Baycorp Advantage goes for three-way growth

Friday 10th August 2001

KEITH McLAUGHLIN: Heading merged company

By Nick Stride

Baycorp's $1.9 billion merger with Australia's Data Advantage has the potential to ruffle national sensitivities on both sides of the Tasman.

At first glance the tie-up has the look of an all-scrip takeover of Baycorp by Data.

That's because the transaction is couched in terms of how many Data shares (1.56) will be swapped for each Baycorp share.

What's more, some might say, the Australians have enticed yet another corporate over to Sydney, with all that implies for loss of the company's spending power and demand for services.

In fact, said Baycorp chairman Roseanne Meo, the company's departure "should be celebrated by New Zealanders because it's an achievement."

The merged entity, Baycorp Advantage, will pursue a three-pronged growth strategy of organic, acquisitive, and geographical expansion.

If it's successful, said managing director-designate Keith McLaughlin, the workforce in both countries will expand.

There's little doubt Baycorp brought more to the deal than Data and that is reflected in the merger ratio - Baycorp shareholders will own 58% of the new company.

The 1.56 Data share to each Baycorp share ratio is 3.3% higher than the deal Data chairman Brian Gatfield was pushing two weeks ago. Mr McLaughlin is confident shareholders will pass the necessary resolutions without quibbling.

"There's huge support from the people we've heard back from. They can see that ... the incremental growth that will come as a result of putting these two organisations together is overwhelming. It's probably a true case where one and one makes three."

At a briefing in Sydney on Tuesday both companies were keen to emphasise the merger's benefits did not consist of cost-cutting and the elimination of duplication. There was in fact little overlap in activities in either country.

Baycorp Advantage's cost of capital would be lower, said Mr Gatfield. And the two would no longer compete for customers and business partners in their push into Asia.

With a ranking of around 70th on the list of Australia's biggest listed companies the new company would also have a greater index weighting, putting it on institutional investors' radar screens, and would attract increased coverage from sharebroking analysts.

But the real gains, said Mrs Meo, would come from creating "a single, focused and powerful regional player" in a rapidly-globalising industry.

The rapid organic growth of recent years is expected to continue.

"Both companies should sustain the organic growth indicated by their upcoming 2001 financial year results," Mr McLaughlin said.

Revenue growth would be accelerated by offering each company's proprietary products and services on the other's former patch. There would also be "cross-sell" benefits in Asia.

Baycorp Advantage will also be on the prowl for acquisitions. The company will be virtually debt-free.

Data's chief executive David Grafton, who will take up the role of executive director in charge of the value-adding and international strategies, said portfolio management and customer management was possibly the weakest area and might look for acquisition candidates.

And pretty much all the countries of East Asia, with the exceptions of Japan and China, are in the international expansion plan.

The merged company will consolidate existing Asian alliances - Baycorp with Dun & Bradstreet and Keppel T&T, and Data Advantage with Trans Union of the US - and is looking further afield to Europe and the US.

Mr McLaughlin said that would depend on the partners.

"If we have products, services, solutions that have applications outside our region then I think it's as much in our alliance partners' interests to introduce us to those markets as it is in ours."

Three other trends have driven the merger.

First, said Mrs Meo, it is becoming increasing important from clients' point of view to have a transtasman presence and standardised products.

Secondly, customers are increasingly looking for "information service providers" to be able to manage all aspects of credit, including assistance with decision-making and providing solutions, as opposed to simply giving access to a database.

Thirdly, said Mr Grafton, "the days of credit bureaux operating within national geographic boundaries are gone. Three major players dominate the US market."

Further ahead Mr McLaughlin sees "very significant" revenues coming from a role as a "trusted intermediary" for online transactions.

"As our customers change their business models we have to predict where they're going to be and we have to be in that space before they are."

As commerce moves to the internet he sees a need for a third party to authenticate both sides of transactions.

"If you want to buy a trampoline through the internet, for example, then the supplier has to know you're OK and you pay your accounts. At the same time you're going to want to know the guy really does supply trampolines and that he's not some transparent organisation."

Online transactions also provided opportunities in fraud detection and management.

"One of the key risks facing credit card issuers is fraud - false names, false ID, stolen cards, etc. What the industry is looking for is any way of minimising the risks."

Online services and solutions at present account for only a single-digit percentage of the combined companies' revenues. Mr McLaughlin was not willing to put a figure on how large a part of the business they might become.

"It depends on the uptake of the internet and I don't think anybody's brave enough to predict that at the moment."

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