Yesterday, I noted the poor track record of Australian businesses attempting to expand overseas. I forgot to mention that even our Big Fella is not exempt. BHP Billiton Limited (ASX: BHP) lost billions in shareholder value in their Magma foray in the nineties.
The history of disasters suggest that any investor betting on successful overseas expansions by ASX listed companies is engaging in a low probability bet. Having said that, the bounty that comes with success is mouth-watering. Just ask any long-term Flight Centre Limited (ASX: FLT) shareholder.
Shareholders of the major ASX listed banks must now consider the exact same issue. Having reached saturation and with limited growth prospects in the domestic market, our big four banks are all looking towards further growth by expansion. Rather than attempting to pick the winners, we suggest that investors should consider which of the banks embarking on expansion is least likely to destroy value.
Today, we examine and compare the strategies of Australia and New Zealand Banking Group (ANZ) and Commonwealth Bank of Australia (ASX: CBA).
ANZ – super-regional
ANZ CEO Mike Smith has been beating the Asian expansion drum for the last 4 years. The author is puzzled as to how a team of ex-HSBC executives running an Australian bank can succeed in the tough Asian market, especially since the venerable HSBC has continually found it tough in China.
To identify the magic ANZ sauce, we looked at the ANZ's CEO Address of 16 Dec 2011:
"This reflects our strong belief that a portfolio diversified by geography, by customer segment and by product will deliver differentiated revenue growth and long-term shareholder value –growth and value that are simply not available with a domestic only strategy."
The message here appears to be that having many fingers in many pies is better than having one full hand in a single pie.
We then looked at the Group Strategy Update published on 18 March 2012. ANZ's strategy is to capture a part of the growing Asian market and become a leading super-regional bank. The update referenced a "consistent coherent strategy –connectivity driving competitive advantage." There is a mention of cross-border customer focus, technology and operations hubs, "throw and catch" capability and culture, and a whole lot of other fancy ideas.
I concluded that there will always be things which I cannot understand. My best attempt at a plain English translation is this:
"We believe very strongly that Asia is where the big money is to be made. Asia is growing strongly whilst the West is going backwards. We do not want to stay in Australia only. We want to go into all these Asian countries and become a super regional bank with a presence everywhere. Our strength is in having a tentacle in every part of Asia- connectivity and cross-border."
CBA – a logical continuation
Commonwealth Bank published its Group Strategy Update on 19 April 2012. The heading is tellingly succinct- A Logical Continuation. CBA identified its competitive edge in three areas – application of technology to financial services, customer focused culture and a strong balance sheet. CBA's strategy is to improve its competitive edge i.e. widening the moat.
By improving its competitive edge, CBA aims to grow the domestic retail market through identifying unmet needs and by improving productivity. A recent example is its mobile payment app called Kaching. Improving its competitive edge also underpins growth outside Australia, by transferring existing capabilities and value-adding. CBA also emphasized "a disciplined approach" to mergers and acquisitions and a "focus" on return on equity.
The translation into plain English appears to be:
"We are good at technology, customer service and financial discipline. We will continue to improve these areas. Some of our expertise can be used in markets outside Australia. We will not expand just for expansion's sake. Anything we do must benefit shareholders financially, which requires a good return on shareholder capital."
Two different strategies – one loftier, the other less aggressive and perhaps with less upside (and less put at risk). A (perhaps rhetorical) question: If management is unable to deliver a clear message to the investment community, what are the chances of management being able to deliver a clear message to its employees?
The mere fact that a strategy was communicated clearly does not guarantee that the strategy will work, or that the strategy will be executed in the manner as communicated.
However, a strategy that is not communicated clearly is not capable of being executed, much less being successful.
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The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool's disclosure policy.