The study “Real Deals 2008: Definitive Information on Mergers and Acquisitions for Advisors,” released by Pershing Advisor Solutions LLC, a subsidiary of The Bank of New York Mellon Corporation, with Moss Adams LLP, reviews the mergers and acquisitions market in the registered investment advisory industry over the past decade and benchmarks key changes in the marketplace since the last “Real Deals” study in 2006.
Despite a slowing of transaction activity in early 2008, the long-term trend of an increasing number of deals remains strong. The M&A activity in the RIA marketplace is building stronger firms, creating synergies, enabling efficiencies and providing training and development opportunities for a new generation of advisory firm leaders.
Most firms will be affected by the implications of these transactions, regardless of their current interest in the transactions. Therefore, understanding long-term implications of the various deal structures and buyer options is critical for advisory firm owners all of which will face growing pressure to enter into deals in light of rising valuations, consolidation, and staff development needs, according to Pershing and Moss Adams.
Dan Inveen, senior research manager at Moss Adams LLP, said, “Never before has the independent registered investment advisory marketplace experienced such a high volume of transactions and had so many options for structuring deals. The transaction environment we are experiencing is characterized by a rapidly rising level of market liquidity. As a result, firms can now grow and develop in ways that were previously unimaginable.”
At least once within the last two years 53% of RIAs either bought or considered buying another advisory firm. Those advisers looking to buy are predominantly looking to access new markets or for an acceleration of growth by improving leverage or capacity.
According to the study, the most important drivers for a firm sale or merger are:
- 37% of advisers are seeking a succession solution,
- 25% are aiming to achieve synergies with an acquirer,
- 17% are looking to cash out their equity value,
- 9% are motivated by financial rewards,
- 5% view the transaction to be in their clients’ best interest, and
- 7% courted a sale or merger for other reasons than those listed.
The data from the “Real Deals” 2006 study illustrated that most deals were situational and, in general, motivation was primarily synergistic. However, the latest numbers find that synergistic deals are overshadowed by purely financial buyers who tend to be passive, or financially motivated serial buyers who seek to add value with existing capabilities, such as by integrating complimentary services or leveraging general scale efficiencies. Although ad hoc bank purchases were the predominant deal type during the first half of the current decade, serial buyers, whose strategies center on making multiple advisory firm deals, accounted for more than one-third of transactions during the 2006-2007 period. These serial buyers are more interested in near-term financial gain than in deals that complement their strategies and have added greater complexity to deal terms, shifting more risk to sellers and making actual value difficult to gauge.
In light of the current market environment, whether or not a firm is expected to close a deal in the near future, advisory firm owners must continually invest in their firms, build transferable value and position their firms as if a transaction were immediately pending, according to the study sponsors. When the time is right to pursue a transaction, it must be done deliberately and with clear purpose. The best-prepared firms are organized as businesses built to last and possess solid management, an orientation toward growth, depth of talent and sustained profitability, the survey report suggests.
“While this mergers and acquisitions environment is encouraging for continued industry prosperity, it poses challenges for firm owners in their attempts to understand and take advantage of the opportunities that arise. The terms of the most successful transactions in any given situation are shaped by the characteristics of the individual firm and by the business and personal preferences of its owners,” said Mark Tibergien, chief executive officer of Pershing Advisor Solutions, in a press release.
Pershing Advisor Solutions LLC is an affiliate of Pershing LLC and a provider of financial business solutions to independent, fee-based registered investment advisers and dually-registered advisers working in conjunction with many of Pershing LLC’s introducing broker/dealer customers. Additional information is available at www.pershingadvisorsolutions.com.