From left: Kevin Gallagher; Jeff Stakel.
A successful relationship, whether personal or business, depends on many factors. While there naturally must be initial attraction, shared interests or simply an enjoyment of being together, a lasting and meaningful partnership is ultimately driven by an alignment on long-term goals and an agreement on how to achieve them.
Consider, for example, the elements of a successful marriage and how they mirror a traditional business merger. You enter a marriage aligned on your long-term lives together: on how you will interact, on your shared goals and dreams and on how you will achieve them. You look beyond what you both bring to the relationship as individuals, focusing instead on how to build a successful future together. Perhaps most importantly, you recognize that walking down the aisle, the official “close” of the transaction, is just the start; the greater challenge comes in successfully integrating your lives.
This may seem to be common sense. Why, then, do asset management firms focus so much time on assessing the target at the outset but neglect the need to take a realistic, honest and holistic view of how the combined entity will operate and, in turn, establish and implement a comprehensive plan to achieve long-term success?
This is especially important in the current environment. Following an active year for investment manager M&A transactions, deal activity slowed, but secular trends—including slow growth, uncertainty around the capital markets and rising costs—all suggest that consolidation will continue. Yet such problems make it all the more essential for merging entities to have a strong rationale and solid go-forward plans prior to embarking on a match-up.
Yes, mergers may be aimed at securing immediate growth or value accretion. Nonetheless, while the relationship may start strong—through synergies, stock price increases or even the calming of markets—they often fall apart or fail to achieve their true potential due to limited energy being spent on understanding what will be needed to make the post-close entity as strong as possible. The businesses are overlooking what we believe to be the most important factor of a successful M&A: a successful integration.
The Long-Term Value of Integration
Effective integration is not easy. It requires a clear vision for the combined entities—along with time, commitment, energy and resources—just like a successful marriage. But its positive impact is clearly evident.
Asset management firms that approach integration with vision and commitment have historically experienced better economic outcomes. For example, more integrated firms enjoy higher margins and have experienced faster growth than less integrated peers.
M&A deals can fail to meet their promise—or even entirely collapse—when integration is undervalued or outright ignored. Common missteps often made along the way include:
- A lack of appreciation for cultural differences between firms and the neglect of the change-management efforts necessary to align disparate cultures;
- Attempting to put both management teams on “equal footing,” resulting in a division or duplication of leadership, inconsistent messaging and hindered decisionmaking;
- General poor business performance post-announcement due to the merging parties not aligning on how the organizations should build on each other;
- An unclear narrative of the goals and values of the combined company, leading to confusion in the marketplace and a lack of clear benefit to clients, which in turn can result in outflows;
- Overoptimistic assumptions about economies of scale, overlooking the investment and time required to unify technology systems and create a shared operating platform for both businesses;
- Sudden changes in personnel covering key clients and intermediaries, which can disrupt relationships even when service has been upgraded in other ways; and
- Poor alignment at lower levels of the organization: While senior business and functional leaders may understand the rationale of the merger and will be compensated well if it succeeds, a lack of alignment elsewhere can create issues with morale, performance and retention at a critical time.
Moreover, these factors naturally impact the combined base of employees, who face increasing fatigue, burnout and confusion about not only their new organization, but their place within it.
Commitment to the Process
If integration is key, what can asset managers do when considering a merger or acquisition to elevate their process and maximize their chances of success? Our experience at Casey Quirk has been that asset managers and their advisory partners need to incorporate and implement six key factors that best position executives and their organizations for the future:
- Define the long-term integrated vision: M&A gives executive teams the opportunity to re-examine their firm’s operating model. Integration planning based on a holistic view of how the combined company will compete can deliver operating improvements, as well as economies of scale.
- Develop a structured decisionmaking process: Internal and external stakeholders need clarity. Some decisions will be known from the start; others will require time. Provide as much clarity as possible and, where needed, provide details on how decisions will be made.
- Articulate the strategic narrative to the market: Asset owners and intermediaries are not blind to the dynamics facing the asset management industry. In fact, both are understanding of and patient with transactions, provided the rationale and benefits to clients are clearly and consistently communicated.
- Ensure an issue-free legal Day 1 (closing): Identification of potential issues and pre-planning of responses is key. Though reaching a successful legal Day 1 will not earn executives credit, missteps will certainly create frustration, failure and fatigue for team members.
- Dedicate resources and create a strong project management office: Successful integration planning and management is a full-time responsibility; trying to accomplish it off the “side of a desk” risks short-changing the integration planning process and the day-to-day management of the firm.
- Mobilize teams for post-merger integration: Realizing the full value of the acquisition involves ensuring that dedicated teams are established, empowered and accountable to refine and execute the integration plans. At the same time, the organization must have realistic expectations for timing, cost and savings and commit the resources necessary to make the post-merger goals a reality.
While each of these components is vital, we believe that point No. 1—defining the long-term integrated vision—is the most critical factor for the success or failure of an asset management M&A deal. Spending the time and resources upfront to develop a detailed plan and visualize the road to success not only indicates to all involved that a firm is committed to the long-term viability of the combined entity, but it makes the latter’s components far easier to achieve.
At the end of the day, it is important to recognize that while it takes a great deal of work to bring a transaction to a close, that milestone does not mark the end of the journey. Like a successful marriage, a successful M&A transaction depends on what the parties do long after the wedding ceremony. It requires planning, trust, energy and commitment for the long term, and while it may not be as exciting as the celebration, in the end, it is far more important.
Jeff Stakel and Kevin Gallagher are both principals at Casey Quirk, a business of Deloitte Consulting.
This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.