22754 Accounting | St George and Westpac Acquisition

Evaluate whether the takeover was value enhancing to shareholders.

Your discussion should cover at least the following points:

1. What are the rationales behind the acquisition?

2. The acquisition method: The method of the acquisition used (e.g., scheme of arrangement, onmarket bid, off-market bid) and the reasons why this method was used.

3. Detailed evaluation of the acquisition analysis: The offer price, method of payment, FVINA
allocation and goodwill.

4. Is the amount of goodwill justified?

5. Explain how and why the market reacted to the takeover around the announcement date?

6. Analysis of post-acquisition accounting performance up to 3 years post acquisition.

7. Using the analysis above, evaluate whether the takeover was value enhancing to shareholders. 

Introduction

In April 1817, Westpac began its trading as the primary bank of New South Wales. However, in 1982, it got merged with the Commercial Bank of Australia and became Westpac Banking Corporation. It has affiliates and branches throughout New Zealand and Australia, contributed by mergers throughout prior years and the Pacific area, and significant financial centres around the globe including Hongkong, Singapore, London, and New York. The bank employs more than 29000 people around the world and pursues more than $402 billion assets that allows it to create a huge base of customers. On the other hand, St George was a housing based financial institution that was founded in 1937 and eventually it became the fifth largest bank of Australia. It has business spanning of all segments of the financial industry that includes institutional, retail banking, wealth management, and business banking. In business culture, this bank focuses primarily on customer services (Alexandridis & Travlos, 2010). In 2008, Westpac acquired St George and both merged as a $66 billion group that became the biggest home lending provider with a market share of twenty five percent and biggest wealth platform provider having resources under administration of $108 billion. Overall, this merger created Australia’s leading financial services company for the shareholders, customers, and employees with an AA credit rating complimented by better fund accessibility and bigger balance sheet (Alshwer et. al, 2011).

Westpac St George merger

Economic rationale behind the acquisition

The major economic rationale behind the acquisition was that Westpac believed that the respective brands would be more capable in competing and flourishing by belonging to the same stronger and larger organization (Ang & Ismail, 2015). Since, both the organizations are powerful businesses pursuing effective brands and strongly affective cultures, they collectively can easily deliver more value to the community, shareholders, employees, and customers (Barbopoulos et. al, 2017).

(Alshwer et. al, 2011)

="text-align: justify;">Furthermore, especially for the stakeholders, the proposed combination was a compelling proposition because the intention was that all the brands of both companies including Bank SA and other ATM/branch networks would be retained (Alshwer et. al, 2011). Besides, the combined ten million customers of both companies would benefit from a significant offering in terms of efficient range of products, financial strength, and expanded distribution (Barbopoulos et. al, 2017). Westpac believed that merging with St George would derive such a bank holding company that would manage all other banks like BT, Bank SA, Asgard brands, etc. Overall, the major economic rationale was that this merger would add strong brands and fetch scale benefits. Nevertheless, scale benefits are more beneficial as the banking industry embarks on a scenario of potential IT investments associated with core platforms (Cho & Ahn, 2017). Commonwealth Bank launched this procedure and other banks had little choice to try and react. Westpac Banking Corporation (WBC) appeared to be hoping to capitalize by updating its systems while accommodating into the business of St George. Westpac had this in mind that if this deal was successful, it would reduce its dependence on New Zealand businesses as a part of the overall Group (Adra & Barbopoulos, 2018).

(Adra & Barbopoulos, 2018)

In addition to all these economic rationales, there are few other motives why Westpac decided to takeover St George. Firstly, it would grant it an allowance for seven hundred million dollars in transaction and integration costs. Further, its pre-tax cost synergies were equal to 20-25% of ST George’s base of costs from scale economies and common infrastructure (Cho & Ahn, 2017). Further, the company had an opportunity for strong revenues in the future with the quality of services provided by St George in its initial years. Another economic rationale was that the acquired company had a powerful credit rating with a powerful capital base that can in turn play a key role in creating value for the customers (Davies & Crawford, 2012).

Personal incentives to accept the offer

The directors of St George believed that partnership with Westpac would fetch or create significant value for their shareholders by permitting them to benefit from a stronger base of resources whilst preserving their unique and unbreakable relationship with the customers across Australia. Furthermore, the board was aware of the fact that the price offered to them was more than the price offered by other competitors. For instance, the transaction amounted to $33.10 per share that was 24% greater than the most recent closing price of the company. Such premium excluded the dividends of WBC and ST George already announced. Moreover, the fact that the board was prepared to accept a scrip bid for control at a lesser price than its last equity ($35) is evidence of the ideology that St George was clearly able to survive as a single organization, still it accepted the deal as it was altogether a perfect deal for the company’s shareholders (Deegan, 2011). This sheds light on the fact that St George had already received bids from other competitors but since the deal from Westpac was fair enough and value enhancing for the shareholders, it accepted the same and convinced the shareholders to swap their SGB shares for WBC (DePamphilis, 2010).

Acquisition method and analysis

St George had agreed to accept 1.31 shares of Westpac for each of its share subject to no independent expert’s opinion and superior proposal emerging that the merger was in the best proposal for the shareholders. Further, the scheme of arrangement was an all scrip offer wherein the shareholders of St George would vote upon the same. The exchange ratio of 1.31 ordinary shares of Westpac for every ordinary share of St George excluded freshly announced interim dividends (Doytch & Uctum, 2012). Further, this represented a premium of 24.1% based on one-month VWAP and premium of 28.5% relying on spot premium. When it comes to capital gains, the shareholders of St George expected to attain roll-over relief. In addition, the shareholders of St George would be entitled to attain a final dividend capped at 97 cents per share in association with the year ending 30 September 2008. Besides, on 8 September 2008, the company had announced that Westpac had agreed to pay final and special dividend for the year ending 2008 of up to $1.25 per shares of St George that included prior final dividend capped at 97 cents for share. Nevertheless, the cap of 97 cents on the final dividend signifies the exchange ratio of 1.31 shares of Westpac for every St George shares (Doytch & Cakan, 2011).

Under section 411 of the Corporations Act 2001, the scheme of arrangement (share scheme) for merger betwixt Westpac and ST George was decided. In relation to this share scheme, if the same became effective, Westpac would become bound to procure the redeemable, non-cumulative, and convertible preference shares called as SAINTS for cash of hundred dollars per SAINTS by a way of scheme of arrangement betwixt the holders of SAINTS and ST George. This scheme was called SAINTS scheme that would not be applicable before the record date so that the holders of this scheme would become entitled to receive their dividend. Further, ST George would also serve an exchange notice in relation to all unsecured, non-cumulative, non-cumulative unsecured, and converting preference shares as the exchange mechanism (Dutta et. al, 2013). In addition, all the award options for the scheme would be cancelled in exchange for the issue of 1.31 shares of Westpac for each award option through a scheme of arrangement betwixt award option holders and St George. This scheme was the option scheme in relation to this merger. This scheme is only applicable to award options that are held by the employees of St George apart from eight senior executives and one prior employee of the group (Dutta et. al, 2013).

Westpac had also agreed that any equity securities that remained on issue after the adoption of share scheme would be acquired by it in accordance with regulatory acquisition provisions that are provided in the Corporations Act or by any other manner as determined by it. Based on market values, when both companies get merged, Westpac will hold 72% of the merged group while St George will hold the remaining. Besides, the directors of St George will also join the board of Westpac (Garcia-Feijoo et. al, 2012).

Post-acquisition accounting performance

After the process of merger betwixt Westpac and St George, the merged company attained effective accounting performance. In relation to the year 2010, the company announced cash earnings of $2983 million that increased by thirty percent since the merger. Further, the statutory net profit after tax enhanced by 32% that is also a positive indicator. Further, cash earnings per share of 100.8 cents were also 22% higher than the previous years. In addition, the company attained significant advancements in meeting customer needs as it grew its home lending balances by $43 billion that includes provision of new 355,000 mortgages as well. Furthermore, the company also grew its customer deposits by fifteen billion dollars that assisted it to reduce its banking fees for providing significant banking benefits to New Zealand and Australian business and retail customers.

Further, the company attained significant improvement in wealth with the platforms of BT attaining around one in every four dollars invested in the platforms. Further, enhancements of the financial position of the Group includes improved stable funding ratio, higher levels of capital, enhanced liquid assets, and sector leading coverage ratio. Besides, the company’s revenue enhanced by four percent since the merger (Peirson et. al, 2015). In addition, the continuation of company’s disciplined approach to management of expenses witnessed moderate growth by around two percent with contributions from flat fixed remuneration and merger scale benefits for the executives. Furthermore, the cost to income of the company decline below forty percent that is a positive indicator on the part of merger. ST George also introduced new products in its network of affairs including BT Super for Life in the year 2010. The company also decreased all its exception fees for both business and consumers to nine dollars, thereby creating a simpler and effective banking fee model. Nevertheless, the merged company has been attaining continuous improvement in customer support initiatives as it helped approximately 22000 customers during these programs. Overall, it can be witnessed that the new merged company has been able to attain proper benefits and performance up to three years from the date of acquisition and is expected to improve in the upcoming years (Parrino et. al, 2015).

How and why share market reacted

As per the deal, the shares of St George would be valued at $33.10 per share. However, the shares of Westpac closed at $25.97 before being placed in a trading halt before the announcement date. In contrast to this, the shares of ST George closed at $26.65. Nevertheless, when the trading halt was lifted following the date of announcement, the shares in ST George increased by twenty six percent. This means that the next day following the announcement of merger, the shares of St George were trading up to $33.48. However, in contrast to this, the share of Westpac witnessed a decline by 2.5% and it came to $25.33. The major reason why such variations in share price was visible can be attributed to the fact that this takeover was the biggest in the Australian Banking industry. Besides, the merger was subject to a number of critical conditions that gathered immense publicity amongst the audience (St. George & Westpac, 2008). The merger was subjected to clearance by the banking regulator APRA, Treasurer, and the Competition Commission of Australia.

Whether the deal was value enhancing for shareholders

The deal betwixt Westpac and St George was surely value enhancing for the shareholders of the merged company because after merger, the newly formed business delivered good growth with increase in lending by nine percent and improved share market as well. Even though the merged company reduced bank fees, yet it was able to attain an increment in revenues that was intended to benefit the shareholders (St. George & Westpac, 2008). Furthermore, in order to lure the shareholders of ST George, Westpac offered premium payments to them for completing the process of takeover. This increment in prices per share allowed the shareholders to remain in the company and continue to function with the shares of the newly formed company in exchange for their previously owned shares of St George. Besides, the interim dividend that is value enhancing for shareholders also increased by 16% that is a positive indicator on behalf of the shareholders.

However, due to cost cutting, unspecified job losses also occurred but there are various shareholders who also function as customers of the company and with a massive base of resources, many customer initiative programs were held that paved a path for trust and confidence on the part of shareholders. Since, the merged company was clearly able to establish Australia’s leading financial institution in relation to meeting strong brands, distribution, customer needs, financial strength, etc, the shareholders would clearly find it more profitable to function in the newly formed company as it would offer them the biggest distribution network having over 1200 branches and more than 2700 ATM’s all around the globe.

Furthermore, the merged company was capable in offering significant value to the shareholders of both the companies. Besides, both companies had a powerful suite of brands that was benefitted from enhanced scale. Nevertheless, since the company was a strategic fit for the sector, it was able to align customer focus that can in turn create maximized wealth for the shareholders of the company. In addition to these, the combined force of both the companies were more than 1000 that played a key role in building wealth or superannuation opportunities for the customers. Common values like sustainability was also attained by the merged company that resulted in value enhancement for the entire group of shareholders. The company’s plan on hiring new managers and regional managers for the betterment of customers is also a noteworthy factor that can altogether play a role in creating value for the shareholders. Even though the GFC that incurred in 2008-2009, the impacts could be seen in Australia for some years, yet the company remained prudent in its efforts to encounter the challenges in future. Since, every business must be obligated towards the society, adherence to the CSR initiatives is essential in nature because new policies can be built and a balance can be created betwixt the corporate world and the society on a whole. In relation to Tata Group, the company has effectively catered to its responsibilities towards the society and others as well. Besides, the methods adopted by the company in handling their CSR efforts are beneficial in creating awareness all around the world. Furthermore, the adequately considered its sustainable development and growth together with compliance with the standards of corporate governance. This can be proved by the fact that it has always endeavoured in framing new and innovative policies that is beneficial for the entire community at large.

Conclusion

From the previously mentioned analysis, it is visible that the merger betwixt Westpac and St George was apt in nature as it resulted into a number of efficacies both for the bank and other stakeholders as well. Furthermore, both companies were in a strong position to perform alone in the market, yet the decision to acquire one company was a bold move by Westpac Bank. Moreover, other competitors like Commonwealth Bank also offered bids to takeover the company but Westpac offered the highest of them all so that it can diversify throughout the world and retain a maximum number of customers. From the merger betwixt these companies, the share market also reacted in a positive note and the prices of St George started rising gradually. Besides, the deal was also value enhancing for the shareholders of both the company because it resulted in a maximum number of benefits like cost cutting, increase in revenues, etc. This is the reason why global financial crisis could not affect the smooth performance of the banks as they focused on supporting customers throughout the crisis by investing massive resources in the front line. Overall, the merged company has been very well positioned to further enhance services to customers and improve returns for the shareholders.

References

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