M&A and Them and Me

For those of us involved in investment management professionally, consolidation has been an ever-present.

Before the financial crisis, the old fashioned stockbroking model was giving way, open outcry trading conceded to electronic, the 3pm booze trolley was beginning to look outdated and mergers were par for the course as traditional firms found solace in each other’s company…literally. In fact some of the double and triple barrelled household names of today have that conciliatory period to thank for their very being.

Post the financial crisis, those with resilient balance sheets revved up their acquisition engines and sought to book build though inorganic means as organic growth opportunities had seemingly all but evaporated. And those less fortunate or able to deal with the ripple effects, including the mounting cost of compliance that came in the years that followed, graciously offered themselves up for sale.

Some of us, no doubt, have been involved either directly or indirectly in some such coming together, but almost all of us will have been impacted by it.

Whether you’re a headline making transaction; a la the blockbuster Standard Life / Aberdeen coupling that’s dominated the new cycles for the past few weeks, or a smaller one; Close Brothers latest IFA acquisition (Coventry-based Adrian Smith & Partners if you hadn’t heard), the implications for the shareholders may not quite align to the implications for either firms’ customers. And it’s the latter that doesn’t seem to get the right amount of airtime.

Clearly entities like the Competition & Markets Authority, the Takeover Panel, and the FCA provide the necessary oversight and adjudicate from the perspective of the end consumer, which they do to great effect. But whilst there is safety in knowing the ‘i’s are dotted, the‘t’s are crossed and the wool isn’t being pulled over our eyes, it’s still extremely hard to discern exactly what these deals mean for investors.

Let’s start with the most blatant illustration of what I’m talking about ….any cost savings will never make it through to you or me! Most mergers, especially the large ones that have to justify themselves to the regulators and shareholders, will cite significant cost savings from the synergies that exist between the two firms. Essentially, by sacking those people they no longer need when they crash two similar functions together, the business will save lots of money. This is the biggest truism in the M&A playbook and although it can take longer to realise than intended, realised it almost always is (at the expense of those poor employees that fall on the wrong side of the line). What should be the second truism of M&A transactions is that the underlying customers will never see a penny of this cost save in the fees or charges they pay – and why would they? Investment Managers are businesses after all, and businesses are profit driven.

From a performance perspective it can be a mixed picture depending on which side your interests lie. As a general rule product manufacturers won’t run two funds with the same mandate and will likely pool the monies into one larger fund. This could well be a positive, if the fund you’re invested in was performing poorly, as the manager with the worst track record is likely to be the one moving on. On the flip side, combining can prove an issue with big not necessarily being better; too much money under management can make funds unwieldy and have negative impacts on performance.

Down another level and its probable that the acquirer and the ‘acquiree’ have similar product/client segmentation approaches even if described differently in each companie’s literature; your conservative-balanced-growth risk bandings for example. It’s improbable however that there is much commonality in the way they chose to interpret those mandates, by which I mean the securities they select or strategies they employ. This difference can be particularly nasty for investors if not managed carefully. Again, in an effort to ensure ‘fair’ treatment of customers and minimal duplication of efforts one side’s approach will be adopted and the other will move to accommodate. Practically that means substantial rebalancing to bring the portfolios into line. Rebalancing means buying and selling; activities which incur costs that could well be passed on the client along with any capital gains tax implications. It can be the case that the firms offer to cover the fee element at least but it’s a blurry line between one-off rebalancing exercises and standard portfolio churn. From a tax perspective they may attempt to ‘manage the CGT liability, which is code for freezing your portfolio to avoid running up an unwanted tax bill until something you own loses money can be sold for a loss. Positive in ambition but totally ludicrous if you think it through and not exactly the ‘active’ investment management you may be paying for.

Where it’s not such an obvious amalgamation of approaches the risk still exists but the trigger is the human aspect. Letting fund managers go for cost or performance reasons is common as already described, but equally so is the unintended loss which typically stems from cultural mismatches between the merging organisations. The outcome unfortunately is the same – someone else takes charge of your portfolio, and changes will follow.

Other implications of consolidation include risk, particularly concentration or single manager risk, and must also be noted, and then there’s always the general period of uncertainty that always follows such endeavours, which can in the most extreme cases manifest itself in the ‘gating’ of products (locking them from being able to receive new money, or from people being able to remove their money).

It needn’t all be bad however. There’s a high chance, particularly in the Wealth Management merger cases, that a driver for the deal is to enhance the capability, technology, or skills, or to help the firm comply with regulation it was otherwise about to fall foul of….in the best case a deal could be mutually beneficial with both sides bringing something to the party and therefore both sets of clients benefiting.

Regrettably however this tends to be wishful thinking only. The reality is that whilst M or A may be billed as beneficial for shareholders, invariably it’s the firms customer base that ends up footing that bill, and they’re the ones with the least choice in the matter.