5 minute read 18 Nov 2019
helping a fellow climber

How to enhance M&A deal value in the wealth and asset management sector

Aaron Byrne
By Aaron Byrne

EY US Financial Services and Strategy and Transactions Principal

Expert in advancing the client's capital strategies and future vision. Adept in building strategy and executing M&A, divestiture, joint venture transactions and new entity stand-ups.

Contributors

Brian Salsberg

5 minute read 18 Nov 2019
Related topics Strategy and Transactions Mergers and acquisitions Wealth and asset management
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As wealth and asset managers use M&A to stay ahead of disruption, CEOs must demonstrate sound M&A integration strategies to maximize deal value.

The wealth and asset management (WAM) sector is undergoing unprecedented levels of change driven by evolving demographics and customer expectations, ongoing technological disruption and globalization. To remain competitive, sector incumbents are acquiring firms for new or complementary capabilities. According to EY analysis of global WAM deal data, in the first nine months of 2019 alone, both deal volume and value have already surpassed the strong performance in 2018. There were 291 deals with a total disclosed deal value of US$18.9b, up 17% compared with the same period last year.

This robust set of M&A data is consistent with the findings of our most recent Global Capital Confidence Barometer, where more than half of WAM executives surveyed say they’ll pursue M&A in the next 12 months as part of a multi-faceted growth strategy.

M&A synergy tips for wealth and asset management companies

Though the strategic rationale for an acquisition may be clear, capturing synergies within a planned time frame can be difficult. The first step in maximizing M&A deal value is to have a clear understanding of synergy sources and realistic timelines even before the deal is announced.

  • Build an ecosystem to internalize customer demand but be clear on when and what to cross-sell. WAM players are buying targets to create financial ecosystems that can help retail clients get control of their fractured financial lives. This strategy can capture substantial client wallet share by providing end-to-end financial solutions and internalizing all relevant demand. To drive these revenue synergies, acquirers must ensure that the type of growth (e.g., revenue versus assets versus specific customer segment) the target provides fits the overall vision of the company. 
  • Bundle complementary offerings while retiring subscale solutions. Merging firms must maintain a dispassionate approach about which solutions should survive post-close, as subscale offerings will continue to require valuable resources. Fund rationalization is a key focus area in the M&A integration of asset managers but often requires careful planning to ensure that investors are not adversely impacted and to ensure that appropriate approvals are received (e.g., from fund boards and regulators).
  • Leverage analytics to drive focused selling. Some of the most significant synergy value in WAM deals is the ability to cross-sell products, and this can be boosted by performing predictive data analytics about customers. For example, buyers can leverage disparate customer data following an acquisition and, if applicable, augment this with social media data to create customer profiles. This will allow the integrated business to develop digitally driven custom campaigns for specific segments and customers. Of course, confidentiality and privacy considerations may affect the ability to capitalize on these synergies and need to be evaluated based on the specific circumstances. 
  • Enhance existing distribution capabilities. Complementary distribution capabilities can drive synergies over time by enhancing digital enablement, providing new opportunities for cross-selling products and driving an integrated advice delivery model. If an acquired distribution mechanism might disrupt current channels, field teams may need to be restructured or a separate value chain may need to be created to minimize that risk.
  • Reduce your corporate overhead and shared services footprint. Considerable synergies can be achieved by de-layering redundant corporate overhead and shared services. Indirect procurement, simplified location footprint and shared services vendor optimization can also produce early high-value cost synergy realization. 
  • Drive economies of scale in the middle and back offices. In any large-scale asset management transaction, management should aim to achieve economies of scale by rationalizing investment platforms, fund administration, custody arrangements and merging middle office teams. Consideration must also be given to third-party administration (TPA) and platform provider contracts that typically have long durations and significant exit fees.

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Mitigate the key hurdles in realizing synergies

Given typical deal velocity and confidentiality, the leadership driving any deal is normally unable to bring executives focused on execution into the tent. This creates a disconnect between executives who anticipate synergies and those the execution team is willing and able to deliver. People on both sides of the deal will need to take steps to avoid these and other challenges that may arise during the process. 

  • Clarity of investment philosophy. Merging businesses may espouse different investment philosophies. While it is possible for a single house to have multiple investment strategies, investors and market participants will expect to see a coherent, overarching house view. Lack of clarity on the investment proposition can lead to AUM outflows and can be a significant inhibitor to progress on downstream activities relating to operational integration and the realization of synergies. 
  • Identify leaders in the distribution channel to design change adoption strategies. Financial advisors (FAs) in WAM firms tend to be leery of efforts to acquire digital direct-to-consumer platforms and robo-advisor capabilities, as these threaten disintermediation in the future. This can restrict digital solutions and the cross-selling opportunities they afford, which can either impede the growth trajectory or kill the adoption of new solutions altogether. Leaders from the distribution channel can help design and execute change adoption strategies that will supercharge adoption rates.
  • Be clear about the need to simplify the technology footprint. Technology synergies can be difficult to achieve due to the complexity of legacy systems, the challenges of platform migration and long-term contracts with technology providers, which may contain onerous exit clauses. Leadership must send a clear message to the organization about the need to simplify legacy systems, as well as expected timelines. Additionally, business, finance and technology teams must determine the best path for new technology adoption and a legacy technology sunset road map.
  • Key employee retention is critical to the success of WAM transactions. Key client relationships and knowledge of certain asset classes may be concentrated in a small number of individuals. Significant AUM outflows have been experienced in recent transactions, where star fund managers have left the business once the deal was announced. Retention of key talent is vital to the preservation of value.
  • Assess the cultural gap and deploy suitable M&A integration strategies on both sides. Cultural differences can produce opposing long-term strategies as well as impede day-to-day execution. For example, targets that are smaller and have a startup mentality are typically used to agile delivery and quick decision-making; individuals on these teams may not appreciate the methodical approval process required by the buyer. These types of situations can ultimately lead to tension between the joint delivery teams, negatively impacting revenue creation and cost synergies alike. Depending on the scale of the acquisition, management should conduct an in-depth cultural gap assessment and deploy strategies for acquirer and target teams to determine the most successful way to work together.

Summary

Identifying and realizing M&A integration synergy is a challenge for even the most experienced business managers and continues to be key to successful deal execution. WAM deal managers must cast a sharp eye on the link between the deal rationale and potential synergies, within the envisioned timeline. This rationale is simple, given the market trends: outsized deals are primarily focused on realizing cost synergies with bolt-ons driving the growth agenda. If growth becomes sluggish, that rationale will become more complex. Deal managers must maintain unwavering focus on synergy opportunity areas and corresponding challenges working against successful synergy realization.

About this article

Aaron Byrne
By Aaron Byrne

EY US Financial Services and Strategy and Transactions Principal

Expert in advancing the client's capital strategies and future vision. Adept in building strategy and executing M&A, divestiture, joint venture transactions and new entity stand-ups.

Contributors

Brian Salsberg

Related topics Strategy and Transactions Mergers and acquisitions Wealth and asset management
Upvote