $360 million worth of foreign exchange losses were discovered as a result of unauthorised trading.

Two weeks after that, NAB sold its 10% stake in St George, plus a strategic stake in AMP, before hunkering down for two years of crisis.

Now both ANZ and NAB have settled, with new CEOs, and are talking expansion: ANZ’s Mike Smith is talking takeovers in Asia, and NAB’s John Stewart is talking about acquiring investment banks.

So St George does not fit with their stated strategies, but competitive opportunism can do strange things to carefully prepared corporate strategies.

NAB, in particular, must be a candidate to join the bidding for St George, especially if its brains trust believes that Kevin Rudd won’t remove the four pillars policy, which would mean St George is the only chance to make a big jump in size.

Apart from the possible entry of one of the others, Westpac’s main hurdle is the potential dominance in NSW that merging with St George would mean. In fact, if the ACCC chose to view each state as a separate banking market, it would be very difficult to get the deal past the regulator.

One thing that won’t be a problem, of course, is due diligence, given that St George’s seven-year CEO, Gail Kelly, is now running Westpac.

That must give Westpac an extra head start over its rivals, in addition to the fact that it has moved first to take advantage of the fact that St George has been weakened most by the credit crisis.

In any case, the ball has been bounced on another exciting game of bank consolidation, and like all such games in the past the result can be entirely unpredictable.

This story first appeared in Business Spectator

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