Integrating to add value in asset management M&A
More perfect unions resulting from industry M&A
Thoughtful integration can become a primary catalyst for improving enterprise value. This paper explores areas of effective integration opportunities, based on three primary conclusions, to help asset management firms unlock value through selective integration.
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Learn effective integration techniques to drive value in asset management
Competition in the global asset management industry continues to become more aggressive. Less lucrative economics are reshaping the operating environment. A shrinking number of firms with strong competitive advantages are seizing business from an oversupply of weaker, undifferentiated vendors with deteriorating prospects.
In response, many asset management firms are turning to strategies reliant on scale, hoping that size will magnify competitive advantage, provide efficiencies, and fund changes required to meet shifting client needs. Such beliefs are fueling cyclical highs in mergers and acquisitions (M&As) between asset managers. But they also have raised questions about the effectiveness of inorganic strategies, as there are few anecdotes of effective transactions across an industry shaped by serial acquisition deals.
Lackluster results of asset management M&A don’t stem from poor industrial logic. If anything, building competitive advantage at scale—in product, distribution, systems, or operating model—has become an even greater strategic imperative. Instead, poor PMI planning and execution has emerged as a primary culprit. Asset management executives, reluctant to disrupt talent and hamstrung by the costs of legacy businesses, often have failed to make the hard decisions necessary to realise the value of the combined organisation.
Thoughtful integration—either through mergers or acquisitions, or even between legacy business units developed organically within an asset management firm—can become a primary catalyst for improving enterprise value. This paper explores examples of effective integration techniques based on three primary conclusions:
- Serial industry M&A has not realised substantial cost savings, often due to misguided efforts to keep investment teams, distribution groups, brands, or technology systems separate following a transaction. Clients haven’t rewarded such efforts with extra revenue to outweigh the duplicate expenses.
- These duplicate costs typically reside in four primary areas: organisational leadership, distribution strategy, enterprise and investment operations, and technology. Better integration efforts in these areas free up capital to invest in necessary cross-enterprise changes that result in new competitive advantages.
- Effective integration requires a plan, including dedicated resources, a future-state strategy that defines competitive advantage, and well-designed metrics and incentives that help define and make the difficult decisions often required.
In this report we discuss how well-designed integration plans both anticipate and mitigate execution risks, and how with the right amount of forethought, asset management firms can unlock, not damage, value through selective integration.
We invite you to read the report and learn more about:
- The curse of legacy costs
- Four core integration levers
- The five elements of effective integration programs
Asset management remains a talent-driven business, and integration may not be the best answer in many cases. Investment teams prize autonomy and view their approaches to portfolio construction and trading as extensions of highly proprietary intellectual property—particularly for capacity-constrained strategies. Certain legacy brands have loyal client followings and may suffer from integration or absorption. And maintaining elements of a partnership culture that appeal to high performers may justify some separate functions. Even putting aside execution risk, there are often strategic reasons to maintain multiple legacy elements of operating models within asset managers.
Ever-increasing pressure on industry economics, however, raise expectations on the benefit from avoiding deeper and wider integration within and between asset management businesses. Duplicate costs that don’t clearly and directly result in competitive advantage deserve scrutiny, despite the checkered history of integration efforts throughout the industry’s history. Leaders of asset management businesses can improve integration prospects with careful planning and strategic decision-making at the functional level, rather than making emotional or risk-avoiding compromises solely at the enterprise level. With the right amount of forethought, asset management firms can unlock, not damage, value through selective integration.