Tower report finds need for $35 million upgrade

Core systems replacement costs revealed in partial takeover report

An independent expert's report into a proposed partial takeover of Tower Limited has revealed that the Australian Securities Exchange-listed, New Zealand-based financial services firm will need to spend up to $35 million upgrading its information systems.

The upgrade is expected to take place in the next three years and comes as banks, insurers and wealth management firms in Australia and New Zealand brace for the costly replacement of many of their ageing core systems.

The project, which will require capital expenditure of between $25 million and $35 million, was disclosed in a Grant Samuel report that was issued as part of a Tower's target's statement in response to Guinness Peat Group's proposed partial takeover of the company.

GPG's GPG Twenty One division has bid to acquire 15.3% of Tower Ltd for A$2.30 per share, a price that the target's board last week said shareholders should not accept.

The recommendation was made after Grant Samuel valued the company at between A$2.45 and A$2.89.

GPG already owns 19.7% of Tower, which separated from Tower Australia Group in late 2006.

Tower yesterday released the report to the ASX, revealing that the company was preparing for a major information systems replacement program that would phase out a number of its older technology platforms.

"Tower management have identified the need to replace the various IT systems and move all businesses within New Zealand to a single IT platform," Grant Samuel representatives wrote in the report.

"Grant Samuel has made a provision for the substantial increase in capital expenditure over the next three years on the basis that it is anticipated that the [Tower] board will approve the investment and Tower will proceed to build a new IT system."

The cost of the project could range as high as $35 million, but Grant Samuel indicated it should also provide cost benefits to Tower through the consolidation of some computing and communications platforms.

"The expenditure will yield cost savings and performance advantages," according to the report.

"As with all IT implementations, there is a risk that the business is compromised if the solution is not installed effectively."

The challenge is similar to the hazards that financial services firms such as Suncorp and Commonwealth Bank of Australia are facing as they work to replace legacy applications that are in some cases as much as 20 years old.

CBA last month revealed that it would spend A$580 million in three years to modernise its core systems, and Suncorp is in the midst of a major overhaul of its computing platforms that was spurred by the need to better integrate its operations with Promina.

The Suncorp upgrade is being carried out under a broader, A$161 million information technology integration programme that the insurer hopes will help to deliver about A$325 million in annual savings.

— Australian Financial Review

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