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STANDARD BANK INVESTMENT CORPORATION LIMITED
(INCORPORATED IN THE REPUBLIC OF SOUTH AFRICA)
(REGISTRATION NUMBER 69/17128/06)
("STANBIC")
SUMMARY OF STANBIC'S STAND-ALONE BUSINESS PLAN AND ANALYSIS OF NEDCOR LIMITED'S
TAKEOVER OFFER
1. INTRODUCTION
FURTHER TO THE PUBLICATION OF STANBIC'S INITIAL RESPONSE TO NEDCOR LIMITED'S
("NEDCOR") TAKEOVER OFFER FOR STANBIC ON 16 NOVEMBER 1999, STANBIC TODAY
PRESENTED TO ANALYSTS AND THE FORMAL INVESTMENT COMMUNITY AN OVERVIEW OF ITS
STAND-ALONE PLAN GOING FORWARD AND A SYNOPSIS OF ITS COMPREHENSIVE ANALYSIS OF
THE TAKEOVER OFFER. THIS ANNOUNCEMENT CONTAINS A SUMMARY OF THE SALIENT
FEATURES OF THAT PRESENTATION.
STANBIC'S COMPREHENSIVE RESPONSE TO NEDCOR'S TAKEOVER OFFER WILL BE PUBLISHED
IN RESPONSE TO NEDCOR'S OFFER CIRCULAR WHICH WILL ONLY BE DISPATCHED ONCE ALL
THE NECESSARY REGULATORY APPROVALS HAVE BEEN RECEIVED.
2. STANBIC AGAIN DELIVERING STRONG AND SUSTAINABLE RETURNS TO SHAREHOLDERS
STANBIC EXPECTS TO DELIVER IMPROVED SHAREHOLDER VALUE, GIVEN ITS:
* INVIGORATED MANAGEMENT TEAM;
* DIVERSIFIED BUSINESS MIX;
* RETAIL RATIONALISATION BENEFITS; AND
* CONTINUED GROWTH FROM:
* RESPONSIBLE COST MANAGEMENT; AND
* ITS TRACK RECORD OF REVENUE GROWTH.
STANBIC EXPECTS TO DELIVER THE ABOVE WITHOUT EXPOSING ITS STAKEHOLDERS TO THE
SIGNIFICANT RISKS INVOLVED IN ANY MERGER WITH NEDCOR. IN MANAGEMENT'S VIEW,
STANBIC IS AN ENTHUSED ORGANISATION AND "STANBIC WILL NEVER BE THE SAME AGAIN".
(SOURCE: STANBIC PRESENTATION DATED 25 NOVEMBER 1999.)
3. NEW LEADERSHIP
STANBIC HAS RECENTLY APPOINTED JACKO MAREE AS CHIEF EXECUTIVE OFFICER ("CEO").
FOLLOWING THIS APPOINTMENT, STANBIC'S EXECUTIVE TEAM HAS BEEN RE-ORGANISED IN
ORDER TO BUILD ON ITS ESTABLISHED STRENGTHS. THE NEW EXECUTIVE TEAM REPRESENTS
A DYNAMIC MIX OF YOUTH AND EXPERIENCE. A PRESS RELEASE WITH DETAILS OF THE NEW
EXECUTIVE TEAM WILL BE RELEASED TODAY.
4. STANBIC HAS UNRECOGNISED FINANCIAL STRENGTH
SALIENT FINANCIAL STATISTICS DEMONSTRATING THE FINANCIAL STRENGTH OF STANBIC
AND ITS MAIN COMPETITORS, NEDCOR, ABSA GROUP LIMITED ("ABSA") AND FIRSTRAND
LIMITED ("FIRSTRAND") ARE SET OUT IN THE TABLE BELOW.
STANBIC NEDCOR ABSA FIRSTRAND
JUN '99 JUN '99 SEP '99 JUNE '991
SHAREHOLDERS' FUNDS (RBN) 13.4 9.9 11.9 11.0
CAPITAL ADEQUACY (%) 10.6 11.0 10.5 10.5
PRICE TO BOOK (TIMES) 2.0 2.8 1.2 4.0
ROE (%) 20.5 20.4 15.5 24.5
COST-TO-INCOME (%) 61.4 54.1 67.2 61.1
PRICE EARNINGS (HISTORIC) 10.1 12.7 7.4 17.7
NOTE 1
CAPITAL ADEQUACY AND COST-TO-INCOME FOR BANKING GROUP - REMAINING NUMBERS FOR
FIRSTRAND GROUP. (SOURCE: DEUTSCHE BANK.)
4.1 STANBIC HAS FINANCIAL STRENGTHS IN DIVERSE MARKETS
STANBIC'S EARNINGS ORIGINATE FROM A DIVERSIFIED MIX OF STRONG BUSINESS UNITS AS
SET OUT BELOW.
PERCENTAGE OF HEADLINE EARNINGS FOR
THE 6 MONTH PERIOD TO 30 JUNE 1999
RETAIL(INCLUDING COMMERCIAL BANKING) 37
SCMB 1 18
LIBERTY 2 18
STANDARD BANK LONDON 17
STANBIC AFRICA 10
STANBIC 100
NOTE 1
STANDARD CORPORATE AND MERCHANT BANK
NOTE 2
LIBERTY LIFE ASSOCIATION OF AFRICA LIMITED
5. RECOGNISED ESTABLISHED STRENGTHS OF STANBIC
5.1 RETAIL BANKING
5.1.1 MASS MARKET
* STANBIC, THROUGH ITS E-BANK BUSINESS, WHICH PROVIDES A BROAD RANGE OF
PRODUCTS AND SERVICES SPECIFICALLY TAILORED TO THE NEEDS OF THE MASS MARKET,
HAS SUCCESSFULLY ESTABLISHED ITSELF AS THE DOMINANT PROVIDER OF FINANCIAL
SERVICES TO THE PREVIOUSLY UNDERBANKED SECTOR OF SOUTH AFRICAN SOCIETY.
* E-BANK CURRENTLY HAS OVER 2.6 MILLION ACTIVE CUSTOMERS, WHICH REPRESENTS A
MARKET SHARE OF APPROXIMATELY 33% AND IS GROWING RAPIDLY. STANBIC EXPECTS A
FURTHER 600 000 NEW ACCOUNTS TO BE OPENED DURING 2000.
* E-BANK HAS BEEN SUCCESSFULLY ESTABLISHED AS AN ASPIRATIONAL BRAND IN THE MASS
MARKET.
* STANBIC HAS RECENTLY INTRODUCED AUTO BANK E, A DISTRIBUTION CHANNEL WITH A
LOW MARGINAL COST OF DELIVERY.
* STANBIC'S GROWING PENETRATION OF THE MASS MARKET HAS OPENED UP VARIOUS
OPPORTUNITIES TO ENTER THE MICRO-LENDING INDUSTRY.
5.1.2 DIRECT AND E-COMMERCE
* STANBIC IS THE LEADING INTERNET BANK IN SOUTH AFRICA WITH 90 000 INTERNET
BANKING CUSTOMERS AND THE BROADEST PRODUCT OFFERING AVAILABLE.
* STANBIC HAS A WELL-ESTABLISHED CALL CENTRE AND ATM NETWORK.
* STANBIC HAS ADOPTED AN INTEGRATED APPROACH BETWEEN THE PHYSICAL AND VIRTUAL
REALMS OF ITS FINANCIAL SERVICES OFFERINGS.
5.2 BANCASSURANCE
STANBIC'S BANCASSURANCE INITIATIVES WITH LIBERTY WILL DELIVER SUBSTANTIAL VALUE
TO SHAREHOLDERS OVER THE MEDIUM TERM FOR THE REASONS LISTED BELOW.
* STANBIC BENEFITS FROM DISTRIBUTION AND UNDERWRITING PROFITS. ITS SHARE OF THE
AFTER TAX EARNINGS FROM BANCASSURANCE IS EXPECTED TO APPROXIMATE R100 MILLION
IN 2000, WHICH IS EXPECTED TO GROW TO R340 MILLION BY 2002. FURTHERMORE,
SIGNIFICANT ECONOMIES OF SCALE ARE ACHIEVED BY USING THE RETAIL BANKING
DISTRIBUTION MECHANISM.
* SIMPLE BANCASSURANCE PRODUCTS PROVIDE QUICK AND SUSTAINABLE WINS WHEREAS MORE
COMPLEX PRODUCTS PROVIDE CURRENT AND LONGER-TERM GROWTH OPPORTUNITIES.
* THE "EMBEDDING" OF BANCASSURANCE PRODUCTS INTO EXISTING BANKING PRODUCTS
REPRESENTS A UNIQUE AND COST-EFFECTIVE APPROACH AND, TO DATE, THE RESPONSE OF
CUSTOMERS TO SUCH BANCASSURANCE OFFERINGS HAS EXCEEDED EXPECTATIONS.
* LIBERTY AND CHARTER LIFE POLICIES HAVE RECENTLY BECOME AVAILABLE ON STANBIC'S
ATMS, A WORLD FIRST INNOVATION FOR STANBIC.
5.3 SCMB
SCMB IS THE TOP DOMESTIC CORPORATE AND MERCHANT BANK, HAVING CONSISTENTLY BEEN
RATED NUMBER ONE IN MANY CATEGORIES BY BOTH ITS PEERS AND INDEPENDENT SURVEYS.
THESE RATINGS INCLUDE:
* NUMBER ONE IN CORPORATE LENDING, MONEY MARKETS, FOREIGN EXCHANGE AND
STRUCTURED FINANCE IN THE PRICEWATERHOUSECOOPERS PEER SURVEY CONDUCTED DURING
1999;
* NUMBER ONE IN THE SOUTH AFRICAN INTERBANK FOREIGN EXCHANGE MARKET ACCORDING
TO EUROMONEY;
* NUMBER ONE IN RAND INTEREST RATE DERIVATIVES ACCORDING TO RISK MAGAZINE;
* NUMBER ONE IN THE NUMBER OF CORPORATE FINANCE TRANSACTIONS COMPLETED DURING
1998, ACCORDING TO THE ERNST & YOUNG - MERGERS AND ACQUISITIONS SURVEY; AND
* THE LEADING BANK IN GOVERNMENT BOND AUCTIONS DURING 1999.
5.4 STANBIC AFRICA
* STANBIC IS CURRENTLY REPRESENTED IN FOURTEEN SUB-SAHARAN COUNTRIES AND
EMPLOYS A STRATEGY OF MARKET OPTIMISATION.
* IN COUNTRIES WITHIN THE COMMON MONETARY AREA, STANBIC PROVIDES UNIVERSAL
BANKING SERVICES, WHILST ELSEWHERE, STANBIC PRIMARILY OPERATES AS A BUSINESS
AND TRADE BANK, BEING A MAJOR SERVICE PROVIDER TO SOUTH AFRICAN AND
MULTI-NATIONAL CORPORATIONS.
* THE BANKING MARKET IN AFRICA IS RELATIVELY UNSOPHISTICATED AND YIELDS GOOD
MARGINS ALLOWING STANBIC TO EXTRACT SIGNIFICANT VALUE FROM ITS ESTABLISHED
INFRASTRUCTURE AND INFORMATION TECHNOLOGY ("IT") PLATFORMS. CONSEQUENTLY,
STANBIC AFRICA IS A HIGH GROWTH, HIGH RETURN ON EQUITY ("ROE") BUSINESS.
5.5 TECHNOLOGY
* STANBIC CONTINUES TO DEVELOP AND INTRODUCE TECHNOLOGICAL INNOVATIONS TO ITS
BUSINESS BANKING PLATFORMS SUCH AS ITS UNIQUE PAN-AFRICAN SATELLITE
COMMUNICATIONS NETWORK. AS A RESULT, BMI RESEARCH HAS CONSISTENTLY RATED
STANBIC'S ELECTRONIC BANKING OFFERINGS THE BEST IN SOUTH AFRICA.
* STANBIC'S STRENGTH IN ITS DELIVERY AND SUPPORT OF CORE TECHNOLOGIES HAS
RESULTED IN:
* THE EFFICIENCY OF ITS TECHNOLOGICAL INFRASTRUCTURE BEING 30% AHEAD OF
INTERNATIONAL BENCHMARKED GROUPS ACCORDING TO INTERNATIONAL COMPASS BENCHMARK;
* ITS APPLICATIONS DEVELOPMENT BEING RATED AMONGST THE BEST INTERNATIONALLY
ACCORDING TO COMPUTER SCIENCES CORPORATION; AND
* STANBIC BEING SOUTH AFRICA'S MOST SUCCESSFUL INTERNET BANK.
6. LIBERTY
THE ACQUISITION BY STANBIC IN 1999 OF CONTROL OF LIBERTY, THE THIRD LARGEST
LIFE ASSURER IN SOUTH AFRICA, IS CONSIDERED TO HAVE BEEN HIGHLY SUCCESSFUL FOR
THE FOLLOWING REASONS:
* THE SIGNIFICANT RESTRUCTURING UNDERTAKEN BY LIBERTY DURING 1999 IS ALREADY
INCREASING PROFITABILITY AND IMPROVING ITS ROE AND, AS A RESULT, THE LIBERTY
SHARE PRICE ON THE JOHANNESBURG STOCK EXCHANGE HAS EXPERIENCED A SIGNIFICANT
RE-RATING DURING 1999;
* LIBERTY BENEFITS FINANCIALLY FROM THE INCREASED VOLUMES GENERATED BY
BANCASSURANCE PRODUCTS; AND
* LIBERTY REPRESENTS A GOOD STRATEGIC FIT WITH STANBIC AND TOGETHER THEY ARE
DEVELOPING FURTHER EXCITING JOINT VENTURES IN THE FINANCIAL SERVICES ARENA.
CUTTING THE TIE WITH LIBERTY WILL RESULT IN A LOSS OF SHAREHOLDER VALUE.
7. STANDARD BANK LONDON
7.1 GROWTH OPPORTUNITIES
* STANDARD BANK LONDON'S ESTABLISHMENT COSTS HAVE BEEN EXPENSED AND THE
REQUIRED GEOGRAPHIC AND PRODUCT BASE HAVE BEEN PREDOMINANTLY ESTABLISHED. ITS
CONTROL AND RISK MANAGEMENT INFRASTRUCTURES ARE IN PLACE AND CAN ACCOMMODATE
VOLUME AND CAPITAL INCREASES, AND IT HAS ESTABLISHED CREDIBILITY WITH TOP TIER
GLOBAL COUNTERPARTIES.
* ITS PROPORTION OF QUALITY, ANNUITY BASED INCOME IS GROWING, ITS BALANCE SHEET
IS LIQUID AND IT HAS A PROVEN CAPABILITY TO SELL RISK OFF BALANCE SHEET AND, IN
ADDITION, THE COMMODITY AND EMERGING MARKET CYCLE IS EXPERIENCING AN UPTURN,
WHICH WILL BENEFIT STANDARD BANK LONDON.
* STANDARD BANK LONDON WAS FOUNDED INDEPENDENTLY OF STANBIC AND ITS CAPITAL
BASE OF IN EXCESS OF GBP250 MILLION POSITIONS IT FOR CONTINUED GROWTH.
* ITS HISTORIC AND BUDGETED GROSS REVENUES AND EARNINGS FOR THE 1996 TO 2000
FINANCIAL YEARS ARE DETAILED IN THE TABLE BELOW.
GBPM 1996 1997 1998 1999 2000
GROSS REVENUE 69.1 97.6 104.4 148.5 177.5
AFTER TAX PROFIT 12.3 20.4 (35.4) 41.3 50.5
AFTER TAX ROE 8.7% 10.4% N/A 14.5% 15.0%
* STANDARD BANK LONDON IS SELF FUNDING AND ITS OPERATIONS HAVE BEEN DESIGNED TO
DELIVER A ROE OF 20% AND HIGHER.
* DURING THE LAST FIVE YEARS, IT HAS EXPERIENCED COMPOUND REVENUE GROWTH OF
APPROXIMATELY 35% PER ANNUM AND ITS DEPOSIT BASE HAS INCREASED TO IN EXCESS OF
GBP1 200 MILLION.
7.2 NOT A HIGH RISK BUSINESS
* STANDARD BANK LONDON'S ASSETS ARE SPREAD BY COUNTRY AND PRODUCT.
* ITS ASSETS ARE TURNED OVER RAPIDLY AND WHERE NOT SOLD THEY ARE MARKED TO
MARKET.
* LENDING BY STANDARD BANK LONDON IS LARGELY SECURITISED OR UNDERPINNED BY
TRADE AND THE FINANCING OF TRADE MITIGATES COUNTRY RISK.
* LIMITS ON THE DEGREE OF RISK CONCENTRATION ARE ENFORCED.
* MORE THAN HALF OF STANDARD BANK LONDON'S FUNDING IS RETAIL BASED AND ITS BANK
CREDIT LINES APPROXIMATE US$1.4 BILLION. IN EACH OF THE LAST TWO YEARS,
STANDARD BANK LONDON RAISED FIVE YEAR TERM FUNDING AT RATES LOWER THAN
STANBIC'S COST OF FUNDING.
* STANDARD BANK LONDON HAS IMPLEMENTED A STATE-OF-THE-ART RISK MANAGEMENT AND
MEASUREMENT SYSTEM THAT HAS BEEN SIGNED OFF BY THE FINANCIAL SERVICES AUTHORITY
* TO DATE, STANDARD BANK LONDON HAS RECOVERED 90% OF ITS 1998 RUSSIAN EXPOSURE
PROVISIONS.
8. DOMESTIC RESTRUCTURING
8.1 OBJECTIVES
THE RESTRUCTURING OF STANBIC'S DOMESTIC BUSINESS UNITS INTRODUCED BY STANBIC'S
NEW CEO HAS THE FOLLOWING PRIMARY OBJECTIVES:
* TO ENSURE MANAGEMENT FOCUS AND ACCOUNTABILITY IN ORDER TO DELIVER GROWTH OFF
THE EXISTING STRENGTHS BY OPTIMISING STANBIC'S CUSTOMERS, PRODUCTS AND
DISTRIBUTION CHANNELS;
* TO ENSURE MANAGEMENT FOCUS AND ACCOUNTABILITY TO SECURE ONGOING EFFICIENCY
IMPROVEMENTS AND PROFITABILITY MAXIMISATION, WHICH WILL PROVIDE IMMEDIATE COST
BENEFITS IN 2000 ALTHOUGH THE MAXIMUM POTENTIAL BENEFITS WILL ONLY BE EXTRACTED
OVER THE MEDIUM TERM; AND
* TO ENSURE STRICT RISK MANAGEMENT DISCIPLINE.
8.2 NEW APPROACH
IN FUTURE, AS A RESULT OF THE CURRENT AND PLANNED RESTRUCTURING, STANBIC'S
DOMESTIC BUSINESS UNITS WILL BE ORGANISED IN A NEW "TEAM" BASED STRUCTURE. A
COMPREHENSIVE RETAIL TEAM WILL BE FORMED TO INCLUDE ALL OF RETAIL, REGIONAL AND
WEALTH CREATION. SCMB AND COMMERCIAL WILL SHARE COMMON INFRASTRUCTURE AND
LEADERSHIP. IT HAS BEEN SEPARATED FROM OPERATIONS AND WILL INCLUDE
RESPONSIBILITY FOR INTERNET BANKING, E-COMMERCE AND DIRECT. OPERATIONS WILL
INCLUDE ALL THE BACK OFFICE PROCESSING OF THE GROUP.
8.3 COST INITIATIVES
STANBIC IS CURRENTLY IMPLEMENTING COST CUTTING INITIATIVES IN RETAIL BANKING
AND OPERATIONS AS SET OUT BELOW. THESE COST INITIATIVES WILL REDUCE STANBIC'S
HEADCOUNT BY 1 000 PER ANNUM OVER THE NEXT THREE YEARS AND WILL ELIMINATE COSTS
FROM 2000 ONWARDS OF APPROXIMATELY R120 MILLION BEFORE TAX, EQUIVALENT TO A
TOTAL PERMANENT COST REDUCTION OF R360 MILLION IN THREE YEARS.
8.3.1 RETAIL BANKING
* STANBIC WILL FURTHER RATIONALISE ITS RETAIL BANKING NETWORK BY EITHER CLOSING
OR DOWNSIZING 70 POINTS OF REPRESENTATION, REPRESENTING 11% OF THE CURRENT
NETWORK;
* STANBIC WILL REDUCE ITS REGIONAL AND RETAIL BANKING PROVINCIAL STRUCTURES BY
27%; AND
* STANBIC WILL CONSOLIDATE THE TWO REGIONAL AND RETAIL BANKING HEAD OFFICE
STRUCTURES.
8.3.2 OPERATIONS
* DURING 1999, 23 OF STANBIC'S RETAIL PROCESSING SITES WERE REDUCED TO 10;
* FOR THE YEARS 2000 TO 2002, THE TARGET IS TO REDUCE A FURTHER 46 OF STANBIC'S
REGIONAL PROCESSING SITES TO 10; AND
* PROCESS AUTOMATION WILL BE INCREASED AT SCMB.
9. STANBIC'S STAND-ALONE PROSPECTS
STANBIC'S PROJECTED REVENUES, PROVISIONS FOR CREDIT LOSSES AND OPERATING
EXPENSES FOR THE 1999 AND 2000 FINANCIAL YEARS TOGETHER WITH THE RESPECTIVE
GROWTH RATES IN THOSE YEARS ARE SET OUT IN THE TABLE BELOW.
1999 2000
ESTIMATE BUDGET
REVENUES RBN 13.3 15.1
GROWTH +18% +13%
PROVISION FOR CREDIT LOSSES RBN 1.6 1.2
GROWTH (12%) (27%)
OPERATING EXPENSES RBN 8.1 9.0
GROWTH +16% +11%
9.1 REVENUES
STANBIC'S EXPECTED TOTAL REVENUES FOR THE 1999 AND 2000 FINANCIAL YEARS, SPLIT
BETWEEN NET INTEREST INCOME AND NON-INTEREST INCOME, ARE DETAILED IN THE TABLE
BELOW.
1999 2000
ESTIMATE (RBN) BUDGET (RBN)
NET INTEREST INCOME 6.9 7.4
NET NON-INTEREST INCOME 6.4 7.7
TOTAL 13.3 15.1
THESE REVENUE PROJECTIONS ARE BASED ON THE FOLLOWING ASSUMPTIONS:
* NET INTEREST INCOME IS EXPECTED TO GROW AT 8% PER ANNUM UNDERPINNED BY:
* DOMESTIC LOANS AND ADVANCES GROWING BY 11% PER ANNUM, PARTIALLY OFFSET BY THE
ADVERSE IMPACT OF THE ENDOWMENT EFFECT;
* NON-INTEREST INCOME IS EXPECTED TO GROW AT 20% PER ANNUM WITH GROWTH DRIVEN
BY DELIVERY ON INITIATIVES SUCH AS BANCASSURANCE, E-PLAN AND TECHNOLOGY;
* STANBIC'S INVESTMENTS IN TECHNOLOGY OVER THE PAST TWO YEARS OF IN EXCESS OF
R500 MILLION ARE EXPECTED TO PROVIDE RETURNS;
* STANDARD BANK LONDON IS EXPECTED TO GROW AT 25% PER ANNUM; AND
* STANBIC AFRICA IS EXPECTED TO GROW AT 24% PER ANNUM.
9.2 PROVISIONS
STANBIC'S PROJECTIONS FOR PROVISIONS ARE BASED ON THE FOLLOWING ASSUMPTIONS:
* STANBIC'S BAD DEBT CHARGE AS A PERCENTAGE OF LOANS AND ADVANCES IS EXPECTED
TO DECLINE FROM 1.4% IN 1999 TO 0.9% IN 2000;
* THE KEY DRIVER FOR THE EXPECTED DECLINE IN PROVISIONS IS THE RETAIL CREDIT
ENVIRONMENT, WHICH IS EXPECTED TO IMPROVE WITH THE STRENGTHENING OF THE SOUTH
AFRICAN ECONOMY, AS WELL AS THE FOLLOWING SPECIFIC INITIATIVES WHICH STANBIC
HAS SUCCESSFULLY COMPLETED:
* THE MIGRATION OF CREDIT FUNCTIONS FROM 450 BRANCHES TO 30 CREDIT CENTRES AND
6 BAD DEBT MANAGEMENT CENTRES;
* THE IMPLEMENTATION OF STATE-OF-THE-ART CREDIT DECISION SUPPORT SYSTEMS; AND
* THE FURTHER IMPROVEMENT OF THE QUALITY OF THE LENDING PORTFOLIO THROUGH
RATIONALISATION AND REVISED CREDIT SCORING TECHNIQUES.
9.3 OPERATING COSTS
STANBIC'S OPERATING COSTS ARE EXPECTED TO INCREASE BY 11% PER ANNUM. THE KEY
DRIVERS OF THIS INCREASE ARE:
* A 6.5% GROWTH RATE PER ANNUM IN CONTINUING OPERATING COSTS, IGNORING CURRENCY
EFFECTS;
* AN INVESTMENT OF R390 MILLION IN DOMESTIC BANKING OPERATION INITIATIVES,
INCLUDING:
* R120 MILLION IN DIRECT AND E-COMMERCE;
* R50 MILLION IN BANCASSURANCE; AND
* R60 MILLION IN MASS MARKET; AND
* AN INVESTMENT OF R60 MILLION IN STANBIC'S AFRICAN BANKING OPERATIONS.
9.4 EARNINGS
STANBIC'S RESULTANT EARNINGS PROJECTIONS FOR THE YEARS 1999 TO 2001 ARE
DETAILED IN THE TABLE BELOW, WHICH SETS OUT HEADLINE EARNINGS, EARNINGS PER
SHARE ("EPS") BASED ON MANAGEMENT'S PROJECTIONS AND THE MARKET CONSENSUS
PROJECTIONS FOR STANBIC'S EPS AS WELL AS THE RESPECTIVE GROWTH RATES IN EACH OF
THESE YEARS. THE TABLE ALSO LISTS STANBIC'S RESULTANT COST-TO-INCOME RATIOS
AND THE PROJECTED RETURNS ON AVERAGE CAPITAL EMPLOYED.
1999 2000 2001
ESTIMATE BUDGET PLAN
HEADLINE EARNINGS 1 RBN 2.9 3.6 4.4
GROWTH +40% +26% +23%
EPS - MANAGEMENT FORECAST CENTS 226 285 350
GROWTH +27% +26% +23%
EPS - MARKET CONSENSUS 2 CENTS 225 278 336
GROWTH +26% +24% +21%
COST-TO-INCOME % 61 60 58
RETURN ON AVERAGE CAPITAL % 21 23 24
NOTE 1
INCLUDES ESTIMATES OF LIBERTY BASED ON I-NET CONSENSUS FORECASTS.
NOTE 2
SOURCE: I-NET.
9.5 CAPITAL
STANBIC'S CURRENT AND PROJECTED CAPITAL POSITION IS SET OUT BELOW.
* AS AT 30 JUNE 1999, STANBIC SHAREHOLDERS' FUNDS EXCEEDED R16 BILLION ON A
MARKED-TO-MARKET BASIS AFTER WRITING OFF AGAINST SHARE PREMIUM GOODWILL
AMOUNTING TO R2.75 BILLION THAT AROSE ON THE ACQUISITION OF THE REMAINING 50%
INTEREST IN LIBLIFE CONTROLLING CORPORATION (PROPRIETARY) LIMITED.
* AS AT 30 JUNE 1999, STANBIC'S TIER ONE CAPITAL ADEQUACY RATIO WAS 10.6%.
THIS RATIO WOULD HAVE BEEN REDUCED TO 8.9% IF THE LIBERTY INVESTMENT WERE TO BE
IMPAIRED. HOWEVER, THERE WAS NO REQUIREMENT FOR SUCH IMPAIRMENT AT 30 JUNE 1999
* STANBIC'S PROJECTED CAPITAL ADEQUACY RATIO AT 1 JULY 2000, AT WHICH DATE
IMPAIRMENT MAY BE REQUIRED, IS EXPECTED TO BE 9.4%.
* FROM A NON-REGULATORY PERSPECTIVE, HOWEVER, STANBIC'S INVESTMENT IN LIBERTY
REPRESENTS A SIGNIFICANT CAPITAL CUSHION OF APPROXIMATELY R5 BILLION AT THE
DATE OF THIS ANNOUNCEMENT.
* FINALLY, STANBIC HAS SIGNIFICANT UNUTILISED CAPACITY TO RAISE TIER TWO
CAPITAL.
9.6 STANBIC'S STAND-ALONE PROSPECTS COMPARED WITH NEDCOR
9.6.1 DIVERSE RETAIL CUSTOMER BASE
* NEDCOR'S FOCUS IS ON THE MIDDLE AND UPPER SEGMENTS OF THE MARKET AND ITS
STRATEGY IS TO SHED LOWER INCOME CUSTOMERS.
* STANBIC'S STRENGTHS INCLUDE:
* A SUBSTANTIAL RURAL AND RETAIL FOOTPRINT;
* A LARGE AFFLUENT MARKET SHARE;
* A PERVASIVE PRODUCT RANGE;
* A DOMINANT MASS MARKET POSITION; AND
* THE STRONGEST BANKING BRAND BY FAR.
THE TABLE BELOW DETAILS THE CHANGES TO THE CUSTOMER BASES OF STANBIC AND NEDCOR
BETWEEN 1995 AND 1998 AND CLEARLY DEMONSTRATES STANBIC'S GROWTH IN CUSTOMERS
ACROSS ALL SEGMENTS COMPARED TO NEDCOR'S LOSS OF CUSTOMERS ACROSS ALL SEGMENTS.
CHANGES IN CLIENT BASE FROM 1995 TO 1998
STANBIC NEDCOR
CLIENTS +22% -30%
LOWER-INCOME CLIENTS 1 +14% -42%
PERCENTAGE "BLACKS, COLOUREDS, ASIANS" +6% -4%
RURAL CLIENTS +18% -41%
NOTE 1
DEFINED AS INCOME LESS THAN R3 000 PER MONTH OR NONE.
(SOURCE: AMPS DATA 1995-1998)
9.6.2 CORPORATE AND MERCHANT BANKING, INTERNATIONAL BUSINESSES AND BANCASSURANC
* SCMB IS A BETTER RATED CORPORATE AND MERCHANT BANK THAN NEDCOR INVESTMENT
BANK HOLDINGS LIMITED ("NIB").
* STANBIC HAS A SIGNIFICANT SUCCESSFUL AFRICAN PRESENCE DELIVERING A 30% ROE,
WHEREAS NEDCOR'S AFRICAN INITIATIVES ARE RELATIVELY INSIGNIFICANT.
* STANBIC HAS A CLEAR INTERNATIONAL STRATEGY THROUGH STANDARD BANK LONDON WHICH
IS DESIGNED TO DELIVER A 20% ROE WITH AN ESTABLISHED FRANCHISE, WHEREAS
NEDCOR'S INTERNATIONAL STRATEGY AND PRESENCE IS LIMITED.
* STANBIC HAS A PROVEN BANCASSURANCE PERFORMANCE AND GROWTH PROSPECTS, WHILST
NEDCOR DOES NOT APPEAR TO PURSUE ANY BANCASSURANCE INITIATIVES.
9.6.3 NEDCOR IS LOOKING TO BENEFIT FROM STANBIC'S UPSIDE
NEDCOR HAS A NARROWER CUSTOMER FRANCHISE AND BUSINESS FOCUS AND ITS STRATEGY IS
RUNNING OUT OF ROAD.
* STANBIC'S STRATEGY IS TO INVEST FOR FUTURE GROWTH AND IT WILL AGAIN BE
DELIVERING STRONG AND SUSTAINABLE RETURNS TO ITS SHAREHOLDERS.
* THE TABLE BELOW DETAILS STANBIC'S ANNUAL EPS SINCE 1987 (CENTS).
1987 1988 1989 1990 1991 1992 1993
22.5 27.0 34.0 42.2 50.7 59.3 70.8
1994 1995 1996 1997 1998 1999* 2000*
85.2 105.3 131.1 158.6 177.8 224.8 278.3
2001*
335.5
(* SOURCE: I-NET CONSENSUS)
10. NEDCOR'S OFFER: NOT IN THE BEST INTERESTS OF STANBIC SHAREHOLDERS
10.1 NEDCOR'S APPROACH IS FLAWED
NEDCOR'S APPROACH TO THE STANBIC BOARD, MANAGEMENT AND STAFF HAS BEEN HOSTILE.
NEDCOR APPROACHED CERTAIN SHAREHOLDERS OF STANBIC BEFORE PROPERLY APPROACHING
THE STANBIC BOARD AND MANAGEMENT, HAS REFUSED TO SHARE DETAILED MERGER RESEARCH
WITH STANBIC AND HAS PUBLICLY CRITICISED STANBIC WHILE INSISTING THAT THE
MERGER IS NOT HOSTILE.
OLD MUTUAL PLC ("OLD MUTUAL") HAS ALSO PLAYED A HOSTILE ROLE, MAKING
INFLAMMATORY PUBLIC STATEMENTS CRITICAL OF STANBIC. OLD MUTUAL HAS CLEARLY
ALIGNED ITSELF WITH NEDCOR'S SHAREHOLDERS AND ACCORDINGLY HAS A CONFLICT OF
INTEREST. IT HOLDS APPROXIMATELY 54% OF NEDCOR AND 1.9% OF STANBIC IN ITS
SHAREHOLDERS' FUNDS AND 20.5% OF STANBIC IN ITS POLICYHOLDERS' FUNDS. AS A
RESULT, ANY BENEFIT TO NEDCOR SHAREHOLDERS FLOWS DIRECTLY TO OLD MUTUAL
SHAREHOLDERS, WHEREAS ANY COST TO STANBIC SHAREHOLDERS FLOW PRIMARILY TO OLD
MUTUAL POLICYHOLDERS.
IT IS THE VIEW OF THE BOARD OF DIRECTORS OF STANBIC THAT NEDCOR'S APPROACH IS
NOT TO PROPOSE A MERGER, BUT RATHER REPRESENTS AN ATTEMPTED TAKEOVER.
10.2 BANK-ON-BANK MERGERS DO NOT ALWAYS CREATE VALUE
STANBIC'S COMPREHENSIVE ANALYSIS OF A SIGNIFICANT RANGE OF INTERNATIONAL
BANK-ON-BANK MERGERS REVEALS THAT BANK-ON-BANK MERGERS DO NOT ALWAYS DELIVER
EARNINGS EXPECTATIONS OR ENHANCE SHAREHOLDER RETURNS. FURTHERMORE, STATISTICS
FOR HOSTILE MERGERS INDICATE THAT THEY ARE INFREQUENTLY ATTEMPTED PRIMARILY
BECAUSE OF THE SIGNIFICANT RISK OF FAILURE.
10.2.1 USA EXPERIENCES
A REVIEW OF THE FIVE LARGEST USA BANK-ON-BANK MERGERS IN EACH OF 1997 AND 1998
SHOWED THAT, IN ALL TRANSACTIONS, THE ESTIMATED EARNINGS FOR TWO YEARS POST
COMPLETION ARE SUBSTANTIALLY LOWER THAN EXPECTATIONS AT THE TIME OF THE MERGER.
THE AVERAGE SHORTFALL IN EARNINGS IS 12.8% WHILST 80% HAVE UNDERPERFORMED THE
BANKING INDEX SINCE ANNOUNCEMENT BY AN AVERAGE OF 18.9%.
10.2.2 SOUTH AFRICA HAS EXPERIENCED THE SAME EFFECT
THE ABSA MERGERS ARE DOMESTIC EXAMPLES OF HOW A MERGER CAN CAUSE MARKET SHARES
IN KEY PRODUCT AREAS TO DROP, WHICH IN TURN CAN CAUSE COST-TO-INCOME RATIOS TO
ESCALATE DRAMATICALLY.
10.2.3 NEDCOR'S INTERNATIONAL EXAMPLES DON'T TELL THE FULL STORY
NEDCOR HAS CHOSEN THREE "SUCCESSFUL" MERGERS TO SUPPORT ITS CASE. THESE ARE
CHASE/CHEMICAL, HYPOVEREINSBANK ("HVB") AND LLOYDS/TSB. A BRIEF ANALYSIS OF
THESE MERGERS IS REVEALING.
10.2.3.1 CHASE/CHEMICAL
* THE MERGER WAS FRIENDLY AND NEGOTIATED;
* MANAGEMENT HAD A SHARED VISION;
* BOTH PARTIES NEEDED THE MERGER; AND
* CHEMICAL WAS ALREADY EXPERIENCED IN MERGER INTEGRATION.
THE RESULT WAS A SUCCESSFUL MERGER.
10.2.3.2 HVB
* THE MERGER WAS FRIENDLY AND NEGOTIATED;
* MANAGEMENT HAD A SHARED VISION;
* BOTH PARTIES NEEDED THE MERGER; AND
* NEITHER HAD INTEGRATION EXPERIENCE.
THE MERGER HAS NOT PRODUCED POSITIVE RESULTS TO DATE:
* ANALYSTS FORECAST HVB'S COST-TO-INCOME RATIO TO RISE;
* HVB'S SHARE PRICE HAS UNDERPERFORMED THE INDEX BY 25%; AND
* HVB'S FORECAST EPS HAS FALLEN 25%.
10.2.3.3 LLOYDS/TSB
LLOYDS/TSB IS WIDELY REGARDED AS A HIGHLY SUCCESSFUL MERGER. HOWEVER, ITS
FINANCE DIRECTOR MADE SOME REVEALING COMMENTS WHEN RECENTLY IN SOUTH AFRICA.
"OVER 70 TO 80 PERCENT OF ALL BANKING MERGERS IN FINANCIAL SERVICES DO NOT
DELIVER THE EFFICIENCIES TOUTED AT THE BEGINNING. DELIVERY BECOMES ALL THE
MORE DIFFICULT IN A HOSTILE SITUATION."
(SOURCE: SUNDAY INDEPENDENT, 21 NOVEMBER 1999)
"KENT ATKINSON, ......., TOLD THE WARBURG DILLON READ BANKING CONFERENCE THIS
WEEK HE WOULD NEVER LIKE TO ATTEMPT A HOSTILE BANKING MERGER."
(SOURCE: SUNDAY TIMES BUSINESS TIMES, 21 NOVEMBER 1999)
10.2.4 HOSTILE BANK DEALS - THE FACTS
STANBIC AND ITS ADVISERS HAVE REVIEWED ALL BANK TRANSACTIONS THAT EXCEEDED $100
MILLION IN SIZE OVER THE PAST TEN YEARS. A TOTAL OF 1 072 DEALS TOOK PLACE OF
WHICH:
* 52 WERE HOSTILE; BUT ONLY
* 6 OF THESE WERE COMPLETED (2 WITHIN THE LAST 6 MONTHS); AND
* THERE ARE NO OBVIOUS SUCCESSES.
WELLS FARGO/FIRST INTERSTATE WAS THE LARGEST HOSTILE BANK DEAL AND IS WIDELY
CONSIDERED TO HAVE BEEN A DISASTROUS FAILURE.
WELLS FARGO WAS A SUCCESSFUL ACQUISITIVE BANK AND TOLD A SIMPLE STORY AT THE
WELLS FARGO INVESTOR PRESENTATION ON 18 OCTOBER 1995.
"THE PROPOSED MERGER IS QUITE SIMPLE... IT INVOLVES CUTTING COSTS...WE HAVE A
TRACK RECORD OF SUCCESS..."
("MERGER SUMMARY", WELLS FARGO INVESTOR PRESENTATION, 18 OCTOBER 1995).
FOLLOWING THE MERGER:
* 17% OF THE DEPOSIT BASE WAS LOST;
* 400 OUT OF 500 FIRST INTERSTATE SENIOR MANAGEMENT MEMBERS LEFT;
* FORECAST EARNINGS ACCRETION OF 29% BECAME ACTUAL EARNINGS DILUTION OF 6%; AN
* WELLS FARGO/FIRST INTERSTATE UNDERPERFORMED THE S&P BANK INDEX BY 42% FROM
THE DATE OF THE FIRST ANNOUNCEMENT UNTIL IT WAS ACQUIRED BY NORWEST.
10.2.5 WHY DO HOSTILE BANK MERGERS FAIL'
HOSTILE BANK MERGERS HAVE BEEN KNOWN TO FAIL FOR THE FOLLOWING REASONS:
* TALENTED STAFF THAT ARE MOBILE TEND TO LEAVE AND STAFF MORALE IS LOW;
* ACQUIRERS HAVE UNREALISTICALLY HIGH ESTIMATES OF THE SYNERGY BENEFITS AS A
RESULT OF DESK TOP ANALYSES PERFORMED;
* REVENUE RUN-OFF IS UNDERESTIMATED; AND
* UNEXPECTED DIFFICULTIES AND COMPLEXITIES ARISE IN INTEGRATING BACK OFFICES
AND SYSTEMS.
11. THE NET FINANCIAL BENEFITS ARE RELATIVELY LOW
11.1 DOWNGRADING OF THE POTENTIAL COST SAVINGS
NEDCOR AND STANBIC AGREE BROADLY ON THE POTENTIAL COST SAVINGS IN YEAR 2000
MONEY THAT A MERGER MIGHT BRING. SIGNIFICANT DIFFERENCES EXIST, HOWEVER, ON
REVENUE. NEDCOR HAS REVISED ITS BUSINESS CASE DOWNWARDS IN THE SIX WEEKS
BETWEEN ITS PRESENTATIONS ON 5 OCTOBER 1999 AND 15 NOVEMBER 1999 (IN SPITE OF
18 MONTHS OF PRIOR RESEARCH) AS FOLLOWS:
* LOWER COST SAVINGS;
* HIGHER REVENUE RUN-OFF;
* LOWER REVENUE SYNERGIES; AND
* HIGHER IMPLEMENTATION COSTS.
5 OCTOBER 15 NOVEMBER
1999 1999
R'MILLION R'MILLION
COST SYNERGIES 3 255 3 143
REVENUE RUN-OFF (900) (1 023)
REVENUE SYNERGIES 900 600
NET SYNERGIES 3 255 2 720
11.2 STANBIC'S DETAILED RESEARCH REVEALS THAT ESTIMATES OF THE NET POTENTIAL
BENEFITS ARE APPROXIMATELY HALF OF NEDCOR'S LATEST ESTIMATES
STANBIC NEDCOR 1
(RM) 2002F 2002F
COST SYNERGIES 2 665 3 143
GROSS REVENUE LOSSES (1 318) (1 023)
REVENUE SYNERGIES - 600
PRE-TAX SYNERGIES 1 347 2 720
POST-TAX SYNERGIES
YEAR 2002 MONEY 943 1 905
YEAR 2000 MONEY 839 1 512
NOTE 1
SOURCE: NEDCOR PRESENTATION DATED 15 NOVEMBER 1999.
11.3 REVENUE RUN-OFF WILL BE SUBSTANTIAL
STANBIC NEDCOR
ESTIMATES ESTIMATES
BUSINESS UNIT 2002F (RM) 2002F (RM) 1
CORPORATE 206 192
INVESTMENT BANKING 366 110
RETAIL 747 720
TOTAL 1 319* 1 022
NOTE 1
TOTAL REVENUE RUN-OFF PER NEDCOR PRESENTATION DATED 15 NOVEMBER 1999, SPLIT
BETWEEN BUSINESS UNIT ESTIMATES BASED ON NEDCOR'S PRESENTATION.
* ROUNDING.
THESE ESTIMATES ARE NOT A DOOMSDAY SCENARIO BUT SIMPLE BUSINESS LOGIC BASED ON:
* UNSUSTAINABLE MARKET SHARE IN KEY REVENUE GENERATING AREAS IN THE MERGED
ENTITY;
* THE NECESSITY TO REAPPRAISE EXPOSURES; AND
* THE EFFECT OF MERGED CORPORATE RELATIONSHIPS.
11.4 NEDCOR'S UNREALISTIC REVENUE SYNERGY ESTIMATES
* THERE IS LITTLE INTERNATIONAL OR DOMESTIC PRECEDENT FOR THE REVENUE SYNERGIES
TOUTED BY NEDCOR, WHICH AMOUNTED TO R900 MILLION IN OCTOBER 1999 AND R600
MILLION IN NOVEMBER 1999.
* ORIGINALLY, ALL REVENUE SYNERGIES CAME FROM BANKING THE UNDERBANKED, YET NOW
THEY COME FROM BANCASSURANCE AND "OTHER" UNDEFINED AREAS.
* STANBIC IS DOMINANT IN THE UNDERBANKED MARKET AND GROWING RAPIDLY. NEDCOR
CANNOT IMPROVE OR ACCELERATE THIS.
* BANCASSURANCE IS NOT A MERGER BENEFIT, BUT AN EXISTING STANBIC / LIBERTY
INITIATIVE.
11.5 NEDCOR'S PLAN ADDS NOTHING OR EVEN DESTROYS VALUE IN BUSINESSES
REPRESENTING 55% OF STANBIC'S EARNINGS.
THE BUSINESSES THAT GENERATE OVER HALF OF STANBIC'S EARNINGS ANNUALLY ARE SET
OUT BELOW AND NEDCOR HAS GIVEN THEM LITTLE OR NO ATTENTION IN ITS MERGER PLAN.
LIBERTY
* VALUE-DESTROYING DISPOSAL DRIVEN BY OLD MUTUAL'
SCMB
* POTENTIAL VALUE DESTRUCTION FROM SCMB/NIB MERGER.
AFRICA
* NEDCOR'S JOINT VENTURES BRING VERY LITTLE.
LONDON
* NEDCOR BRINGS NOTHING.
11.6 NEDCOR'S ESTIMATE OF 30% RETURN ON EQUITY IS UNLIKELY TO BE ATTAINABLE
* IN ASSESSING THE MERGER BENEFITS, NEDCOR COULD HAVE MADE THE ERROR OF DOUBLE
COUNTING. MERGER BENEFITS CAN EITHER BE PASSED ON TO SHAREHOLDERS IN THE FORM
OF IMPROVED EARNINGS OR TO CUSTOMERS IN THE FORM OF REDUCED PRICES OR IMPROVED
BENEFITS, BUT NOT TO BOTH.
* A RECENT SURVEY OF THE LARGEST BANKS INTERNATIONALLY HAS INDICATED THAT THE
LARGEST DOMESTIC BANKS ARE RARELY THE MOST PROFITABLE. IN SEVEN OUT OF THE
EIGHT COUNTRIES SURVEYED, THE LARGEST BANK WAS NOT THE MOST PROFITABLE AND IN
FOUR OUT OF EIGHT COUNTRIES, THE LARGEST BANK HAD A ROE BELOW THE AVERAGE OF
THE TEN BIGGEST BANKS. (COUNTRIES SURVEYED: UNITED STATES, UNITED KINGDOM,
GERMANY, FRANCE, ITALY, SPAIN, AUSTRALIA AND CANADA). (SOURCE: BANKSCOPE).
12. THE MERGER GENERATES SUBSTANTIAL RISK
THE KEY RISKS ASSOCIATED WITH NEDCOR'S PROPOSAL CAN BE SUMMARISED AS FOLLOWS:
* BUSINESS RISK: THE PROSPECTS FOR FUTURE GROWTH OF THE MERGED ENTITY WILL BE
SIGNIFICANTLY IMPAIRED.
* IMPLEMENTATION RISK: THERE IS A LACK OF RELEVANT IMPLEMENTATION EXPERIENCE IN
EITHER BANK.
* SYSTEMIC RISK: THERE WILL BE INCREASED DOMESTIC CONCENTRATION.
NEDCOR'S BUSINESS CASE DOES NOT REFLECT ANY PROVISION FOR COSTS ARISING FROM
THESE RISKS AND THUS ASSUMES PERFECT IMPLEMENTATION OF THE MERGER.
PARAGRAPHS 12.1 AND 12.2 BELOW DISCUSS THESE RISKS IN GREATER DETAIL.
12.1 GROWTH PROSPECTS SUFFER
* THE COMBINED MARKET SHARE OF NEDCOR AND STANBIC IS UNSUSTAINABLY HIGH IN MANY
AREAS, LEAVING LITTLE ROOM TO GROW MARKET SHARE IN THESE AREAS SUCH AS THE
FOLLOWING MAINSTREAM EXAMPLES.
PRODUCT MARKET SHARE (%)
TOTAL ADVANCES 36.0
CARDS 53.9
TOTAL DEPOSITS 37.0
CASH, CHEQUE AND TRANSMISSION ACCOUNTS 53.8
* NEDCOR'S OWN ANALYSIS CONFIRMS THAT SMALLER BANKS RETAIN AND GROW MARKET
SHARE.
* THE WORKFORCE WILL BE DISRUPTED AS THE FOCUS SWITCHES FROM EXTERNAL GROWTH TO
INTERNAL IMPLEMENTATION.
* THE MERGED BANK WILL STRUGGLE TO ATTRACT THE NECESSARY SKILLS TO ENSURE
GROWTH AND SUCCESSION IN MANAGEMENT.
12.2 THE IMPLEMENTATION RISKS ARE VERY HIGH
* THE HOSTILE NATURE AND PROTRACTED TIMEFRAME OF THE OFFER INCREASES EXECUTION
RISK TO ALL SHAREHOLDERS.
* NEDCOR DOES NOT HAVE ANY RELEVANT INTEGRATION EXPERIENCE:
* WHEN PERMANENT BANK ("THE PERM") WAS INTEGRATED INTO NEDCOR, 40% OF THE
PERM'S CUSTOMER BASE OF 1,5 MILLION CUSTOMERS WAS LOST. STANBIC HAS IN EXCESS
OF 6 MILLION CUSTOMERS. THE PERM HAD LESS THAN 20 PRODUCTS WHILST STANBIC HAS
OVER 300 PRODUCTS;
* IN THE NIB/UAL/SYFRETS MERGER, HALF OF KEY MANAGEMENT WAS LOST; AND
* IT IS CRITICAL AND NEDCOR AND STANBIC HAVE DIFFERENT IT SYSTEMS. THE SCALE OF
THE EXERCISE IS OVERWHELMING: IT INTEGRATION IN THIS MERGER WOULD TAKE
APPROXIMATELY 1000 MAN YEARS AND WILL TAKE UP TO SIX YEARS IN A COUNTRY WHICH
HAS A MASSIVE IT SKILLS SHORTAGE. THE RISKS OF LESS THAN PERFECT IMPLEMENTATION
ARE SIGNIFICANT. FOR EXAMPLE, IN THE WELLS FARGO/FIRST INTERSTATE HOSTILE
TAKEOVER IN 1996, COMPUTER SYSTEM FAILURES RESULTED IN THE WRITE-OFF OF US$150
MILLION IN LOST DEPOSITS.
* LISTED BELOW ARE QUOTES FROM TWO UNSUCCESSFUL US MERGERS.
WELLS FARGO / FIRST INTERSTATE (HOSTILE TAKEOVER, 1996)
"WE HAD TOO MUCH CONFIDENCE IN OURSELVES AS MIRACLE WORKERS, AND WE DIDN'T DO
IT THIS TIME".
(SOURCE: WELLS FARGO, JULY 28, 1997.)
FIRST UNION / CORE STATES (AGREED TAKEOVER, 1997)
"FIRST UNION APPEARED TO HAVE OVERESTIMATED THE POTENTIAL IT COST SAVINGS THEY
COULD DRIVE OUT WITHIN THE TIME FRAME DUE TO THE UNFORESEEN LEVEL OF COMPLEXITY
INVOLVED".
(SOURCE: WALL STREET JOURNAL, JUNE 1, 1999.)
* MERGERS FAIL EVEN IN IDEAL ENVIRONMENTS WHERE THE MERGER IS FRIENDLY, THERE
IS EXTENSIVE MERGER EXPERIENCE AND THE ACQUIRER IS LARGER THAN THE ACQUIREE.
NEDCOR DOES NOT HAVE THE KNOWLEDGE, EXPERIENCE OR RESOURCES FOR A MERGER OF
THIS SIZE.
13. THE MERGER IS NOT IN THE NATIONAL INTEREST
13.1 THE FALLACY OF THE "NATIONAL CHAMPION" ARGUMENT
NEDCOR MAINTAINS THAT THE MERGED BANK WILL BE A GLOBALLY COMPETITIVE "NATIONAL
CHAMPION". THE MERGED BANK IS STILL SMALL BY INTERNATIONAL STANDARDS AND WOULD
RANK AS NUMBER 155 IN THE WORLD BY TOTAL ASSETS. ITS TOTAL ASSETS WOULD BE LESS
THAN 10% OF THE WORLD'S LARGEST BANK, AND WOULD BE LARGELY RAND DENOMINATED AND
RESTRICTED BY SOUTH AFRICAN EXCHANGE CONTROL REGULATIONS.
13.2 PUBLIC INTEREST ISSUES
* NEDCOR'S SUDDEN INTEREST IN THE UNDERBANKED IS INCONSISTENT WITH ITS PAST
STRATEGY AND NOW EXPEDIENT. IN THE PERM INTEGRATION, 600 000 LOW INCOME
CUSTOMERS WERE SHED.
* THE TAKEOVER WOULD RESULT IN THE PERMANENT REMOVAL OF AT LEAST 10 000 JOBS
FROM TWO COMPANIES THAT ARE HIGHLY PROFITABLE, AND THESE JOB LOSSES WOULD BE
EFFECTED PRIMARILY BY RETRENCHMENT.
* MARKET SHARES OF THE LEVEL THAT WOULD RESULT FROM THE TAKEOVER WOULD NOT BE
PERMITTED IN MOST DEVELOPED COUNTRIES IN THE WORLD.
14. THE NEDCOR OFFER IS INADEQUATE
14.1 WHY YOU SHOULD SAY NO TO NEDCOR
* NEDCOR IS OFFERING STANBIC SHAREHOLDERS ONE OF ITS OWN SHARES IN EXCHANGE FOR
5.5 STANBIC SHARES AND THERE IS NO CASH UNDERPIN TO PROTECT STANBIC
SHAREHOLDERS FROM THE RISKS IN THE TAKEOVER NOR THE DILUTION IN EARNINGS THAT
WILL RESULT.
* NEDCOR'S TAKEOVER OFFER DOES NOT UNDERPIN THE VALUE OF STANBIC SHARES, BUT
SIMPLY DIVIDES THE ENLARGED BUSINESS BETWEEN THE RESPECTIVE SHAREHOLDERS.
* STANBIC SHAREHOLDERS' SHARE OF THE MERGED BANK DOES NOT REFLECT STANBIC'S
CONTRIBUTION TO THE COMBINED ENTITY: STANBIC SHAREHOLDERS WILL HOLD LESS THAN
50% OF THE MERGED BANK, BUT STANBIC DELIVERS 14% MORE EARNINGS (BASED ON THE
I-NET 1999 MARKET CONSENSUS FORECAST EARNINGS) AND 33% MORE CAPITAL (BASED ON
SHAREHOLDERS' EQUITY AS AT 30 JUNE 1999). MOREOVER, STANBIC DELIVERS TO NEDCOR
A UNIQUE GROWTH OPPORTUNITY WHILE NEDCOR IS ATTEMPTING TO ACQUIRE IT ON THE
CHEAP.
* NEDCOR DOES NOT INTEND TO OFFER ANY PREMIUM FOR CONTROL TO STANBIC
SHAREHOLDERS.
* NEDCOR SHAREHOLDERS GET THE REWARD AND STANBIC SHAREHOLDERS TAKE THE RISKS.
NEDCOR GETS GUARANTEED IMMEDIATE EARNINGS ENHANCEMENTS WHILST BENEFITTING FROM
STANBIC'S INVESTMENT IN BUSINESSES WITH SUPERIOR GROWTH PROSPECTS.
* ANALYSTS ESTIMATE THAT STANBIC'S SHORT-TERM EARNINGS GROWTH WILL BE IN LINE
WITH THAT OF NEDCOR.
* OVER THE MEDIUM TERM, STANBIC'S CORE FRANCHISE AND INVESTMENT IN GROWTH
BUSINESSES OFFER SUPERIOR PROSPECTS TO THOSE OF NEDCOR.
THE TABLES BELOW SHOW THE EPS EFFECTS, BEFORE AND AFTER THE TAKEOVER, BASED ON
I-NET'S CONSENSUS FORECASTS AND A 5.5 EXCHANGE RATIO, WITHOUT AND WITH
STANBIC'S SYNERGY ASSUMPTIONS.
TABLE 1
WITHOUT STANBIC'S SYNERGY ASSUMPTIONS.
CENTS/SHARE STANBIC NEDCOR
BEFORE AFTER CHANGE BEFORE AFTER CHANGE
1999 225 - - 1 036 - -
2000 278 257 -7.6% 1 300 1 414 +8.8%
2001 336 311 -7.3% 1 578 1 710 +8.4%
TABLE 2
WITH STANBIC'S SYNERGY ASSUMPTIONS.
CENTS/SHARE STANBIC NEDCOR
BEFORE AFTER CHANGE BEFORE AFTER CHANGE
1999 225 - - 1 036 - -
2000 278 254 -8.7% 1 300 1 397 +7.5%
2001 336 328 -2.2% 1 578 1 804 +14.3%
* TABLE 1 INDICATES THE EXTENT OF THE DILUTION SUFFERED BY STANBIC SHAREHOLDERS
IGNORING ANY EFFECTS ARISING FROM THE TAKEOVER. IN ORDER TO ACHIEVE THE EPS
FORECAST BY INDEPENDENT BROKERS AND SUPPORTED BY STANBIC MANAGEMENT, STANBIC
SHAREHOLDERS ARE RELIANT ON THE NEDCOR MANAGEMENT TEAM DELIVERING THE EXPECTED
RESULTS AND PRODUCING MERGER BENEFITS.
* ON THE BASIS OF STANBIC'S OWN SYNERGY ASSESSMENT, AS SHOWN IN TABLE 2 ABOVE,
EPS BREAKEVEN WOULD STILL NOT BE ACHIEVED BY 2001. IT SHOULD ALSO BE RECOGNISED
THAT THESE ASSUMPTIONS DEPEND ENTIRELY UPON PERFECT IMPLEMENTATION OF THE
MERGER, WHICH, GIVEN ITS HOSTILE NATURE, MUST BE SUBJECT TO CONSIDERABLE DOUBT.
* IN TAKEOVERS, WHERE IMPLEMENTATION IS THE RESPONSIBILITY OF THE ACQUIRER, ITS
SHAREHOLDERS WOULD NORMALLY BE EXPECTED TO BEAR THE EXECUTION RISK. IN THIS
SITUATION, THE REVERSE IS TRUE.
15. TIMING
THE POTENTIAL TIMING OF THE PROCESS IS LIKELY TO BE PROTRACTED, AS SET OUT
BELOW.
REGULATORY APPROVALS 2 - 3 MONTHS
AND THEN
LAUNCH OF PARTIAL OFFER 2 MONTHS
AND THEN
LAUNCH OF SCHEME PROCESS 2 MONTHS
AND THEN
POTENTIAL LAUNCH OF UNCONDITIONAL OFFER 2 MONTHS
PERHAPS A 6 TO 9 MONTH PROCESS
16. STANBIC SHAREHOLDERS SHOULD TAKE NO ACTION
THE POTENTIALLY LONG TIMETABLE FOR THE PROCESS MEANS THAT STANBIC SHAREHOLDERS
HAVE A VALUABLE PUT OPTION AGAINST NEDCOR FOR THEIR SHARES. ACCORDINGLY,
STANBIC SHAREHOLDERS NEED NOT TAKE ANY ACTION UNTIL A FINAL, UNCONDITIONAL
OFFER IS MADE.
17. CONCLUSION
STANBIC IS A DIVERSIFIED BUSINESS THAT IS BUILT TO DELIVER VALUE IN THE FUTURE
AS WELL AS TODAY, WHILST NEDCOR IS RUNNING OUT OF ROAD AND SEEKING TO BENEFIT
FROM STANBIC'S INVESTMENTS.
IT IS THE VIEW OF THE STANBIC BOARD THAT THE POTENTIAL MERGER BENEFITS HAVE
BEEN OVERESTIMATED BY NEDCOR AND SUCH BENEFITS ARE OUTWEIGHED BY THE
IMPLEMENTATION RISKS IN A HOSTILE ENVIRONMENT.
STANBIC ALONE WILL DELIVER STRONG EARNINGS GROWTH AND VALUE APPRECIATION WHILE
NEDCOR'S INADEQUATE AND HOSTILE OFFER DELIVERS A CUT IN EARNINGS, SUBSTANTIAL
RISK AND POTENTIAL VALUE DESTRUCTION.
ACCORDINGLY, GIVEN THAT THE STANBIC BOARD STILL BELIEVES THAT THE TERMS OF THE
PROPOSED TAKEOVER OFFER INDICATED BY NEDCOR ARE UNACCEPTABLE TO STANBIC
SHAREHOLDERS AND THAT A REAL OFFER MAY NEVER MATERIALISE, THE STANBIC BOARD
ADVISES THAT SHAREHOLDERS SHOULD TAKE NO ACTION UNTIL THE OUTCOME OF THE
REGULATORY APPROVAL PROCESS IS KNOWN AND A REAL OFFER IS FORTHCOMING.
JOHANNESBURG
25 NOVEMBER 1999
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