M&A – IDENTIFYING OPPORTUNITIES AND VALUING THEM

Headlines:

• Valuations in the current M&A wealth management industry are close to highs.
• The new wave of Fintech acquisitions is exciting for the industry but there needs to be caution, Fintechs need to be well-matched with the strategic direction of the acquirer.
• Acquirers of wealth businesses need to consider staff, culture, management, shareholders and critically a client’s perspective.
• Private equity firms like the wealth management sector because there is a perception that there is more room to create efficiency post-acquisition.

Key issues and challenges:

• There are more buyers than sellers in the wealth management M&A space, which means deals are more often than not at a premium valuation.
• This high valuation perception is based on strong assets, turnover and profit multiples.
• Wealth management is still a very fragmented industry and this attracts private equity companies. The deals typically have a 3 to 6 year business turnover horizon, an interesting contradiction given that wealth management businesses are modelled on long term relationships.
• The private equity businesses like wealth managers because there is “a lot of fat that can be cut from the business model”. It is about engineering a more efficient business through technology, digitisation and injecting some new ideas.
• An important consideration for private equity companies considering a deal is the role of the CEO. In the case of a merger or takeover, “the business needs a CEO that is up for the fight”. That is the challenge and in many cases, the right type of CEO is few and far between. Some businesses for example have had a higher turnover of CEOs during the M&A and subsequent integration process than in previous years. “In the Fintech (financial technology) space valuations are even more phenomenal – profit multiples are alarming”
• Good examples are Schroder’s recent Fintech acquisition in this space and other deals by Investec, Aviva and Blackrock. The question then becomes, how do you realise the high valuations of these acquisitions?
• It is important to first understand where the Fintechs are coming from – what types of leader do they have, what business are they and what business would they like to become. For Fintechs the strategy and cultural challenge are the hardest fit because it involves wealth professionals and entrepreneurs combining at the core.
• Often it is more advisable to have a strategic partnership where the Fintech could begin as a strategic partnership, followed by an incubator and then fully fledged partnership, then perhaps even a buyout.
• The key considerations critical for a strong Fintech partnership are understanding a) the industry that they operate in b) the problem they are trying to solve and c) the value they are trying to add as much as any cultural and strategic rationale considerations.
• Deals in wealth management are typically struck to tie bankers and relationship managers in to the bank and business for a period of time. “It can be difficult to get people to go to a house they don’t want to go.” Therefore it is important to address this by talking to the employees in the right way at the right time. There is often a 2-3 year lock in period and sometimes with a proceeding 5 year lock out.
• Wealth managers typically pay a premium for people and systems. There is also perceived value from a business withdrawing from a market or with a cleaner book of business, for example the C. Hoare and Cazenove deal – the business had no skeletons in the closet. “Surprisingly, 50% of deals do not get close to meeting the initial expectations of the deal.”
• The reason for this is often that synergies and economics of scale are never realised. A hindrance for deal completion is when the deal itself falls through.
• This is why the due diligence process is so critical. A large number of deals do not complete as a result of undiscovered details late in the M&A process. Flushing out these details early on would help the overall process success rate and determine earlier on if the deal can complete or not. “Sometimes you get what you didn’t expect to get. Client integration and cultural issues specifically therefore cannot be overestimated as in the example of the Rathbones and Smith Williamson proposed deal.”

Conclusions and solutions:

• It is important to consider shareholders, management decision making, client integration and the people or cultural fit.
• M&A deals are not just implementation exercises but must also incorporate best practice post-purchase integration for the clients, the people and the infrastructure.

 Expert: Farer & Co