Brew the perfect partnership

According to Ray Soudah, founder of Swiss-based Millennium Associates and a leading M&A consultant in the European financial services sphere: “In the last couple of years, people in the wealth management industry have lost their incentive to sell their firms, because they are enjoying high profitability.” But those players who do not have huge growth prospects, regardless of their size, should sell their businesses now, because valuations are high and the demand for such businesses is high, recommends Mr Soudah.

“The current business performance, which has been very good for the whole industry, has been due basically to the rising value of the existing assets under management. The issue is whether firms are able to attract new assets under management beyond market appreciation,” he says, explaining that growth is a hedge against falling markets.

A bid for growth was the main reason for the acquisition of the three UBS units Banco di Lugano, Ehinger & Armand Von Ernst and Ferrier Lullin by Julius Baer at the end of 2005.

Boris Collardi, chief operating officer at Julius Baer, explains that the four mid-sized private banks, which have merged to create “the largest pure wealth manager in Switzerland”, had assets which “were probably too small on a stand-alone basis to embark on a growth strategy”.

Scale is a key factor in private banking. Management fees, which are dependent on the level of assets under management, account for at least 60 per cent of yearly revenues, the rest being transaction driven, says Mr Collardi. The bank’s assets have increased to SFr405bn (e247bn) from SFr304bn at the end of 2005. And having larger assets translated to bigger profits for the bank, he says.

This has enabled Julius Baer to invest around SFr100m (e60m) last year in growth initiatives, explains Mr Collardi. The number of private bankers at the combined Julius Baer firm has increased by 35 per cent to over 500 since the merger. Bankers have been hired across the board, but especially across the geographies where the group is growing and developing new operations, particularly in Singapore, Hong Kong and Dubai.

This type of growth would probably not have happened previously, says Mr Collardi, because the old Julius Baer had a very small overall footprint outside Europe.

The latest expenditure was invested to acquire private bankers, premises, conduct brand advertising campaigns, recruit product specialists and invest in IT systems, he says. “It is fair to say that this resource was only available thanks to the merger, because our profit pool is much bigger,” concludes Mr Collardi.

There can be a fine line between acquiring a company and merging with another company. Mr Collardi explains that although it was Julius Baer that acquired the three UBS units, as well as the asset management company GAM, in practice the transition had the nature of merger.

“Technically it was an acquisition, but in our hearts and minds it was a merger,” he says, explaining that in the first phase of the project they spent a lot of time working towards their optimal business model. “We did not just take the Julius Baer structure and merge everything in there, but we reviewed it critically.”

However, Mr Collardi’s views that “there must be a strong party in the discussion that leads to whatever form of joint venture, acquisition or merger” belies the theory that everybody in such an operation can be happy and on the same level.

Even though the physical integration as such has been completed, cultural intergration could take another two years. “It takes time for everybody to understand exactly and put in practice all the values and how the new firm operates,” says Mr Collardi.

Keeping the culture

“A key challenge that needs to be considered when merging businesses in wealth management is culture, say Liz Nickles and Zoë Couper at wealth management communications advisory firm firm Carte Blanche Communications. “Culture is an intangible, and it is too often considered a soft issue that will take care of itself with a few joint coffee sessions, a CEO pep talk, a PowerPoint presentation and a handbook.”

‘Technically it was an acquisition, but in our hearts and minds it was a merger’ - Boris Collardi, Julius Baer

But the soft stuff has a hard edge, say the consultants, one that will impact the bottom line. “In a merger, cultural expectation can be either an asset or a barrier, as in any relationship, work is often required. And it’s not easy work.”

According to a study by PricewaterhouseCoopers, since 2000 the great majority of deals involving a European buyer or seller have been intra-European and of those, two thirds were domestic, reflecting the structural barriers to cross-border deals. However, lately European wealth managers have begun to show an increasing propensity to make cross-border acquisitions.

The Julius Baer story has has been one of a domestic merger but in a multi-lingual and multi-cultural country like Switzerland the concept assumes a new value. Strong corporate cultures were very different in each one of the firms, says Mr Collardi, explaining that the principles common to everybody were identified as “care, passion and excellence”, which have become the new company’s flagship values.

The opportunity to grow its onshore business also drove the recent decision by SG Hambros Bank in London to acquire the £1bn (e1.4bn) ABN Amro’s UK private banking arm.

“This is a rare opportunity in the London private banking business to get some step growth by acquiring a business rather than just individual private bankers and their clients,” explains Warwick Newbury, chief executive of the French bank’s UK subsidiary, running £7.6bn in assets.

Indeed, according to the PricewaterhouseCoopers study, a factor driving M&A activity in the sector is that poaching teams, a common technique for growing assets as clients follow their managers, has become much less attractive as a growth strategy.

Wealth managers have tightened contracts with much success, restricting considerably the ability of individuals to take clients with them and thus institutionalising the client base.

But as there are not many opportunities to acquire a bank or a private banking business, the poaching of private banking teams will continue, even if it is much more difficult than in the past to get them to transfer clients, say Mr Newbury.

SG Hambros itself has successfully recruited private bankers from all its major competitors over the past few years, including ABN Amro.

Winning trust

The ultimate goal in any merger or acquisition is to retain clients and therefore advisers.

“The challenge will be to win clients’ trust and make sure they will stay long-term clients,” says Mr Newbury. “Of course, continuity is key, nobody likes dealing with new people, therefore we want to retain all the private bankers and front-office advisory staff,” he states.

It can be debatable whether an acquisition is more likely to succeed than a merger.

“In the end the issues are the same, but from a cultural view point, merging is probably a better starting point because there tends to be more balance in the aspirations of the parties,” says Mr Soudah. It is like a marriage, he says, because usually the husband and wife are not dominating each other, he explains rather idealistically.

While a merger is friendly and co-operative, in an acquisition one is dominating the other. The initial risks are higher in an acquisition than a merger, but ultimately the risks – the major ones being losing clients and people handling those clients – are the same.

“As in a marriage, it could still not work after a few years,” says Mr Soudah.

In a merger, there are always two different business models, says Phillippe Couvrecelle, chairman of the board at Edmond de Rothschild Asset Management. And what tends to happen in practice is that the dominant party pushes the other out, he says.

“In the French market this is always the case,” says Mr Couvrecelle, who recently joined the French independent asset manager from Natexis Asset Square where he was responsible for the multi-management business and for the business development of Natexis Asset Management, prior to Natexis Banques Populaires’ merger with Ixis.

‘You have to organise a separate model to create alpha and you have to set up incentives for managers’ - Phillippe Couvrecelle, Edmond de Rothschild Asset Management

The richer firm or the one having more power or owning the transaction generally becomes the dominant model, pervading the culture of the whole new group, he says.

One of the major differences that can be identified in former Ixis Asset Management and Natexis Asset Management is their different approach to open architecture, with Ixis Asset Management managing the great majority of its assets in-house, unlike Natexis, where there was a higher percentage of third-party assets.

Often, merging the asset management lines comes as a consequence of a merger between two banking groups, pursuing growth in capital markets and improvement in their balance sheet. The asset management side is a weak point in a merger, says Mr Couvrecelle.

This is because, in managing money market funds, scalability is a real issue, and the bigger you are the better it is. In the equity space, which is much more profitable for a firm, this is not true, as shown by the increasing number of successful boutiques which can raise substantial assets. In the equity space, it is only a matter of retaining talent and people. This leads to the challenge of retaining managers, which in a big company, especially on the equity side, proves to be very difficult.

“You have to organise a separate model to create alpha and you have to set up incentives for managers,” says Mr Couvrecelle. But this often clashes with the culture of big organisations where the ideas of high salaries being paid to equity managers or lines managers are often thwarted by the rest of the employees.

On the contrary, with smaller groups, such as Rothschild, the different culture enables them to capture the best profitable managers and give them the freedom to manage their portfolios and create alpha, boasts Mr Couvrecelle.

Complementary products

In a merger it is difficult to have a complementary product range between two asset managers which are subsidiaries of banks in the same country, comments Mr Couvrecelle, considering the mergers in the French market, such as those between Crédit Agricole and Crédit Lyonnais, BNP and Paribas, as well as Natixis. And this can also bring challenges.

But things can change in the case of cross-border mergers.

There were no such challenges in the recent merger between BlackRock and Merrill Lynch Investment Managers (MLIM), stresses James Charrington, head of international retail business at the merged organisation.

This was due to the fact that at product level there was very little overlap which enabled a revamp of the new company’s product range.

“There was an enormous degree of synergy there,” says Mr Charrington, reminding us that MLIM was historically an equity manager – although the firm has its own fixed-income products – and BlackRock is known as a fixed-income manager.

“The fixed-income fund range has been reorganised, and a number of funds have changed their objectives.” New funds were launched, such as the fixed-income global opportunities, which includes BlackRock’s best ideas in the fixed-income space. Also there have been manager changes, as they are making more use of the historical BlackRock capabilities.

‘There was an enormous degree of synergy there’ - James Charrington, BlackRock MLIM

On the distribution side, there was no overlap either, says Mr Charrington.

BlackRock is primarily a US institutional fund manager, which was interested in building its business outside the States. And Merrill Lynch, a more global company, had a very balanced book of business, although with a much bigger retail business than BlackRock.

The distribution of retail funds was not impacted by the merger other than having the benefit of a broader range of products to take to market, says Mr Charrington. “We started to see much stronger inflows in our fixed-income funds in Luxembourg.”

The right mix

The merger will affect the asset class mix that the firm expects to sell to European distributors. Of the current $80bn managed by the firm in its Luxembourg fund range, 80 per cent of the assets are in equities and 20 per cent in fixed income. But in the next two to three years Mr Charrington expects that the mix will shift to 65 and 35 per cent in favour of equities.

The majority of assets that we manage will continue to be in equities, he says, expecting that, with reasonable market conditions, the assets of the Luxembourg range will increase by 50 per cent by 2010.

“Where the challenge will arise,” says Mr Charrington, “is in changing the brand from MLIM to BlackRock, which we will be undertaking in the course of the next two years.

“Our clients are used to dealing with Merrill Lynch and their clients are used to having ML products in their portfolios. At some point the name of Merrill Lynch will disappear on those funds and they will become BlackRock products.”

Although the group has the licence to use the ML name until October 2009, Mr Charrington expects the group to move to the BlackRock name well in advance of that time. “Our programme for re-branding will be a combination of effort, advertising, public relations, sponsorship in order to get a high level of awareness around our [new] name and helping distributors raise awareness of our brand with their clients.”

Mr Charrington admits that while distributors know who they are and understand the merger between BlackRock and Merrill Lynch and what that means, their clients are less familiar and less aware.