Westpac Banking Corporation is facing an information systems integration bill of more than $220 million but would shave at least $43 million a year off its computing and communication costs under its proposed $18.6 billion acquisition of St George Bank. The bill could rise even higher if Westpac used the integration as an excuse to replace its ageing core business systems, but broad similarities between the acquirer's computer platforms and its target's could also dull some of the potential for pain in the merger.
ABN Amro analyst Jarrod Martin said that information technology integration was one of the most sensitive aspects of the tie-up, and noted that half of the estimated $451 million pretax integration bill would stem from welding the banks' computer systems together.
"Half would be a rough rule of thumb," he said. "If there is a big platform refresh a la the Commonwealth Bank, there would be additional on top of that."
Commonwealth Bank of Australia said last month it would spend $580 million over three years to replace its core transactional systems, and all Australian banks are under pressure to do the same.
Mr Martin said it was likely that Westpac would face a similar core systems replacement bill to CBA's and noted that a decision to refresh computing technology had helped take the total cost of integrating insurers Suncorp and Promina to $375 million.
He said Westpac should strip about 30 per cent out of the computer and communications costs of St George as it renegotiated contracts with suppliers and achieved greater economies of scale.
"You've got more scale and negotiating power, so that normally gives you 10 to 20 per cent in itself," he said.
According to UBS, the banks' combined computing and communications technology and services expenditure during the first half was $421 million, comprising $349 million for Westpac and $72 million for St George.
But synergies would only come from St George's IT cost base, Mr Martin said.
Westpac is expected to detail its anticipated integration costs and synergies in the next two weeks, but it is under pressure to extract savings from information technology after it took cuts to the number of branches and ATMs it operates off the table.
Chief executive Gail Kelly said last week that information technology, property, procurement and head office functions would all come under the knife, although it was too early to estimate the cost of the merger or any savings.
She did, however, acknowledge that information systems integration would pose serious risks and said she was counting on Westpac's technology chief, Diane Sias, and retail banking head Peter Clare - a former St George information systems boss - to lead it through the complex task.
"We are fortunate to have within our organisation some excellent strength and experience in integration and in IT elements of integration," she said.
"Diane Sias, for example, who is the group executive responsible for IT and operations within Westpac, has formerly done an integration here within Westpac and more recently she has been working with the McKinsey group in New York running their integration practice.
"We also have Peter Clare as part of our team and he ran and managed the integration program between Commonwealth Bank and Colonial."
In a research note, Merrill Lynch said Mr Clare would be well placed to advise on information systems integration and cost synergies.
But one analyst, who asked to remain anonymous, suggested that the proposed merger would accentuate instability within Westpac's senior information technology executive ranks.
Westpac recently confirmed that it had made some adjustments to the tasks chief information officer Simon McNamara and chief technology officer David Backley performed, but there were no signs of a widespread management revamp.
A combined Westpac and St George, however, would be heavy with senior technology executives and it is likely the bank would have to thin their ranks.
The executives include Ms Sias, Mr McNamara, Mr Backley and St George's freshly minted executive in charge of group technology and operations, Paul Newham, who was appointed to the position on Friday.
In addition, a number of jobs within Westpac's and St George's IT departments would also face the axe.
Heavily outsourced Westpac employs about 1200 information technology workers, while St George's computing and communications department boasts 700 staff, proportionately high for an organisation of its size.
St George has recently increased the volume of work it gives to external suppliers, and IBM has emerged as one of its key service providers.
IBM also handles outsourced information technology services for Westpac under a 10-year, $4.3 billion contract, putting it in the box seat to pick up lucrative integration work but also leaving it a likely victim of cost cuts.
IBM, whose Westpac contract expires in 2010, declined to speculate on the impact the planned merger would have on its operations.
"Westpac and St George are significant clients of IBM Australia and we have had long-term relationships with them both. We provide a broad spectrum of products and services and play an important role in enabling them to leverage information technology to deliver service to their customers," an IBM representative wrote in an emailed response.
"Until the outcome of merger discussions are known, IBM will continue to support both organisations within the scope of our current arrangements."
Just as Westpac and St George share a technology services supplier, the banks also have much in common on a technical level, and that would help smooth the integration of their IT operations.
Both use a similar array of computer operating systems, databases and customer management technology.
"Clearly, they will immediately look for opportunities to rationalise the platforms. There will also be opportunities around things like contact centres and other areas which are more readily integrated," the managing director of information technology consultancy S2 Intelligence, Bruce McCabe, said.
"But in terms of core banking applications like mortgages and product support, that's a long and expensive road. It would take many months just to do the auditing just to work out your priorities, let alone start the work.
"It's impossible to exaggerate the scale of the work involved if they decide to go top to bottom, rationalise everything and eliminate duplication."
While the banks use similar systems, it is common for large organisations to heavily customise versions of software to suit their own operations, meaning that tweaks must even be made to similar applications before they will fit together.
The banks also diverge in one key area, telecommunications, where Westpac is mid-way through a five-year deal with Telstra while St George recently signed a $100 million deal with Optus.
It is expected that one of those contracts would be axed following a merger of the banks.
Similar but different
How Westpac's and St George's IT systems line up
Costs & savings
Total integration: $451m
IT integration: $225m
Total synergies: $450m
IT savings: $43m
Westpac head of retail banking: Peter Clare
Westpac group executive, business & technology solutions & services: Diane Sias
Westpac chief information officer: Simon McNamara
Westpac chief technology officer: David Backley
St George group executive, group technology & operations: Paul Newham
Information systems and suppliers the banks have in common include databases, customer software and business intelligence technology from suppliers such as IBM, Oracle, Microsoft, EMC and Cognos. But they use different telecommunications suppliers and one is likely to lose out.
Source: ABN Amro, MIS Magazine
Fairfax Business Media
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