M&A - Has the game changed?

Headlines:

1. The M&A landscape has shifted significantly due to rising interest rates, consumer duty regulations, and evolving market dynamics.
2. Increased borrowing costs have impacted deal pricing and structures, while tighter due diligence processes focus on culture, alignment with regulations, and potential liabilities.
3. Acquiring smaller firms, particularly single-adviser businesses, remains challenging but critical for market consolidation.
4. Integration, succession planning, and strategic alignment are central to achieving successful acquisitions.

Discussion points:

Impact of Increased Borrowing Costs
The rise in interest rates from 0.1% to 4.75% has significantly altered M&A strategies, with higher funding costs leading to longer deal timelines, often extending from two to three or four years. Despite these challenges, firms like Anthony’s have continued their acquisition activities, emphasizing effective integration and cash management to adapt to market pressures. Buyers and sellers are gradually adjusting their expectations as valuations stabilize, with deal multiples averaging 7-8 times earnings for flat transactions.

Consumer Duty Regulations and Regulatory Considerations
Consumer duty principles have become a central factor in M&A due diligence, necessitating alignment with cultural fit and compliance standards. Pricing in potential liabilities, especially for past reviews, is now a critical consideration during deal evaluation. Additionally, the Financial Conduct Authority (FCA) has announced plans to review the consolidation space in 2025, focusing on market conduct and diversity.

Challenges in Acquiring Smaller Firms
Acquiring smaller firms, particularly single Registered Individual (RI) businesses, poses unique challenges due to their lower assets under management and the resource-intensive nature of their integration. Strategies to address these challenges include succession planning solutions, asset purchases to mitigate risks, and tailored approaches for community-based practices. However, concerns persist regarding the long-term viability of smaller firms if larger acquirers continue to deprioritize them.

Valuation, Deal Structures, and Market Trends
Competitive pressures in the market have driven up deal prices despite increased funding costs, leading to greater focus on smaller firms and individual client buyouts. Evolving deal structures now frequently include deferred considerations, equity tickets, and extended payment timelines to manage risks and returns. While seller expectations are beginning to moderate, they often remain misaligned with buyers’ perspectives on valuations and future liabilities.

Integration and Succession Planning
Effective integration of acquired firms is vital for M&A success, with a strong emphasis on developing comprehensive playbooks to address cultural and operational differences. Succession planning for single-adviser firms presents opportunities to fill gaps in market coverage and ensure smooth transitions. Participants also emphasized the need to clearly articulate value propositions, especially when integrating firms with differing fee structures.

Future Outlook for M&A in the Sector
The M&A space remains active, driven by continued interest from private equity and institutional investors despite increasing complexity. Addressing challenges such as cash management, aligning seller expectations, and adhering to consumer duty standards will be crucial for sustained success. Additionally, diversifying deal strategies, including asset purchases and equity considerations, will help mitigate risks and capitalize on market opportunities.

Key takeaways:

• The rise in interest rates has reshaped M&A strategies, with longer deal timelines and a focus on effective integration and cash management.
• Despite increased funding costs, firms remain active in acquisitions, with valuations stabilising around 7-8 times earnings for flat deals.
• Consumer duty regulations are becoming central to M&A due diligence, emphasizing the need for cultural fit and compliance.
• Smaller firms, especially single Registered Individual (RI) businesses, present challenges in acquisitions due to lower assets and resource-intensive integration requirements.
• Innovative deal structures, such as deferred considerations and equity participation, are being used to balance risks and returns in the current market.
• Effective integration is critical for successful acquisitions, with a focus on addressing cultural and operational differences through comprehensive playbooks.
• Succession planning for single-adviser firms offers opportunities for acquirers to fill market gaps and ensure continuity during transitions.
• The M&A sector continues to attract private equity and institutional investors, despite the challenges posed by rising borrowing costs and regulatory changes.
• The need for diversity in deal strategies, including asset purchases and equity considerations, is growing to effectively navigate the evolving market conditions.