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LNK – ACCC gets it wrong

Link Group’s specialty is the administration of large superannuation funds to provide a low cost service per member. Two years ago, it won the Superpartners business of five large industry superannuation funds for this very reason.
With about 30% market share in Australia, LNK is keen to increase its business both organically by winning new business from less efficient administrators and through acquisition of similar businesses.
The NSW Government is likely to sell its superannuation administration business, called Pillar and Link has indicated that it is interested in acquiring it. As part of that process, Link advised the ACCC (Australian Competition and Consumer Commission) that it had expressed an interest in acquiring Pillar.
All good so far.
But the ACCC is not happy. In its response to LNK’s announcement, the ACCC has initially decided that the acquisition of Pillar by LNK would be likely to substantially lessen competition in the supply of superannuation administration services.
Indeed, the ACCC thinks that Pillar is the only alternative superannuation administration services provider in the market that is able to compete with LNK.
The ACCC hasn’t done its homework because it seems to have overlooked the fact that nearly 60% of the superannuation administration market is conducted by in-house providers such as the AMP Superannuation Savings Trust and The Universal Super Scheme owned by NAB. In fact, eight of the top ten superannuation administration funds are in-house managers accounting for nearly 35% market share.
Mercer and other smaller businesses also compete in this market.
In addition, the ACCC’s admission that it “is seeking to better understand the barriers to entry or expansion” in the market reveals that is has failed to think about the business model.
LNK’s advantage over its competitors, especially the in-house providers, is that it is the most efficient operator and can therefore provide a lower cost of service per member – a crucial factor that allowed LNK to win the Superpartners business.
Understandably, the ACCC has got its calculator out and decided that if LNK lifts its 30% market share by acquiring Pillar’s 4% share, then the logical conclusion is a lessening of competition and a possible reduction in service and/or increase in prices.
But the opposite is likely to occur.
For LNK to win new business and retain existing business, it must continue to increase service to members and not increase its prices.
That is why LNK spends more than $100 million a year on information technology to continuously improve its capability to handle large numbers of members more efficiently than its competitors.
The share price reaction to the potential block by the ACCC is therefore an opportunity to buy the stock. Once the company has a chance to present its case, the ACCC cannot logically sustain its current position.

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