Transformational and less transformational deals – the industry at crossroads

“The golden decade for asset management is over,” stated Stefan Hoops, CEO of DWS to the Financial Times in an article published last week, continuing that “investors now faced a market environment where not everything is going up and up and up, but “costs are.” Yie-Hsin Hung, CEO of State Street Global Advisors added that “asset management used to be a rising tide that would lift all boats and that’s no longer true.” One of the widely expected answers to the new environment is increased M&A activity in the asset management sector and there is no shortage of respective news flow these days.

GAM, once one of Europe’s most respected asset managers, certainly takes center stage these days. The company postponed its long overdue 2022 full-year results again to May - by which point the company hopes to have concluded its potential sale to UK fund manager Liontrust.  Meanwhile, some influential GAM shareholders, gathered in a group called NewGAMe - nice wordplay by the way - are aiming to push up GAM’s share price which won’t be well received by management and Liontrust, who are eager to close the deal. Also, Schroders has quietly built up its position, becoming the fourth-largest external shareholder in GAM.

But would that acquisition make sense for Liontrust? The deal, which would certainly be extremely cheap, would triple Liontrust’s assets under management and also enhance its distribution footprint but is not short of challenges and pitfalls. There are reasons why the usual suspect bidders did not show up this time, in spite of GAM’s rather desperate search for a buyer.  

Also, UK investment bank Numis takes a sceptical view and wrote in a note that "in summary, we are not convinced this would be a good deal for Liontrust due to the uncertain outlook, despite the acquisition of Gam being inexpensive… The announcement suggests the offer is for the whole business, but we are not sure that Liontrust would want to keep all parts of the business, notably the admin business and certain fund franchises, suggesting there could be post-deal disposals/closures… We think restructuring costs would be material.” 

But how about fund investors? Most fund professional fund buyers do not like M&A activity - in particular, if their fund manager’s firm is about to be acquired. Unsurprisingly, many pull the trigger if fund managers and supporting units are left in the dark about their future and respectively distracted. 

The Swiss shotgun wedding serves well as another reminder of this. Since the announcement of the UBS / Credit Suisse merger, investors have pulled almost EUR 6 billion from CS funds. In terms of the UBS / Credit Suisse shotgun wedding please see our comment from last week.

Mergers do not provide solutions nor superiority per se. Integrating asset management businesses, staff and operations is a complex and often lengthy process, which can have a negative impact on the performance of key staff. The longer the integration takes, the longer the uncertainty remains, the worse it gets. This ultimately affects the client’s outcome and experience. 

Nonetheless, brace for more large deals to come. Just a week before last, Morgan Stanley’s CEO James Gorman said during a call with analysts that the US banking giant would do more acquisitions in the asset and wealth management space over the coming years. "We constantly keep a list of who's attractive and who would be a good fit.” One week earlier, BlackRock’s founder and CEO Larry Fink stated in the firm’s analyst call on Q1 results, that the giant is seeking transformational opportunities that have emerged as a result of the turmoil in the banking sector and market dislocation. "If there is an opportunity to do something transformational, we are going to be prepared to do it.”

Being transformational or not, acquisitions must make real sense and ad undisputed value - for shareholders and fund investors alike. This is what will separate the wheat from the chaff.