M&As good for fin coy sector

Standard & Poor's believes that the current trend of mergers and acquisitions in the New Zealand finance company sector will continue and ultimately should have a strengthening effect on the industry, lessening some industry risks that are currently apparent.

Tuesday, 1 May 2007

"Ultimately, an industry comprised of a smaller number of companies of greater individual size and financial strength should have a strengthening effect on the industry overall."

The impetus for companies to engage in M&A activity is driven by a range of factors, including relentless competitive forces that are impacting company performance and companies positioning themselves in anticipation of regulatory changes under review by New Zealand regulatory authorities.

"Margin pressure is already evident and likely to intensify for finance companies in the highly competitive New Zealand financial services sector," Gunning says. "Economies of scale should be achievable for finance companies that can expertly execute merger strategies, contemporaneously assisting them to contend with pressure on interest margins."

Consistent with current trends, the nature of merger activity is expected to continue to vary, and could reasonably be expected to include full mergers between local industry participants, strategic stakes by local companies in competitors, and acquisitions of local companies by overseas-based financial institutions. Companies that engage in mergers currently have the advantage of relatively benign economic times to progress integration strategies.

"Overall, due to a confluence of factors, the New Zealand finance company sector is considered ripe for consolidation."

"Standard & Poor's believes that merger strategies that are well-conceptualized and executed in the crowded New Zealand finance company sector could contribute positively in rating assessments of individual companies."

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