Stock Review

AMP: Setting up for failure?


  • Company: AMP (AMP)
  • Recommendation: Sell
  • Price at Review: $5.47
  • Current Price: $5.62
  • Fundamental risk: 3
  • Share price risk: 3.5

Do AMP’s ambitions exceed its capabilities? History suggests they may. It's time to get out. Greg Hoffman explains why.

AMP’s acquisition of AXA’s Australian and New Zealand assets is now a done deal, with approval received from shareholders and the Supreme Court of Victoria. The combination will create Australia and New Zealand’s largest ‘non-bank wealth management company’ which will be ‘the market leader in retail superannuation, individual risk insurance and financial advice’.

This all sounds great in theory and the acquisition is truly a ‘company transforming deal’. The question is whether it will transform the fortunes of AMP’s 800,000 shareholders for better or worse. Mark us down as sceptics.

Share on issue to balloon

Firstly, the deal will see AMP’s shares on issue balloon by 33% (plus the company will make almost half a billion dollars in cash payments to AXA shareholders). The final acquisition price is more than double AXA’s GFC-induced low; the comparable off-the-low gain for AMP’s own shares—the currency management is using to pay for the deal—is a lowly 55%.

Two other factors should combine with that rough indicator to set shareholders’ nerves on end. The first is general; extensive studies have repeatedly shown that large takeovers tend to destroy value for the acquiring shareholders. The second reason is specific; AMP’s form in this regard is mediocre. And that’s being kind. 

Key Points

  • Acquiring AXA’s local and NZ assets is indeed ‘transforming’ but not necessarily for the better

  • AMP’s record on corporate deals like this is, being kind, poor

  • There’s no reason to go along with the risks this deal entails

Want to know more?

See AMP: A case study in (the perils of) valuation Part I and Part II.

Since demutualisation, shareholders have suffered from ill-timed or poorly executed acquisitions (such as GIO general insurance) and a bloodbath in the UK life insurance market (something those who remember the Pearl ‘with profits’ fiasco would rather forget). So they have every right to feel unnerved by the current strategy, which involves ‘expanding into adjacent markets and new geographies’.

When it comes to another current priority, ‘renovating the core business’, it’s all been said before, too. Eight years ago shareholders were promised that management would be ‘focusing on our core businesses’ and ‘pursuing operational excellence’.

Table 1 shows the key performance measures as determined by the board over the past seven years. It isn’t a pretty picture, especially when it was painted at a time when there wasn’t the distraction of a major acquisition.

Table 1: AMP board’s five key performance measures









Earnings per share (underlying) (cents)








Return on equity (underlying) (%)








Total operating margins ($m)








Value of new business ($m)








Controllable costs ($m)








AMP does enjoy excellent brand awareness and product distribution. In the right hands, the stock could easily be worth more than $6, as we explained in AMP: A case study in (the perils of) Valuation. Currently, though, its ambitions appear to exceed its capabilities. And there’s plenty of scope for things to work out badly.

AMP shareholders could be giving too much of the farm away to AXA shareholders, or maybe the integration process will take longer and prove more costly than expected. The current estimate is that by spending $285m after tax (or more than $400m, assuming a 30% tax rate), $120m per year can be added to the bottom line in three years’ time.

That may occur but history suggests it’s unlikely. These projects tend to take longer, cost more and often don’t save as much as initially expected. For two former mutual organisations, each with the ‘legacy’ systems and issues you might expect from a combined 300 years of history, that’s an even stronger possibility.

AMP’s share price has risen with the market since our update on 19 Aug 10 (Hold—$5.11) but this stock will offer little, if any, downside protection in the next market downturn. If you’re looking to preserve the gains of the past few years—and your analysts most certainly are—this stock isn’t a safe warehouse for your cash.

Recommendation guide

Long Term Buy

Up to $4.00


Up to $5.00


Above $5.00

Over the next three years, though, AMP’s share price will also be influenced by whether management has paid a reasonable price for the AXA assets (a hefty takeover premium reduces the odds of that) and its ability to successfully undertake the task of integrating these vast businesses at the budgeted cost whilst delivering the anticipated ‘synergies’.

That’s a difficult enough task for a company with a first-class record in making acquisitions work (such as QBE, for example). AMP doesn’t have that. In fact, it has the reverse; a woeful record in acquisitions. With more attractively-priced, less risky and more defensive stocks on our current buy list, we recommend you now SELL.

What's this?

Recent Stock Reviews

  • 6/5/13

    Westpac: Interim result 2013

    After a total return of 70% in less than 2 years and a recently announced 10-cent special dividend, is it time to sell down, asks Nathan Bell.

  • 23/4/13

    Introducing IT services

    It’s a sector with plenty of appeal, but risks abound and prices aren’t cheap. Jason Prowd picks three of the best for your watchlists.

  • 8/4/13

    On pipelines and poles

    Investors of income and chasers of yield beware: pipeline operators might not be the lucrative hunting ground they appear to be.

  • 26/3/13

    Tatts Group Limited

    Tatts: A reliable illusion?

    This gaming and wagering outfit offers the appearance of stability, punctuated by periods of high uncertainty. Greg Hoffman explains why Tatts is not...

Back to top Back to Stock Reviews List

Members Login


Not a member yet?

for free access to our web site.

Upcoming Dividends

As at: 15 May 13

Company Ex date
Bendigo and Adelaide Bank CPS 22 May
WHK Group Limited 22 May
ANZ CPS2 convertible preference share 24 May
Westpac Capital Notes 27 May
E&A Limited 28 May

The Intelligent Investor

Current Issue 368

  • Stockland unveils new strategy
  • Macro investing: Recession risk? Pt 2
  • Macro investing: Recession risk? Pt 1