Integration can be the key to unlocking value in investment management M&A.
The economic case for thoughtfully integrating asset managers following mergers and acquisitions is strong. Firms that take a deliberate and strategic approach to integration experience faster growth and higher margins. Planning for integration from the beginning of the M&A process allows firms to present a compelling narrative to the market, realize revenue and cost synergies, present a unified presence to clients, provide clarity to employees, and transition to run-rate operations in a faster, more seamless way.
Competition has intensified Dynamics leading to a consolidating industry
Asset managers are facing a set of secular drivers that have made inorganic activity more attractive. As a result, industry M&A in recent years has reached all-time highs. We believe that M&A will continue to be a fundamental component of many firms’ strategies to win in a more competitive and slower-growing industry. Firms that can navigate the unique challenges of integrating asset management businesses will have an important strategic advantage in this market.
Source: Public Reporting, Casey Quirk/McLagan
Performance Intelligence, Firm Websites
Source: Public Reporting, Casey Quirk/McLagan
Performance Intelligence, Firm Websites
Source: Public Reporting, Casey Quirk/McLagan
Performance Intelligence, Firm Websites
Source: Public Reporting, Casey Quirk/McLagan
Performance Intelligence, Firm Websites,
Top1000funds.com
Asset management M&A has entered a new phase
Cost synergies and economies of scale are a primary driver of deals
As the asset management industry has matured, the purpose and pace of industry M&A activity has evolved. In its earliest phase, asset management could be described as a “cottage industry,” with many boutique, independent, investment-led firms. As the industry matured, asset managers pursued deals to diversify their businesses, “bolting on” new teams and capabilities. The Global Financial Crisis then led to a new rationale for transactions, as financial companies with asset management affiliates sought to free capital and solidify their balance sheets. Today, in a more mature industry, M&A is driven not only by the need for new capabilities, but also by a strategic imperative to implement a more efficient operating model and achieve economies of scale.
01
Initial Founders Exit
1980s - 1990s
To create liquidity for the founding owners of asset managers
02
Capability-Driven
Acquisitions
Early 2000s - 2007
To add new investment capabilities in in-demand asset classes
03
Post-Crisis Buyout
2009s - 2014s
To optimize parent companies’ balance sheets
04
Industry Consolidation
2015 and beyond
To realize revenue and cost synergies and build a more scaled, efficient and durable franchise
Competitive Case
Effective post-merger integration can help firms improve
growth, realize savings, and optimize the business
As we wrote in our paper More Perfect Unions - Integrating to Add Value, the advantages of effective integration are not just theoretical. Our industry benchmarking shows that asset managers that are integrated experience both faster organic growth and significantly higher profitability.
The competitive and economic case for integration is real
6-8%
increase in range of margin
Source: Public Reporting, Casey Quirk/McLagan
Performance Intelligence, Firm Websites
Typical focus areas
Distribution
Reorganizing coverage structure and shifting spending toward client service and cross sales, technology and client experience
Leadership
Reducing redundancies and migrating to metrics and rewards that favor collective execution of the new strategy
Enterprise and Investment Operations
Identifying areas of leverage and overlap across functional support areas
Technology
Deciding where systems integration creates efficiency—and where it doesn’t
Branding
Determining the optimal way to position and promote the organization in the market
M&A isn’t easy
But it can be better
to embrace six key success factors
01
Defining the long-term
integrated vision
Learn more
M&A gives executive teams the right to reexamine their company’s operating model. Integration planning based on a holistic view of how the combined company will compete can deliver operating improvements as well as economies of scale.
Back
02
Structured decision-making
processes
Learn more
Internal and external stakeholders need clarity. Some decisions will be known from the start; others will require time. Provide as much clarity as possible and where needed provide details on how decisions will be made.
Back
03
Articulation of the strategic
narrative to the market
Learn more
Asset owners and intermediaries are not blind to the dynamics facing the asset management industry. Our experience shows that the market is more understanding and patient with transactions when the rationale and benefits to clients are both clear.
Back
04
An issue-free legal day one
(closing)
Learn more
Identification of potential issues and pre-planning of responses is key. Reaching a successful Legal Day 1 (LD1) will not earn executives credit, but missteps will certainty create frustration, failure and fatigue for team members.
Back
05
Dedicated resources and a
strong project management
office
Learn more
Successful integration planning and management is a full-time responsibility. Trying to accomplish it off the “side of a desk” risks short changing the integration planning process and the day-to-day management of the firm.
Back
06
Post-merger integration
mobilization
Learn more
Realizing the full value of the acquisition involves ensuring dedicated teams are established, empowered, and accountable to refine and execute the integration plans and the organization has realistic expectations around timing, cost and savings.
Back
Follow our integration playbook to navigate the journey and achieve deal success
We think of the M&A and integration journey as a four-step process. While the duration and depth of each step vary from deal to deal, there is a set of common initiatives and requirements to pursue before signing a letter of intent (LOI), announcement, and closing. The specific focus areas and the time required for executive team members will fluctuate throughout the process, as will the internal and external support bench needed to reach a successful close and execute on post-merger integration.
01
Diligence & Negotiation
02
Future State, IMO Planning, & Deal Term Finalization
03
IMO, LD1 & TSAs, Functional TOM
04
Post-Close Integration
01 | Diligence & Negotiation
Key Tasks
Beyond assessing the target itself, diligence should create a future state vision for the combined company
Too often, commercial diligence focuses solely on the strengths and opportunities associated with the target company. This approach works well if no significant changes to the target’s operating model are foreseen. However, when more thorough integration is the plan, executive teams should use the diligence process to challenge the existing operating model of both the target and the acquirer. This requires leadership to contemplate potentially difficult implications around talent, go-to-market approach, priority initiatives, and incentives, to inform revenue and cost synergies and to preserve the best of both organizations. Planning for an integrated operating model early in the deal process also allows acquirers to develop appropriate retention and incentive programs for leadership and key talent of both organizations. Including these kinds of integration planning in the diligence phase can be key to avoiding significant headaches later in the process.
02 | Future State, IMO Planning, & Deal Term Finalization
Key Tasks
Defining, structuring and preparing to mobilize an integration management office early is key
The Integration Management Office (IMO) is typically composed of two layers: a project management layer that focuses on traditional PMO activities and an integration layer that is organized by functions. The PMO layer is designed to control and manage all integration activities, including activities that span multiple functions, such as legal-day-one readiness, synergy capture, cost tracking, communication, and reporting. Functional workstreams are run by leaders responsible for defining the future-state operating model for each function, and identifying the best approach to achieve it. Success requires that PMO and functional teams have clear decision rights and regular touch points with a defined Steering Committee (firm executive leadership that is setting priorities and approving major decisions).
Clients and Distribution
Prioritize global opportunities (geography, channel, strategy), design organizational structure and coverage model, and determine how to handle client and prospect overlap
Investments
Conduct investment capability assessment, optimize investment platforms and identify potential synergies
Brand &
Marketing
Define go-forward brand, outline marketing strategy and organization, and define differentiated client experience
Incentives & Benefits
Develop retention approach for key talent, and define unified compensation philosophy and processes for the combined organization (including an approach to cash bonuses, equity awards, and deferrals)
Operations & Technology
Integration / transformation of systems and processes to enable a unified, modernized investment platform
Legal & Tax
Design future-state legal entity structure to optimize for tax, regulatory capital, and operational needs
Risk & Compliance
Identify and execute compliance activities and risk mitigants with clients, regulators, and other parties
Leadership, Governance,
& Organizational Design
Determine new firm vision, organizational model, and governance approach (including IMO)
Product
Identify target product suite, outline organizational structure and processes, and articulate platform / product positioning
Integration Coordination
Requires centralized team to coordinate project management activities, set clear and consistent structure and cadence, enforce discipline and solve problems across functional work teams. Team is responsible for tracking risks and issues that arise throughout integration and report to the executive steering committee.
Communication
Develop and drive internal communication related to integration including steering committee updates, workstream status reports, etc. and act as clearing house for external communication that requires revisions or updates to financial guidance, timing to close, key decisions, etc.
Legal Day 1 Readiness
Work with functional teams to clearly identify minimum and desired day 1 requirements and fast followers. Define the critical path to execute against each and build and maintain detailed LD1 execution plan.
Synergy & Cost Tracking
Robust synergy model to assess financial implications, track achievement of targets, and monitor cost of integration throughout the process.
Integration
Management Office:
Key Functions
Project Management
Office
Integration Coordination
Synergy & Cost Tracking
Communication
LD1 Readiness
Investments
Brand &
Marketing
Incentives &
Benefits
Operations &
Technology
Legal & Tax
Risk &
Compliance
Leadership,
Governance, &
Organizational
Design
Product
Clients and
Distribution
Shared
Service
Integration
03 | IMO, LD1 & TSAs, Functional TOM
Key Tasks
Reaching an issue-free legal day one requires defining strategic priorities and internal focus
Executive teams should not expect to get credit for clearing this hurdle, but risk serious consequences for failing to get it right. A disjointed process that lacks coordination and the right decision-making forums can make the journey more difficult than it needs to be – impacting the morale and output of all team members. Success begins with developing functional target operating models and defining integration requirements while avoiding activity that would be considered “gun jumping” in case the deal does not close. From there, specific goals for legal day one and required transition service agreements (TSAs) and any necessary cutover plans can be developed.
01
Determine desired target
operating model design
Learn More
02
Define LD1 requirements and
action steps
Learn More
03
Determine unique
deal needs
Learn More
04
Mobilize a command center
and cutover plan
Learn More
01
Determine desired target operating model design
Work with functional heads to develop the future-state requirements of the target operating model, guided by executive vision and goals
Develop understanding of the existing model, future model, and key gaps to be closed to reach the end state
Ensure smooth transition of knowledge between due diligence team and integration execution teams
02
Define LD1 requirements and action steps
Define the specific level of integration by capability required for Legal Day 1 and map out fast-followers
The requirement gathering process must consider maintaining consistent relationships, clear communications, uninterrupted operations, and consistency in service for clients, employees, suppliers, and 3rd parties
Issues and decision management can be facilitated by RAID (Risks, Assumptions, Issues, Decisions) logs for increased accountability
03
Determine unique deal needs
Determine the unique challenges and complexities to the deal that could undermine integration success
Develop mitigation strategies associated with key complexities
Establish a “clean room” for data sharing depending on specific regulatory and/or deal considerations
Design appropriate TSAs to ensure required functional support if full separation of the target cannot be achieved at closing
04
Mobilize a command center and cutover plan
Develop a detailed cutover plan with outlined communication strategies, roadmaps and blackout periods, along with designated roles and responsibilities
Create a Command Center to serve as a single point of contact and direction for managing execution of detailed cutover plans
05
Post-merger-integration
Create a comprehensive, accountability-driven post-merger integration plan with clear milestones in order to ensure shared vision and direction for functional teams executing the integration
Define what processes and activities will be maintained, redesigned, or eliminated in the target operating model, and identify the implications on people, technology, and workflow
Map timeline, milestones and resource delivery teams to implement and work toward the target operating model
04 | Post-Close Integration
Key Tasks
Successful post-merger integration requires detailed planning, ongoing executive accountability and clear understanding of the timeline required
Reaching a successful close is a key milestone in any transaction. From an external perspective the close may mark the end of the journey; however, internally it is the beginning of integration execution within select functions. The length and complexity of this phase will vary, but when integration exists, this period is typically the longest. Delivering on new organizational design, processes and workflows requires specificity on key milestones, timing, required resources, new technology and enterprise interdependencies. It is important to maintain the IMO for continuity and accountability, albeit the composition and cadence may change. Progress against the desired functional operating model is what allows transactions to start to unlock benefits to all stakeholders.
Throughout the process a robust communication plan is needed to help stakeholders understand the benefits
One of the most crucial components for any integration is the communication plan. All communications should be built off a core set of coordinated messages but also recognize the nuances important to different stakeholders. Most industry stakeholders recognize the secular trends leading to more consolidation, that said, uncertainty and lack of clarity in any integration is cause for concern. The best communication plans lead with facts and articulate clearly what decisions have been made and describe the decision-making process and timeline for current unknowns.
Current
clients
Corporate
board
Management
and employees
Fund board(s)
Prospects and
intermediaries
Shareholders
Service
providers
Media
People are the heart and soul of asset management
Leadership in times
of uncertainty helps
mitigate low morale
Asset management is a human capital business. Whenever uncertainty and potential change enter the equation, it is natural for individuals’ worries about the future to impact business-as-usual activities. While team members are likely experience a range of emotions throughout the process, periods of high uncertainty and low morale typically occur at similar points in the integration lifecycle. To mitigate business impact, executive teams will double down on change management and the employee experience at key points in the process.
01
Communicate strategic
vision early
02
Involve and “hear” all key
internal stakeholders
03
Provide appropriate
transparency throughout
process
04
Communicate often in
various forums
05
Celebrate success and
acknowledge challenges
06
Proactively build toward
a unified culture
About Casey Quirk
Casey Quirk, a practice of Deloitte Consulting, is the largest management consultant in the world focused exclusively on strategy advice to asset and wealth managers. Our global team combines unparalleled industry strategy and implementation experience, proprietary research, and proven solutions frameworks to deliver value in a rapidly evolving environment. Our core consulting assignments include broad business strategy reviews, capability positioning and strategy, market opportunity evaluations, organizational design, ownership and incentive structuring, and all parts of the M&A and integration lifecycle. In conjunction with Deloitte, Casey Quirk offers the most comprehensive end-to-end consulting solution in the industry.
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