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Mergers and acquisitions in wealth management: exploring key transaction models
Mergers and acquisitions (M&A) are now an integral component of the strategic tool-kit of wealth management companies seeking to expand their client base or diversify their services. What are the potential M&A transaction structures? And what benefits and challenges do they each bring? We explore the three key transaction models.
Consolidation in the External Asset Management (EAM) sector has been a recurring theme for several years, but is yet to materialise in practice. This could soon change, with the introduction of new regulations in Switzerland that reflect similar changes seen in the United Kingdom and the European Union (especially in France and Germany). The impact of regulatory change, coming on top of an already fragile business model, could accelerate the consolidation of EAM companies over the next three years. That said, it should be noted that most mergers between external wealth management companies remain undisclosed, leaving observers in the dark as to the true number of M&A transactions.
When it comes to M&A activity within wealth management, three models stand out in particular – the share deal, the asset deal, and the referral transaction – with combinations of these also evolving over time.
Share deal
A share deal involves the sale of shares – often in a joint-stock company such as a public limited company. This approach, valued for its simplicity and efficiency, allows the direct transfer of the shareholding without the need to modify the company’s legal structure. For Switzerland-based sellers, advantages of this model include the possibility of receiving the proceeds of sale directly – under certain conditions the seller can also realise a tax-free capital gain.
Under this model, the buyer must assume all the liabilities of the structure acquired, so has an interest in performing a thorough due diligence check prior to the purchase. Taking into account confidentiality requirements, due diligence is sometimes also performed by the seller (known as vendor due diligence) and provided to the buyer.
In a share deal transaction buyers will often request contractual guarantees and ensure the inclusion of clauses to protect their interests, such as a mechanism for deferred payment of part of the sales price or a calculation of the price based on profitability after the sale, though these mechanisms may not be well received by the seller.
Asset deal
In an asset deal, specific assets of the company are transferred, thus providing the buyer with greater flexibility to exclude undesirable assets such as client relationships that do not match their business strategy or risk appetite. This structure is often more complex to implement and has direct repercussions for clients and employees.
In general, executing an asset deal requires the agreement of the employees or clients concerned. This agreement will often be at the centre of discussions, and can be made difficult by the differing – sometimes competing – objectives of the parties. The seller will aim for the least intrusive mechanism available and to ensure the transfer of as many customer relationships as possible, given that the sales price often depends on it. The buyer, for their part, is likely to favour a “conscious” transfer on the part of clients – an express acceptance of the new ownership that the buyer can consider a guarantee of customer loyalty.
When it comes to the transfer of employees, Swiss law allows a facilitated transfer of all employment contracts linked to transferred assets. There is also an assumption that in addition to the “legal” transfer of employment relations, the buyer will ask the seller to set up a retention programme (sometimes financed by the buyer) to ensure the continuity of key employees following completion of the transaction.
Read also: Family business transfer in Switzerland
Referral transaction
A referral transaction is based on client-recommendation, with the seller remunerated based on the assets under management (AUM) effectively transferred during a specified, fixed period. This structuring provides limited certainty regarding the effective transfer of client relationships, making the transaction uncertain for both parties.
The thorny issue of client data management
A crucial aspect of all transactions in the wealth management industry is the processing of client data. The EAM must comply with strict regulations, such as business confidentiality and data protection laws in Switzerland and the European Union. Depending on the structure of the transaction, client consent may need to be obtained. In all cases, regardless of the M&A structure chosen, clients must be informed of the transaction, with deadlines dependent on the transaction model.
Price – the heart of the matter
The heart of the matter – the price – depends mainly on two factors: the calculation methods chosen and the terms of payment. Though they are often linked in the negotiation, they are in fact independent of one another.
In M&A transactions, the methods used to calculate the price are limited only by the creativity of the players involved (and their advisors). Various valuation methods are commonly used, including the valuation of net assets with goodwill calculated based on assets under management (AUM), revenues, or EBITDA. Factors that have an effect on pricing include the type of client and their profitability, their risk profile, and the buyer’s expectations of their ability to maintain the portfolio of assets under management after the transaction.
Payment terms can vary widely, from deferred payment to full payment at the close of the transaction, or structures where deferred payments are calculated based on post-sale profitability (earn-out). Clawback clauses may also be included to adjust payments depending on the retention of assets under management after a specified period.
The choice of legal structure is a key factor in the success of the transaction for both parties – in effect, it is the legal structure that dictates the allocation of opportunities and risks between buyer and seller. It is essential that both parties be aware of the range of benefits and challenges of each transaction structure before starting negotiations, so as to take full advantage of the growth and consolidation opportunities offered by M&A transactions for EAMs.
Important information
This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.
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