This excerpt taken from the WBK 6-K filed Oct 2, 2008.
11.7 Disadvantages and Risks
Disadvantages and risks arising from the Westpac Proposal include the following:
· exposure to specific business risks inside Westpac such as:
· the differing nature and scope of its business operations. Westpac has a different mix of financial market trading businesses to St.George as well as significant operations in institutional banking (which is characterised by a small number of large customers), underwriting and general insurance (manufacturing rather than just distribution), all of which expose St.George shareholders to different risks than they are currently exposed to;
· exposure to the New Zealand market. Westpac generates approximately 15-20% of its after tax profit from its operations in New Zealand (including retail and institutional banking). St.George has no exposure to the New Zealand market. New Zealand is facing a substantial slowdown in economic growth in 2008 as a result of a slowing housing market, drought, high interest rates and rising inflation which have eroded consumer and business confidence. These conditions are likely to flow through into lower earnings and increased bad debts from Westpacs New Zealand operations;
· large specific bad debts. Westpac has announced that it does not have the same level of exposure to the kinds of loans that have forced NAB and ANZ to announce significant increases in provisions and write downs for the year ending 30 September 2008. Westpac does have a small collateralised debt obligation portfolio but has publicly announced that this portfolio has experienced no measurable impact on earnings. However, all banks are exposed to varying degrees to increasing levels of bad debts and Westpac does have exposure to the weak commercial property (an issue for ANZ in its recent announcement) and New Zealand markets. On the other hand, Standard & Poors confirmed Westpacs AA stable outlook on 29 July 2008 after a review of its likely credit losses in the short to medium term;
· its legacy information technology systems which Westpac is in the process of reviewing and in which it expects to make significant investment over the next three to five years (50-60% above current spending levels). This will add complexity and risk to the integration process;
ST.GEORGE SCHEME BOOKLET SUPPLEMENT
· third party relationships with franchisees (within the RAMS business) and BTIM (through a licence agreement) create additional risks as poor performance or termination of the franchise agreements or the licence agreement may impact revenue and cause brand damage; and
· contingent liability risks. Westpac is involved in a number of actual or potential claims and proceedings in the ordinary course of its business (including tax related issues) that have not been determined and for which no provision has been made in its balance sheet because the outcome is uncertain or it is not possible to estimate the potential impact. Material adverse findings could impact Westpacs earnings.
These are the unavoidable risks in any business combination but:
· Westpac is subject to the disclosure requirements of the ASX; and
· St.George undertook a two week due diligence (admittedly relatively high level) investigation of Westpac and concluded that there was nothing that came to its attention that was likely to have a material impact on Westpacs share price;
· the acquisition of St.George is a very substantial transaction for Westpac, increasing total assets by 34% and shareholders funds by 40%. The merged group will be Australias leading provider of residential loans and will have the largest wealth management platform in Australia. It will be critical that St.George is integrated effectively into Westpac. In particular, the integration of the information technology systems of St.George and Westpac is complex and risky, and will require significant investment of time and resources. St.George is a very substantial business and will represent a significant proportion of the merged groups operations. The scale of the integration task is much larger than in any of the other recent bank transactions. The integration could also be impacted by loss of key personnel and by differences in the culture of St.George and Westpac.
Cost savings need to be realised without destroying the St.George (customer facing) business and its distinct culture. This will be a demanding and delicate task. The history of bank acquisitions over the past 15 years does not provide a high level of confidence that this can be achieved. In particular, the Westpac acquisitions of Challenge Bank and Bank of Melbourne resulted in very substantial losses of customers and goodwill. However, there are grounds for believing the Westpac Proposal may be more successful:
· Westpac is adopting a different model, leaving St.George to operate largely as a separate business (for retail and business banking) under its own brand and with no net reduction in branches or ATMs. This should minimise customer alienation; and
· the Westpac CEO was previously the CEO of St.George (until August 2007) and therefore has an in depth understanding of the business and its culture. Indeed, she has been introducing many of St.Georges approaches and philosophies into Westpac since her appointment.
Nevertheless, a substantive risk remains:
· the two brand strategy is being attempted on a scale much larger than it has been in any other banking transaction. In addition, it is clear that, for many customers, the attraction of St.George is its smaller size and independence from the major banks and the positioning of St.George under the Westpac umbrella will have to be carefully managed; and
· the CEO is only one person. In reality, the day-to-day responsibilities of integration and future management will lie with the broader senior executive team; and
· because St.George shareholders are being offered Westpac scrip and not cash for their St.George shares, the value of the consideration that they will receive on implementation is uncertain as it will depend on the price of Westpac shares at the time and there may be short
Independent Experts Report (continued)
term volatility in the Westpac share price after the issue of new Westpac shares. However, this should only be of concern if St.George shareholders decided to sell their Westpac shares in the short term.
These risks are reflected in the Westpac share price. If the Westpac Proposal was assumed to be successfully implemented and the synergies fully realised there would be a case for a materially higher Westpac share price than $23.00-25.50.
In Grant Samuels opinion while these disadvantages and risks are not inconsequential they are not significant enough to change the conclusion that the Westpac Proposal is in the best interests of St.George shareholders in the absence of a superior proposal.