M&A -The Outlook

Expert: Andy Peterkin and Anthony Turner, Partners, Farrer & Co. 

State of play 

• Widespread reduction in M&A for obvious reasons all stemming from uncertainty, future taxes due to Covid Government spending. This makes pricing very difficult. Also, a decision to shore up existing businesses rather than going into M&A.
• Often comparisons to the previous financial crisis. But in reality, it really is rather different.

“My sense is that people have less time on their hands now."

• Pulling together some themes; challenges for some mean opportunities for others:

Theme 1

• Consolidation and the need to get scale to justify the regulatory burden. Trend was that consolidation was growing naturally by M&A – don’t see this driver going away.

Theme 2

• Have been some struggling businesses. Jupiter acquisition of Merion investors for example.
• Covid has exacerbated existing pressures. Take profitability for example – this pressure remains. Cost implications of this are huge and will increase in this environment.
• Tech remains a key theme. For Wealth there is now an increasing familiarity with tech and clients accessing their assets digitally. This is a challenge as not all firms are ahead on the tech curve. Solutions needed for client and the back office. Mobile banking, E2E digital processing for example. Client onboarding etc. Example, CS closing 25% of its offices and then reinvesting the saving into its tech capabilities.
• 25% of PB clients said their PB had not been in touch. 1/3 of them said they were unhappy with the advice they were receiving. People are thinking a great deal about how they want their services to be delivered.
• Rationale of the Tilney S&W deal was a broadening of services (very client facing rationale for the deal). Pointers towards tech, scale, increased in office presence. How much was tech a driver of the merger decision with S&W and Tilney?
• Going down to smaller deals, the themes were around culture, consolidation, plugging specialist areas (pensions, discretionary management).
• Capacity is a common theme that goes along with scale.
• Organic growth is always desired, but M&A is an accelerator. We’re seeing a fair bit of tech investment – banks doing this by acquisition, rather than investment.
• Deal structures post Covid – pricing is meaning a buyers’ market right now. Valuations are harder as underlying fundamentals are harder to judge. In uncertain markets, pricing is difficult. Asset transfer for example – clients that consent will be paid for, but those that don’t the buyer will not be happy to pay for.
• Earn outs will be pushed back – a way of de-risking. Spending on employee incentivisation for example.
• Cost of regulation is a significant driver to deals actually going ahead, but how is regulation influencing deal structure. The FCA is always the third party of the deal.
• Going back four years or so, the regulator has a changed attitude to deal structuring. People saw share sales as a high regulatory impact approach. After 3m of paperwork and questions, you end up with a suspended deal
• Asset/book sales seem to be much quicker. Although the view was expressed that there is a lot more attention being paid to book sales. Firms are applying the same amount of emphasis now as they do on share sales. Very hands on and activist throughout the process. How clients are to be treated is crucial.
• In terms of execution, a book sale is now harder to pull off. COBS source book now contains quite a bit of directly imported MIFID II material. The regulator used to be able to give you helpful waivers, but they now can’t as they are applicable pieces of European law. Much less flex around relevant COBS provisions.
• Other thing to touch on is outsourcing a service provision. Transitional services agreement tends to take the longest to draft due to regulator’s third party service provider focus.
• One delegate was interested in the point about FCA and book selling. 

“It seems to me that firms that don’t sell their book will fail anyway. What is the rationale here?”

Another comment: “The regulator seems to be looking increasingly closely at deals. Are you seeing the same levels of scrutiny in other jurisdictions – does it match the FCA scrutiny?”

• Another delegate asked if you can get insurance to cover book acquisitions. “You’re often required to provide guarantees to the local regulator for up to 10 years – how do you work out the cost of that risk (need insight on this as a potential buyer).”