The financial services industry was stunned in late May by the announcement that Australia's Colonial Ltd. banking and insurance group would acquire Legal & General Australia Holdings for A$890 billion (U.S.$547 billion).
Several other big names were in line to buy Legal & General, including two of the big four banks: ANZ Bank, Melbourne; and Westpac Banking Corp., Sydney.
Melbourne-based Colonial also has announced an equity raising of A$959 million, approximately one-third of which will be raised through a sale of $4.90 shares to institutions. The remaining A$642 million will come from an issue to existing shareholders at $4.50.
Analysts calculate Colonial has paid about 15.4 times Sydney-based Legal & General's assets under management, compared with an average takeover multiple in acquisitions in the past 10 years of a little more than nine times.
Nick Selvaratnam, insurance analyst with Credit Suisse First Boston, said he was astounded Colonial was seeking to raise so much of the purchase price through the stock market.
Other analysts also expressed surprise at the price.
One rival chief executive who refused to be identified said, "Legal & General in the U.K. must be laughing all the way to the bank."
Colonial Managing Director Peter Smedley defended the price tag, saying he expects to generate cost savings of at least A$50 million a year within three years.
The high price was a result of the number of bidders, but Mr. Smedley said it was "a very fair price for both parties."
After the deal, Colonial will be virtually debt-free and capable of making other acquisitions. Its market capitalization will be around A$4.2 billion.
This will leave it behind National Mutual Holdings, Melbourne, with a capitalization of about A$6.2 billion; Lend Lease Corp., the Sydney parent of the MLC group, A$8.5 billion; and the giant AMP Ltd., Sydney, which is due to list its shares on the Australian Stock Exchange on June 15 and might be capitalized at up to $16 billion.
Other players in the financial services market still are looking to expand to rationalize the market and to achieve economies of scale from larger assets under management.
ANZ Bank Managing Director John McFarlane has said his bank is looking for local and overseas acquisitions in both the life insurance and funds management fields.
National Australia Bank, Melbourne, acquired County Investment Management, Melbourne, in October for A$100 million and was an unsuccessful bidder in May 1997 for the Sydney-based Axiom Funds Management, which was bought by Deutsche Bank for A$240 million.
In late 1996, Commonwealth Bank of Australia, Sydney, paid A$60 million for Commonwealth Funds Management, which formerly managed the Commonwealth of Australia's major public service superannuation funds.
Under-bidders for Legal & General, such as Westpac and Norwich Financial Services, Melbourne, the Australian offshoot of the U.K.'s Norwich group, also are potential buyers, along with National Mutual, which wants an acquisition to replace the failed merger with MLC.