Anticipating asset manager M&A
While 2011 was the worst year in global asset management M&A in the last five years, both in terms of deal volumes and values, we hope that European bank divestitures of their asset management (AM) businesses, continuing improvements in valuations and strong interest from buyers will make 2012 a better year.
Asset managers had high expectations for 2011 being a year of recovery in M&A, building on the progress seen in 2010 – but the year turned out to be highly disappointing for most. Both global deal values and volumes were down compared to the prior year, by 48% (from $29.5 billion to $15.4 billion) and 25% (from 848 deals to 639 deals), respectively. ¹
But we noted an increase in overall M&A activity in 2011, despite the decline in completed deals. Many proposed deals failed, particularly in the third quarter of 2011, as market volatility increased and debt funding availability decreased; buyers reduced their valuations and sellers who were in no rush to sell, terminated their sales processes. In addition to the valuation differences that led to failed deals, the diligence and negotiation process in 2011 took longer as buyers appeared to have less appetite for risk.
We hope that 2012 will be a better year for AM M&A. While the ongoing sovereign debt crisis, regulatory changes and economic weakness around the globe mean there is still considerable uncertainty, nonetheless, many positive signs signal a potential increase in M&A activity.
We expect that European banks selling their asset management businesses will be significant contributors to the expected improvement in M&A activity. Certain European banks are already well on their way to sell their AM arms. But we do not expect the situation in 2012 to be similar to that in 2009, when banks completed many large divestitures quickly at attractive valuations for the buyers. The process in 2012 is likely to be more competitive as several potential buyers, who are eager to grow and widen their product and geographic footprint, could enter the fray. Although these deals may be game-changers for successful bidders, those bidders will have to deal with many challenges that may make the negotiation process trickier, and may even result in failed deals.
The US economy continues to show positive signs of recovery and we are seeing an improvement in valuations, albeit within a wide range. Highly attractive AMs are achieving valuations close to the historical averages but, on average, EBITDA multiples are still below historical levels.
Another promising factor is that the AM sector is overdue for consolidation. Both alternative AMs and mutual fund managers are having difficulty competing for assets under management. Meanwhile, lower performance fees as well as higher costs related to regulatory, investor and board demands are hurting profitability. Whether this consolidation takes place in 2012 or not will depend on what happens to valuations, regulatory and tax uncertainties, as well as how financial markets perform.
¹Source: Thomson Reuters, SNL and PwC analysis.