AMP as much a target as Axa

Asked at yesterday's Commonwealth Bank September quarter update for his response to news that AMP had made an offer for Axa Asia Pacific, CBA boss Ralph Norris said:  "We have a wealth management business in good shape. There is scope to make it more efficient. The cost to income ratio has significant potential for improvement.

"We would look at opportunities to diversify our wealth management business."

The big banks dominate the Australian wealth management market and they have shown they are keen to get bigger. Westpac's merger with St George added Asgard to the BT business. National Australia Bank bought Aviva and ANZ has recently moved to full ownership of the ING Australia joint venture.

All wealth management companies will be under pressure to improve efficiency as they respond to a range of reform initiatives in the pipeline that will be aimed, in part, at reducing the cost of superannuation, managed investments and financial advice. Getting bigger is one way to get the cost to income ratio down.

And the banks are all sitting on surplus capital that they plan to deploy once they are confident the effects of the financial crisis have worked their way through the system.

Analysts have been demanding to know when that capital will be put to use. Typical of the commentary is Macquarie Research's note on ANZ's recent profit announcement, which said: "Until management can find a home for more than $4 billion of surplus capital, profitability will suffer and shareholders will wear the drag."

AMP yesterday disclosed details of the offer it made to Axa over the weekend. AMP has made the offer in a joint proposal with Axa SA, the French parent of Axa Asia Pacific.

AMP proposed to buy 100 per cent of Axa AP, keep the Australian and New Zealand operations and sell the Asian businesses to Axa SA.

AMP is offering scrip and cash, which it says values Axa AP at $4 billion. The $5.34 a share and $1.38 cash offer (based on AMP's November 5 close) represents a 31 per cent premium to Axa's November 5 close.

Axa SA plans to invest in $500 million of subordinated debt to help AMP fund the cash component of the offer. AMP otherwise says it has no need to raise capital in connection with the bid, should it proceed.

The deal would take AMP from number two to number one in retail superannuation, from number five to number one in life insurance, from number three to number one in retirement income products and from number 10 to number five in non-super managed funds.

The combined group would control 19 per cent of the financial planner market, with 3000 "aligned and owned" planners.  

Axa AP's independent directors yesterday rejected the offer as inadequate, saying it undervalued the company.

While speculation rumbles around over whether others - such as a bank - may bid for Axa Asia Pacific, perhaps AMP is making itself a target as much as Axa.

It has been eight years since the AMP board turned away an approach from National Australia Bank, leaving NAB to bid for MLC the following year.

NAB, and other big banks, will be taking a fresh look at their options on each of AMP and Axa.