OpinionMay 11 2022

How do you solve a problem like a merger?

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How do you solve a problem like a merger?
(Mart Production/Pexels)

Another asset management merger has been in the news recently, and not for particularly good reasons.

Jon Little, a former non-executive director at Jupiter, sent a fairly no-nonsense open letter to the company, warning the board its acquisition of Merian Global Investors should never have happened, and accusing it of self-inflicting the crashing share price.

It is not the first time an asset management tie-up has been in the news.

The merger of Janus and UK company Henderson led to £7.3bn of outflows in one year in 2017

And everyone will remember the infamous rebranding of Standard Life Aberdeen to its vowel-free counterpart last year, whose share price is sitting 30 per cent lower than when the combination of Standard Life and Aberdeen Asset Management was announced in 2017.

Why is it so hard to successfully execute a merger of two asset managers?

With the current continued pressure on fees, and the decades-long bull run in equity markets coming to an end, more asset management M&As are likely to be on the cards as companies scramble for market share.

But asset management is not the same sector it was 30, 20, or even 10 years ago.

Getting it wrong

Part of the problem with these mergers is the tough battle for fund houses to define their offering.

Looking through the comments left by readers underneath the FT’s coverage of the Jupiter executive’s letter, a thread begins to appear.

“What’s Jupiter's USP? Size isn’t as relevant if they can consistently answer this question,” one said.

Another added: “Mid-sized asset managers have the worst of both worlds – not large enough to be just asset gatherers exploiting marketing and distribution, but too large to maintain a performance-driven culture.”

The rise and rise of passive investing has tempted investors away from the more expensive active funds managed by groups such as Jupiter.

A wave of redemptions can so easily turn into a self-fulfilling prophecy, as a fund's performance starts to be negatively impacted by waves of outflows.

While the behemoths of Baillie Gifford and BlackRock trundle onwards (despite the former struggling with performance recently) buoyed by their size, and the boutique houses such as Amati enjoy close relationships with their investors, a clearer purpose and smaller range of funds, those in the middle get stranded.

There is then the other issue of the ‘soft’ stuff.

At the start of my career I worked for a large multinational company that had recently acquired a similar-sized peer that had fallen on hard times.

The problems with the merger started to emerge fairly quickly, and it became clear that while those on the executive floor seemed happy with the terms of the deal, there was little attempt to explain to staff what was happening, let alone gauge the tone of the trading floor.

Heads of departments soon found themselves demoted to co-heads, sharing their offices and hearing rumours that their incoming colleagues were earning far more than them.

Needless to say, it did not go well; the company’s share price crashed and there was a fairly large exodus of staff.

The view from the ground

Kamil Kaczmarski, a partner at Oliver Wyman, told me a lack of an overarching vision, clarity of the benefits of a merger as well as board-level preparedness can lead to confusion at staff level on issues as seemingly insignificant as not knowing whether to wear a tie into the office after the merger.

These ‘soft’ factors are often as important as hard strategic decisions to the success of an acquisition, he said, with the outcome of a lack of communication on company cultural issues usually leading to an exodus of staff.

“The moment a merger is heard about, headhunters will tap the best-rated fund managers, and [often] teams will get poached," he said.

In a pandemic-scarred world, where employees do not frequent the office with anywhere near the regularity seen pre-lockdown, team dynamics are harder to absorb and problems much harder to detect.

While the reasons for mergers leading to underperformance are numerous and complex, asset managers looking for a join-up would do well to focus on culture.