What's new?

When a company launches a major acquisition, it is wise to consider its past form in this area. AMP's track record is far from glittering given its disastrous British expansion and subsequent retreat just a few years ago. Nevertheless, its current bid for Axa AP's Australian and New Zealand business is a more favourable proposition.

Should it succeed, the acquisition would be transformational for AMP in terms of gains in market share.

The company would become a leading provider of wealth management and protection products in Australia. This is a key reason behind the willingness of its management to pay more for this set of assets than the Aviva business, for which NAB previously outbid them.

Compulsory superannuation makes the Australian wealth management industry particularly attractive. This serves to underwrite robust growth due to the constant flow of funds to the industry. The under-penetration of life insurance products in Australia will also facilitate attractive growth in this area. Taking the opportunity to acquire a market-leading position is therefore not difficult to justify conceptually. In practice, though, an acquisition's value always comes down to price, which on AMP's numbers at the time of the announcement is about 16.6 times Axa AP's 2010 earnings. This is not cheap in absolute terms. However, earnings are at a cyclical low and the realisation of synergies will provide a further boost in the years ahead.

The outlook

The chairman of Axa AP, Rick Allert, has said the offer undervalues the company but AMP's subsequently buoyant share price has weakened this argument, given some two-thirds of the payment would be in the form of AMP stock.

In light of which, AMP may feel it can bring Axa AP to the negotiating table without improving the terms of the bid. If an increase is forthcoming, it will likely be in the cash component. Issuing more stock would dilute AMP's earnings per share and jeopardise management's claim of marginal earnings accretion in the second year.

The other complication is that AMP is in the interesting position of being both a potential acquirer and a possible target. Australian bank acquisition targets are all but non-existent for the big four. This leaves wealth management and insurance as an attractive growth avenue. An acquisition of AMP represents an opportunity to build significant scale in the sector for the banks.

Price

AMP's failed British campaign saw its stock price collapse from a 2001 high of more than $14, to the 2003 low of $2.78. After re-grouping, the stock set off on a stellar run to almost $11 in late 2007, before the GFC took hold and set AMP's stock price plummeting. The broad equity market recovery from March this year has seen AMP return to its winning form.

Worth buying

If AMP succeeds in acquiring AXA AP it will greatly enhance the company's exposure to the sector's relatively low risk, yet attractive, future growth. Should Axa AP slip through its fingers, there is a reasonable chance a major bank will make a play for AMP. Given these factors and AMP's current exposure to the sector's favourable characteristics, we consider the stock a buy.