St George & Westpac Acquisition: Economic Rationale, Analysis, and Performance

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The case of St George & Westpac assists in highlighting the international corporate strategies together with the business models that facilitate stagnant growth. 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. 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. After the process of merger betwixt Westpac and St George, the merged company attained effective accounting performance.

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St George & Westpac Acquisition
Executive summary
The case of St George & Westpac assists in highlighting the international corporate
strategies together with the business models that facilitates in stagnant growth. The main
reason of the acquisition lies in the fact that Westpac believed that the respective brands
would be more capable in competing and flourishing by belonging to the same stronger and
larger organization. Besides, the CSR measures adopted by the company ensure that there is a
friendly and fair environment for the society at large. In the previous years, the company’s
growth strategies in the form of technological measures, innovative products, etc allowed to
expand throughout the world. This means that both the organization were potent in their
approach and had a strong market capture that lead to powerful business. From the
acquisition it became crystal clear that the major objective is to strengthen the market further
and deliver a huge range of services to the customer and stakeholders.
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St George & Westpac Acquisition
Contents
Introduction...........................................................................................................................................3
Economic rationale behind the acquisition...........................................................................................4
Personal incentives to accept the offer.................................................................................................5
Acquisition method and analysis...........................................................................................................6
Post-acquisition accounting performance.............................................................................................8
Whether the deal was value enhancing for shareholders...................................................................11
Conclusion...........................................................................................................................................14
References...........................................................................................................................................15
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St George & Westpac Acquisition
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).
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St George & Westpac Acquisition
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)
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
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St George & Westpac Acquisition
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).
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St George & Westpac Acquisition
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
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St George & Westpac Acquisition
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
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St George & Westpac Acquisition
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
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St George & Westpac Acquisition
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
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St George & Westpac Acquisition
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.
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St George & Westpac Acquisition
(St. George & Westpac, 2008)
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
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St George & Westpac Acquisition
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
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St George & Westpac Acquisition
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.
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St George & Westpac Acquisition
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.
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References
Adra, S. and Barbopoulos, L.G. (2018) The valuation effects of investor attention in stock-
financed acquisitions. Journal of Empirical Finance. [online]. 45, 108-125. Doi:
https://doi.org/10.1016/j.jempfin.2017.10.001
Alexandridis, D.P. and Travlos, N. (2010) Gains from Mergers and Acquisitions Around the
World: New Evidence. Financial Management. [online]. 39(4), 1671-1695. Doi:
https://doi.org/10.1111/j.1755-053X.2010.01126.x
Alshwer, A.A., Sibilkov, V. and Zaiats, N. (2011) Financial Constraints and the Method of
Payment in Mergers and Acquisitions. Available at: https://doi.org/10.2139/ssrn.1364455
[Accessed 14 August 2018]
Ang, J.S. and Ismail, A.K. (2015) What Premiums Do Target Shareholders Expect?
Explaining Negative Returns upon Offer Announcements. Journal of Corporate Finance.
[online]. 30, 245-256. Doi: https://doi.org/10.1016/j.jcorpfin.2014.12.015
Barbopoulos, L.G., Paudyal, K. and Sudarsanam, S. (2017) Earnout deals: method of initial
payment and acquirers' gain. European Financial Management [online]. pp. 1-43. Doi:
https://doi.org/10.1111/eufm.12135
Cho, H. and Ahn, H.S. (2017) Stock payment and the effects of institutional and cultural
differences: A study of shareholder value creation in cross-border M&As. International
Business Review. [online]. 26(3), 461-475. Doi: https://doi.org/10.1016/j.ibusrev.2016.10.004
Davies, T. and Crawford, I. (2012) Financial accounting. Harlow, England: Pearson.
Deegan, C. M. (2011) In Financial accounting theory. North Ryde, N.S.W: McGraw-Hill
DePamphilis, D. (2010). Mergers and Acquisitions Basics Negotiation and Deal Structuring.
Academic Press.
Doytch, N. and Uctum, M. (2012) Sectoral Growth Effects of Cross-Border Mergers and
Acquisitions. Eastern Economic Journal. [online]. 38(3), 319-330. Doi:
https://doi.org/10.1057/eej.2011.16
Doytch, N., & Cakan, E. (2011). Growth Effects of Mergers and Acquisitions: A Sector-level
Study of OECD countries. Journal of Applied Economics and Business Research, 1(3), 120-
129.
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St George & Westpac Acquisition
Dutta, S., Saadi, S. and Zhu, P. (2013) Does Payment Method Matter in Cross-Border
Acquisitions? International Review of Economics & Finance. [online]. 25, 91-107. Doi:
https://doi.org/10.1016/j.iref.2012.06.005
Garcia-Feijoo, L., Maduraa, J. and Ngo, T. (2012). Impact of Industry Characteristics on the
Method of Payment in Mergers. Journal of Economics and Business. [online]. 64(4), 261-
274. Doi: https://doi.org/10.1016/j.jeconbus.2012.03.003
Parrino, R, Kidwell, D. and Bates, T. (2012) Fundamentals of corporate finance. Hoboken,
NJ: Wiley
Peirson, G, Brown, R., Easton, S, Howard, P. and Pinder, S. (2015) Business Finance, 12th
ed. North Ryde: McGraw-Hill Australia.
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https://www.westpac.com.au/docs/pdf/aw/ic/WBC_SGB_080526_Pres.pdf [Accessed 17
August 2018]
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