Dialogue: A&E: Big fish need bigger pond to thrive

By ROSANNE MEO*

Not long ago the Australian media were preoccupied with the migration of one of the nation's largest companies, the resources giant BHP.

The prospect of this huge industrial icon moving its corporate base abroad, as a result of a merger with the British-based group Billiton, was a cultural shock for many.

However, as the process took hold, it became increasingly recognised that although BHP Billiton would continue to have a substantial natural base in Australia, its long-term success required it to be part of a vast global resource network.

Being Australia's largest mineral company was simply not enough.

To many New Zealanders, this is an all-too-familiar story. It was with almost a sense of relief that we were reminded New Zealand is not alone in facing issues of migration.

In fact, many countries throughout the world struggle to find appropriate niches for themselves to compensate for their size and location.

The plain fact for New Zealanders is that we live in a small, isolated nation with a population of around 3.8 million - the same as Sydney.

Fast-growing companies inevitably reach capacity quickly in this market and must decide where their next growth opportunities lie.

For many, the proximity and capacity of the Asia-Pacific region beckons, making it a logical place to expand.

It then comes down to how each company approaches its regional development. There is no one-size-fits-all answer here.

Take Fisher & Paykel and The Warehouse Group. Both have made a conscious decision to develop on their own and, in doing so, retain their head offices in New Zealand. Fisher & Paykel has set up overseas subsidiary operations, and The Warehouse has acquired assets in Australia.

We at Baycorp, however, have chosen a different path. It became clear to us early on that if we were to maintain our strong growth, we needed to expand overseas.

But for us, going out on our own seemed too risky. We had tried this 10 years ago and the strength of our counterpart in Australia, Data Advantage, just exacerbated the risk.

Our preferred strategy was therefore to enter new markets through partnerships and alliances. After several years of forging closer links with Data Advantage, we decided to merge. Last week we announced the formation of Baycorp Advantage.

In doing so, we have had to address the issue of domicile.

For purely commercial reasons, we made the decision to base the merged group in Australia, which, from a capital markets perspective, offered more opportunity than the smaller New Zealand market.

It not only gives access to a wider range of investors, it also gives us more ability to raise capital for expansion, should it be required.

Furthermore, Australian companies trade on higher price-earnings ratios than New Zealand companies. This optimises value for shareholders present and future.

Another important consideration was that around 60 per cent of the merged company's shareholders are based in Australia.

There are obvious advantages under present tax laws in having the same domicile as the major shareholders, for example with the issue of franked dividends.

This would not be an issue if there were tax harmonisation between both countries that allowed Australia-based companies to pay out imputation credits to New Zealand shareholders (and vice versa for New Zealand companies).

In fact, forming a single economic union with Australia would level the playing field and focus attention on value creation, not sovereignty.

This would help companies in industries where regional expansion is essential, such as Telecom, Air New Zealand and our major financial services companies.

Baycorp itself is in such an industry. As companies go global, they require global companies to service them. Indeed, a reason for Baycorp's move into Australia is so it can better service the requirements of its existing customer base.

If Baycorp is to maintain its record on increasing shareholder wealth, it cannot resist this trend.

The need for some companies to migrate overseas should be viewed as a simple commercial fact of life for a country of our size.

Successful companies inevitably reach a size when they must look beyond our shores for growth. Such expansion requires capital, which will increasingly come from international funds. This is exactly what is happening to Baycorp.

So although it is moving its head office across the Tasman, this should not be seen as a snub to New Zealand.

Rather, it should be viewed as a natural evolutionary process - the export of a successful formula.

* Rosanne Meo is chairwoman of Baycorp.