Westpac Banking Corporation has revealed a number of early targets for information and communications technology cost savings from its proposed $18.6 billion acquisition of St George Bank. Westpac also said it would aim to pump up investment in computer systems following the merger, which would lead to the introduction of common IT across the combined business.
But Westpac yesterday put outsourcing and telecommunications companies on notice that they were prime targets for cost cutting after it highlighted potential savings from almost $5 billion worth of contracts that are due to expire in 2010.
The contracts include IBM Australia's $4.3 billion computer services agreement with the bank, signed in 2000, and a five-year, $400 million Telstra telephony deal that dates from 2005.
The bank did not provide details of the scope of cost savings it expected it could reap from the strengthened buying power it would enjoy after a merger with St George, but it said it would benefit from the renegotiation of its IT and communications outsourcing contracts.
IBM also works closely with St George, where it is redeveloping computer systems within the takeover target's Asgard wealth management business - meaning the outsourcing giant is likely to face price pressure from a number of sides.
However, as a major supplier to both Westpac and St George it is also well placed to pick up potentially lucrative IT integration work should the merger go ahead.
Analysts have suggested that IT integration would account for approximately half of the cost of merging the two banks.
ABN Amro previously tipped that Westpac would need to spend close to $225 million to bring together its and St George's information systems.
But that expense could now come in significantly higher after Westpac yesterday said it was allowing for $700 million in integration and transaction costs.
The bank also said it was expecting to rip between 20 per cent and 25 per cent out of St George's cost base, which would put in on track to extract about $36 million in computer and communications savings from the organisation. The figure is slightly lower than ABN Amro's forecast in mid-May that St George's annual computer and communications bill could be reduced by as much as $46 million.
Westpac has also indicated that it may shelve some projects as a result of the merger, allowing it to reduce IT capital investments that it had previously assumed it would need to make.
The company said yesterday that the merger might allow it to scrap plans to build a new disaster recovery facility that would back up its computer and communications systems.
For an organisation the size of Westpac, the bill for building a new disaster recovery site could run into the tens of millions of dollars once the cost of real estate, equipment, communications links and labour are accounted for.
Westpac also expects to reduce operating costs across the combined group by sharing processing and support systems.
The bank's chief executive, Gail Kelly, acknowledged a fortnight ago that smooth IT integration was the key to the overall success of the St George merger.
And analysts have warned that missteps would have the potential to turn customers away from the business.
But it remains unclear which Westpac and St George computing and communications executives would sit on a proposed 10 person integration team that would comprise an equal number of representatives from each bank.
Fairfax Business Media
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