As the pace of merger and acquisitions activity in the platforms market is expected to pick up market participants have warned that such deals rarely work out.
While problems created by platforms migrating to new technology have been well publicised in recent years, the problems of platform M&A run deeper, according to Barry Neilson, chief customer officer at the Nucleus platform.
He said people and culture at a firm were often key to a successful takeover.
Mr Neilson said: “It is important to remember that the client ultimately owns the assets that are on the platform, the platform doesn’t own them, so a platform buying another platform has to ensure there is a cultural fit between the two."
He explained: "Many advisers that use platforms such as Nucleus and Transact that are not part of bigger life insurance companies, are likely to be unhappy [if] the independent platform they signed up to has become part of a wider company."
Ian Taylor, chief executive of the Transact platform, told FTAdviser in September he had rejected several offers for the business from fund houses before floating the company on the stock exchange.
He said he rejected the offers as he felt the firms' primary motivation was to improve their distribution, which was not something he felt would work with his company.
Ben Hammond, platform director at consultancy firm Altus, warned if a firm that is being acquired has poor communication with its staff or advisers about the takeover this can lead to people leaving the firm and in turn harm the value the acquiring firm thought it was getting.
Despite this technology does play an important part in any platform merger.
Mr Hammond said: "When it comes to integration of two platforms, the technologies they sit on tends to be the first thing that is looked at, and if you are lucky enough to be on the same tech as the platform you’re purchasing, then all the better. If not, it’s going to be a harder task, with a number of well publicised examples in the last couple of years."
Mr Neilson believes such activity rarely works out. He said: “Although some platforms use the same underlying technology provider, that doesn’t mean sorting the technology is easy, because they could be different versions of the same company’s technology. But the problems with platform M&A are much deeper than that.”
As FTAdviser previously reported, Mr Neilson believes the platform market will evolve over the next decade, with some firms continuing to focus on providing tax wrappers and investment products, while others will evolve to provide a wider range of services to advisers.
He said “in a normal industry” such an evolution would lead to lots of M&A activity as firms try to achieve economies of scale.
Mr Hammond said smaller, slower growing players were often more profitable than bigger platforms. He said: "Nevertheless, scale is still seen as key to being a success in the platform industry, so it is often the larger players who are looking to consolidation to grow their businesses.
"But it’s not just the current platforms who are looking to buy into the platform market, with money from outside the industry in the form of private equity starting to raise its head and perhaps go up against some of the existing platforms who are looking to consolidate.
"Epiris’s acquisition of the James Hay platform last year is quite possibly the first in a line of what’s to come here."
The pace of M&A activity in the platform market picked up in 2019, with Embark buying the advised client business of Alliance Trust and later the Zurich platform.
Phil Smith, chief executive of the Embark Group, said he is confident that having previously integrated platforms, he will be able to do so again with Zurich.
david.thorpe@ft.com
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