Asset Management M&A Outlook Brighter for 2012, Says PwC

After a Disappointing 2011, Outlook for Asset Management M&A Still Uncertain, but Brighter
Due to Potential European Bank Divestitures, Improving Economy, Strong Interest from
Potential Buyers

NEW YORK, February 28, 2012 – Volatile markets, increased regulatory and economic uncertainty, decreasing availability of debt funding, and differences in valuations between buyers concerned with overpaying and sellers reluctant to accept lower prices made 2011 the least active and lucrative year for mergers and acquisitions (M&A) in the global asset management industry since 2006. However, potential divestiture of asset management divisions by European banks, continuing improvement in valuations and stronger interest from buyers are likely to make 2012 a better year, as detailed in the new PwC report, “Asset Management M&A Insights: The Way Forward.”

Global Overview

After the progress seen in 2010, last year was disappointing, with global deal values declining by 48 percent compared to 2010 and global deal volume falling 25 percent. There were 639 deals announced in 2011, compared to 848 in 2010. Even at the height of the financial crisis, more deals were being done. Many proposed deals did not close because buyers lowered their offers and sellers ended negotiations rather than accept lower prices.

There are signs of a potential increase in M&A activity in 2012, including progress made by some European banks potentially preparing for the divestiture of their asset management arms as they seek to bolster their balance sheets and meet new capital requirements. In addition, valuations are starting to show some improvement albeit within a wide range, with the most attractive asset managers seeing valuations nearing historical averages as the U.S. economy shows more signs of recovery.  Overall, however, valuations are still below pre-crisis levels.

“Beyond positive economic signals, the asset management sector could undergo further consolidation,” said Sam Yildirim, US asset management M&A leader, PwC.  “Sector's earnings have been hit hard in terms of lower revenues and higher costs.  Both traditional and alternative sectors are fragmented and asset managers are facing pressure to expand their product offerings to deal with changing asset flows and capture a greater share of their clients' asset allocation and geographic footprints in order to have local expertise in developing countries and become truly global."

Among other findings of the report:

• Deal activity continues to be focused on small- and midsized asset managers; last year saw only one mega-deal valued at $1 billion or more, compared to eight such deals in 2010 and six each in 2008 and 2009. Excluding mega-deals, average disclosed deal value edged up in 2011, to $67 million, compared to $53 million in 2010 and $41 million in 2009.
• For the first time, deal values involving Asian firms exceeded those in both Europe and North America, accounting for 31 percent of total deal value in 2011. In contrast, North American deals accounted for only 27 percent, with European deals lagging slightly behind at 25 percent.
• Reflecting the growing diversity of the asset management industry, only two of the buyers in the 10 largest transactions of 2011 were from the U.S. In fact, the buyers in the top 10 deals came from eight different nations on five continents.

U.S. Overview

Three years after the financial crisis, asset management M&A is still struggling to get back to normal in the U.S., with 2011 being another “wait-and-see” year for the industry. Disclosed deal values declined to $3.3 billion, down from $4.9 billion in 2010 and $17.8 billion in 2009.

Based on the results of a PwC survey of more than 300 U.S. participants  during PwC’s November 2011 asset management M&A webcast, buyers continue to be most concerned about regulatory and compliance issues of potential acquisition targets followed by getting the valuation right.  

In 2012, while there is still significant uncertainty, the outlook is positive:

• Appetite for M&A activity remains high, with asset managers finding it difficult to achieve organic growth, and there is a strong pipeline of potential sellers. However, the sellers are looking for an improvement in valuations or strong strategic partnerships before they are willing to come back to the M&A playing field. Other factors, such as flush corporate balance sheets and interest rates at all-time lows, also point to more deals this year.
• To date, the impact of regulatory initiatives on asset management M&A has been less pronounced than expected. However, some predict the proposed Volcker Rule’s restrictions on proprietary trading by banks and limits on their management or sponsorship of private funds may lead to divestitures by U.S. banks. It is clear that most banks are not making any fast decisions and they are watching the developments.
• There are a number of rumored divestitures of sizable U.S. asset management businesses of European banks.  While the sellers of these businesses are in need of capital, they are unlikely to part from them at distressed valuations.  Success of such divestitures will depend on the appetite of potential buyers to do a large deal.

However, there is still a possibility that 2012 may be another challenging year for M&A. Last year, many negotiations broke down as would-be buyers re-priced deals because of concerns about overpaying. Valuation multiples, driven primarily by the expectations of future performance, remain a top concern for potential buyers and sellers, and could continue to delay or derail deals during the coming year unless buyers gain confidence about their prospects.

“The M&A process in 2012 is likely to be more competitive than in recent years, with more potential buyers, but greater concern about the many risks - especially with regard to valuations. Although these deals may be game-changers for the successful bidders, the risks could make the negotiation process more problematic,” added Yildirim.

The PwC report, “Asset Management M&A Insights: The Way Forward,” looks closely at issues in asset management M&A and provides perspectives on recent trends and anticipated future developments in the U.S. and major global markets. To obtain a copy, please visit www.pwc.com/us/assetmanagement.

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