Consolidator  

Buyers beware

This article is part of
Sipps – October 2016 special report

The modern world is in an incredible rush: even old saws develop practically overnight. One such is that the self-invested personal pension (Sipp) market is consolidating rapidly. How can it not be? After all, there have been so many deals. Advisers and Sipp members want to know what all this consolidation means for them – a question that is posed frequently.

Before we assume the obvious truth of Sipp market consolidation is in fact as obvious and as true as we think, we need to make sure we understand what we mean by consolidate or consolidation (see below). 

Consolidate and consolidation

• To bring together separate parts into a single or unified whole; to unite; to combine;

• To discard unused or unwanted items and organise the remaining;

• The unification of two or more corporations by the dissolution of existing ones and the creation of a single new corporation.

Source: Barnett Waddingham. Copyright: Money Management.

Next, we need data. A well-known provider of financial information, long established in the Sipp market, revealed something seemingly incongruous at a recent roundtable: the number of Sipp providers has barely changed in recent years, and the number of products has gone up. How can this be if the industry is consolidating?

The answer is simple: for the most part, it is not. Following most deals, the acquired company still exists and its products remain open. Nothing has been discarded, nothing has been combined. Therefore, the data provider continues to maintain its records.

Terminology

So, in many cases, we have been using the wrong word. “Acquisitions” would be a more appropriate one: the purchase of one business by another. Since the target firms seem to have been in agreement with the deals announced, we could go further and call them friendly acquisitions. 

Looking at these deals, the first point to note is that the acquiring company typically assumes the assets and obligations of the other party. Any evaluation of the acquirer now needs to incorporate an evaluation of the acquired, too.

Acquiring companies usually pay a premium on the target company’s valuation to persuade the owners to sell. That is probably not the case for some deals, as they appear to have been distressed sales. 

The key evaluation in those cases sits in the first point. Where a premium is paid, the acquirer will need to generate a return on its investment. So the question in those cases is how are they going to do that?

The nature of acquisitions

Microeconomics gives us reasons as to why companies are doing these deals: to increase market share, add (or expand) niches and increase overall scale. 

Increasing market share is an interesting one. Two Sipp providers may each have a place on an adviser’s product panel. When one acquires the other, they may have an incentive not to merge products if they fear that new business going into one of the products on panel will not end up in the other. 

Of course, those compiling the panel will need to decide if they are happy with that. This model is used in other industries. For example, many consumer goods brands are now owned by the same few large corporations.