2017 was a banner year for M&A in global asset management. The tempo has eased somewhat this year. But there is a big difference between the latest wave of M&A and the wave that happened around the turn of the millennium. In many cases, skills as well as scale or market position were the primary driver. In a separate track, team lift-outs have been common.
In contrast, some of the biggest deals in the past were driven by empire building. The outcome was the ‘winner’s curse’: value destruction for the shareholders of the acquiring firm. Many combined firms were inherently unscalable due to cultural mismatches and organisational complexity – and they remain so today.
In hindsight, crunching businesses together proved to be mission impossible. After acquisition, the whole had to be worth more than the sum of its parts.
This has been the exception rather than the rule in the numerous deals I have studied over the past 20 years. Size invariably jacked up costs when firms became too complex to manage efficiently. Many were forced to unscramble or de-merge.
There were no shortage of economies of scale; there was a shortage of management will and the ability to extract it in what is a people business. Deals that slaughtered sacred cows were rare, as were deals that were able to retain the best talent of the combined entity cost effectively. Built around key individuals, the operating models were often exposed to the upward repricing of skills.
In contrast, successful deals had five common threads. First, their senior executives had crafted a sound business case for acquisition that was closely scrutinised by the movers and shakers involved in the integration process. Second, senior executives walked the talk in order to get the necessary buy-in from key staff in every area of the business. Third, jobs were allocated within days of the mergers. Fourth, core decisions on product synergies and cost savings were announced at the outset, with clear timelines and individual accountabilities. Finally, operating models had a strong client focus and meritocratic incentives.
These lessons have shaped the thinking of the new generation of top executives. Their approach to M&A is far more hard-nosed than their predecessors’, who were readily swayed by the big-can-be beautiful argument. But that is not the same as saying that the current wave of M&A can transform the asset industry. It is focused far more on profitability and the survival of asset managers in the face of the relentless rise of passive investing, and far less on radical changes in the existing business models.
If you subscribe to the FT, please see my article of 30th November 2018 for more details.