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Consolidation in the Asset Management Industry Table of Contents

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Consolidation in the Asset Management Industry Table of Contents Consolidation in the Asset Management Industry Table of Contents Foreword The Strategy of Consolidation Getting It Right: Three Dimensions of an Ideal Consolidation Experience Looking Ahead Contributors 1 Foreword DONNA MILROD Head of Global Client Management State Street Consolidation is a major theme In this special report, we examine asset in the investment industry, management industry consolidation with many institutions now through the lenses of strategy, culture, operating transformation and data. contemplating merger and Drawing on perspectives from experts acquisition (M&A) opportunities. across Accenture and State Street, On top of a slew of high profile deals we offer our view on where the industry over the past few years, new global is headed and guidance on how firms research from State Street1 reveals anticipating a consolidation scenario can that half of asset managers say it is avoid some of the most common pitfalls. either ‘somewhat’ or ‘very’ likely that We hope you find these insights useful they will undertake M&A or another form as you navigate the road ahead. of consolidation activity over the next year. This can bring a range of benefits to investment businesses, from new Now emerging from a asset class expertise to complementary turbulent 2020, we know the product sets to enhanced scale and asset management industry resilience. These priorities have taken on a new urgency in the era of COVID-19, is focused on the future, making consolidation an attractive examining every avenue to proposition for many organizations. accelerate growth. 1 State Street Growth Readiness Study, October 2020 2 The Strategy of Consolidation Looking to the future, we believe that as investors, especially institutional investors, place emphasis on an asset manager’s ability to deliver outcomes, M&A activity will be driven increasingly by a search for new capabilities and less by cost considerations. While synergies are a component of every deal thesis, we see a deeper, strategic focus on them GERRY HEALY now. This may be investment strategy expertise, Managing Director, Asset Management or experience with complementary asset classes Accenture or product types. Acquisition targets may be attractive for opening entry to new customer Many factors drive consolidation in the asset segments or geographic markets, or for the management industry today, as firms navigate enhanced scale or distribution power they can an extremely difficult environment. offer in existing markets. The rise of passive investing and the steady State Street research bears this out, with march of fee compression have put pressure results of a new study showing that increasing on investment business revenues. In 2019, assets investment capabilities or product range was under management for publicly traded asset the top driver for planned consolidation, cited managers grew by 19 percent while revenues by 42 percent of traditional asset manager grew 0.19 percent and gross margin compressed respondents contemplating it.3 by 20 percent.2 On the expense side, many asset managers find it ever more challenging to achieve their cost reduction targets. With fixed costs that are often too high for their given level of assets under management, many managers are discovering that achieving any further Looking to the future, meaningful long-term cost reduction may require significant transformation of their infrastructure, we believe that M&A a path that must create a foundation for activity will be driven end-to-end digital transformation, requiring every business to become a cloud business. increasingly by a search These trends converge to make a compelling for new capabilities. economic case for merger and acquisition activity, within a highly concentrated ecosystem. 2 Accenture analysis, based on public company Securities and Exchange Commission (SEC) filings in 2019 3 Source: State Street Growth Readiness Study, October 2020 3 Figure 1 Top Reasons Cited for Planned Consolidation Asset Manager Respondents Globally 50 48% 42% 38% 38% 40 38% 36% 36% 34% 33%34% 30 20 10 0 Increase Manage risks Enter or increase Expand Acquire innovative investment more e ectively presence in new distribution new technologies capabilities or geographic markets capabilities product range Traditional Asset Managers Alternative Asset Managers Source: State Street Growth Readiness Study, October 2020 This is a meaningful shift for the asset How should firms approach the integration management industry, as firms begin to look process? In our experience, successful large- rigorously at specific underlying capabilities scale asset management merger integration (e.g., wealth management, exchange traded programs are typically supported with fund market leadership, etc.) that will be three pillars, which govern the framework, most complementary to their existing suite management and execution (Figure 2). of offerings. In an intensely competitive marketplace, we believe the firms that truly embrace this capability-driven transformation agenda will be the most successful over the long term. 4 Figure 2 Program Framework Technology and Processes Industry Partnerships • Program structure • Integration timeline • Joint playbooks • Integration Management • Integration Management • Command center structure Office (IMO) structure Office (IMO) & functional and execution • Resource plan work plans • Case management • Functional charters • Document management • Program analytics • Overview of deliverables Source: Accenture, 2020 Drawing upon the lessons learned from The acquiring entity should over-plan for prior integration experiences, some clear potential productivity disruption post-close best practices emerge for asset managers and, with the aid of vendors who can scale confronting a new consolidation scenario. their services, build in flexibility to resolve any emergent system or settlement issues. Having a solid structure in place from the beginning is the primary determinant of success. Additionally, program leaders should quickly The integration timeline must be milestone- partner Integration Management Office (IMO) driven, with dates for close and cutover that are liaisons with functional leads, not hesitating to reasonable, well-communicated and achieved. rotate if necessary to find a strong fit. Common program analytics should serve as the ‘single source of truth’ for dynamics across the new target organization. 5 Comprehensive planning, Service Providers communication and • Ensure third-party service providers and vendors are informed at each step of the documentation must extend process and agree to key milestone dates to all stakeholders, each • Define future state interaction model and with a unique set of needs. processes to minimize post-conversion hyper-care activities Finally, the most successful integration Customers programs are those that empower decision • Over-communicate with customers for makers. Without this element, paralysis can changes in customer experience and result and accountability is diluted. With the right notification of cutover dates program structure and tools in place, complex integrations can proceed on track and yield a • Track end-to-end customer experience gaps positive outcome for all stakeholders. and mitigation approach as the primary indicator of the program’s success Employees • For transferring employees, focus on Day 1 enablement, which includes training, job aides and access to coaches if needed The most successful • Establish a mechanism for seamless integration programs interaction of functional teams across the buyer and seller organizations, are those that empower with clear rules of engagement and decision makers. procedures to quickly escalate any issues requiring attention 6 Getting It Right: Three Dimensions of an Ideal Consolidation Experience 1. Culture For example, one company may have a flat organizational structure – highly collaborative and not overly tied to seniority or job titles. The other entity could be more traditional, attaching a lot of significance to organization hierarchy and status. The more different the companies are, the more challenging the integration becomes. DR. BRIDIE FANNING Talent & Organization Leader, North America Even if the deal goes ahead, failure to fully take Financial Services, Accenture these aspects into account can threaten the long- term success of an acquisition. Large financial Q. What should industry leaders know about services firms often look to acquire new FinTech the cultural aspects of a merger or acquisition? companies to provide a specific digital service. However, a traditional, legacy environment may A. A good understanding of culture is essential to not be appealing to the incoming workforce of achieving a positive outcome in any consolidation technologists and digital specialists, so they leave. scenario. In our industry, the M&A process tends At that point, the whole reason the company was to be driven by financially oriented leaders who bought is gone – the acquired company can’t often don’t think enough about the cultural aspects, function for the purpose it was acquired to do. which can jeopardize all the other benefits they’re seeking to reap from the deal. If HR departments are central to M&A deals from early on in the process, they can spot these potential challenges, bring them to senior Q. What are some common mistakes that leadership’s attention and devise strategies for leaders make when navigating the talent mitigating problems. HR needs to be on the lookout, implications of a
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