Many industry pundits are viewing Morgan Stanley’s recent acquisition of Eaton Vance as a bellwether of accelerated consolidation in the asset and wealth management industries, as firms look to reduce costs, build scale and fill holes in products, geographies and distribution. The Eaton Vance acquisition comes on the heels of large deals such as Franklin Templeton’s acquisition of Legg Mason, Charles Schwab’s purchase of TD Ameritrade, and Invesco’s acquisition of OppenheimerFunds, among others, adding evidence to support this view on consolidation.
As we look ahead to more consolidation, it should be noted that many industry observers—most recently Casey Quirk—have found that most acquisitions fail to meet expectations. In ZS’s own research, we have found that a main driver of M&A success is in revenue synergy, not cost synergy, which is too often the dominant focus of integrations. And the biggest misses regarding revenue synergy come in three areas: distribution organization design, implementation and risk management.
With this in mind, I wanted to highlight three key insights regarding revenue synergy from ZS’s whitepaper on M&A from the point of view of an asset or wealth manager.
1. A “divide and conquer” approach to distribution is rarely the right answer. Take the example of a merger of two asset managers, both of whom have national distribution coverage of financial advisors and RIAs. We commonly see firms choosing a path of low resistance, choosing to divide the newly combined sales teams by customer or product, or else aggressively collapsing sales headcount to meet cost synergy targets.
But as illustrated in Figure 1, each of these approaches can have a negative impact on revenue growth and, sometimes, a hidden impact on cost synergies. Instead, firms should step back, view their new portfolio of products and offers, and design an optimal coverage model from a blank slate. Only then can you tackle the tough task of mapping salespeople to roles in a way that maximizes effectiveness and minimizes unnecessary relationship disruption.
2. Don’t ignore the unique sales effectiveness strengths of each distribution organization. Often, asset and wealth management companies let the organization size shape the integration: Whichever company has the largest sales team or biggest customer base in a segment sets the distribution strategy going forward. And in a merger of distribution equals—with similarly sized teams—chaos often ensues, with co-heads for many departments and a lack of speed and direction.
Instead, quickly and comprehensively asses the full distribution effectiveness capabilities of each organization and use those to guide the scope and structure of the integration process. As Figure 2 shows, the acquiring company often needs to learn or transfer sales effectiveness practices from the target company.
3. Don’t let your data and systems delay your strategy. After a merger or acquisition is announced, many financial firms quickly jump into the data integration abyss, holding off on important strategic and transition decisions until the client landscape can be fully mapped out. Having been a part of a number of data integration “clean rooms,” we know the importance of insights generated from newly-combined customer and sales data—but waiting too long to act can cause irreparable damage to revenue momentum.
For example, when Principal acquired Wells Fargo’s retirement business, it couldn’t wait on complete data and systems integration to act. Competitors began targeting Wells Fargo’s customers within a day of the announcement. If Principal had waited to build its strategy on a perfectly unified client list, it may have had few customers left to retain.
As Figure 3 shows, immediately setting your competitive strategy and addressing your distribution organizations using the best-available information is crucial. At the same time, don’t look at tools and systems only to inform that strategy. Pull forward work on data, incentives, tools and systems, and sales competencies and address them in the context of the merger and integration. Too often these detailed, operational tasks become disconnected from the vision and strategy, muting the revenue impact envisioned at the outset.
If, as predicted, M&A activity accelerates in the asset and wealth management industries, then companies will have an unprecedented opportunity to restructure the competitive landscape and position themselves for success. To succeed, focus on the revenue synergies envisioned from a merger or acquisition and be mindful of design and implementation choices that suppress revenue. A disciplined, thoughtful approach to distribution strategy and integration can help your firm join the select few whose mergers and acquisitions were successful.