Megamergers: money makers or market mishaps?

Date: 07 Feb 2024

Ashleigh John

The last few years have seen a number of mergers and acquisitions between enormous corporations. Colloquially known as ‘megamergers’, these mammoth collaborations can be seen across a wide range of sectors. Citywealth investigates the impacts of these mergers within the private wealth industry, positives and pitfalls alike.

A bit of background

In summer 2022, Tilney and Smith & Williamson merged and renamed as Evelyn Partners. The summer of 2023 saw even more major merger news in the private wealth industry; UBS acquired Credit Suisse in June and Rathbones completed its combination with Investec in September.

In their press release, CEO of UBS Group Sergio P. Ermotti said on the Credit Suisse acquisition: “Today we welcome our new colleagues from Credit Suisse to UBS. Instead of competing, we’ll now unite as we embark on the next chapter of our joint journey. Together, we’ll present our clients an enhanced global offering, broader geographic reach and access to even greater expertise. We’ll create a bank that our clients, employees, investors and Switzerland can be proud of.”

On how clients can expect to benefit from the merger, Rathbones listed an enhanced research team, a broader range of services and wider geographical coverage as just a few of the anticipated positives.

2024 already has one confirmed megamerger in the pipeline. ‘Magic Circle’ law firm Allen & Overy is set to merge with US giant Shearman & Sterling to create A&O Shearman. The firms announced in June 2023 that 99% of the votes cast at each firm were in favour of the merger, which will result in a powerhouse firm, boasting nearly 4,000 lawyers, 800 partners, 48 global offices and combined revenues of approximately $3.5bn.

Further merger activity is expected in the legal sector following this news, though perhaps not until 2025 at the earliest.

Whilst the ‘mega’ aspect of a megamerger often leads to successes when looking through the lens of improved scale and reach, being bigger isn’t always better. The larger the combining forces, the higher the chance of instability caused through the inability to integrate effectively, which ultimately impacts the service clients receive. The general consensus in recent years has been that mergers are good, helping to raise and maintain standards in the industry. Is this still the case?

Industry opinions

To gain an up-to-date perspective on megamergers within the private wealth industry, Citywealth spoke to a few professionals to ascertain more on the intricacies of how M&A activity makes an impact.

Sarah Bartram-Lora Reina is a Trustee Director in Stonehage Fleming’s Family Office Division in Jersey. She is responsible for managing assets held in trust on behalf of beneficiaries, acting on boards of corporate trustee and corporate director companies in a number of jurisdictions. Sarah is the President of the Jersey Association of Trust Companies since 2021 and Chair of the Jersey Charity Tribunal since 2018.

Partner of Ogier’s Corporate Team in Jersey, James Fox has more than 20 years’ of experience in the industry. He has acted for clients in a large number of M&A and IPO transactions and has extensive experience in real estate investment structuring, fund formation and finance work, and private equity.

Clare Archer heads Penningtons Manches Cooper’s Private Client Team in London. She has developed a particular interest in family office work through her role as a trusted advisor to a number of high net worth families and has a focus on relationships with landed and business families, including some of the firm’s longest standing clients. Clare is a member of STEP, the world’s leading organisation for private wealth professionals, and writes the probate section of the STEP handbook.

Where do you think industry interest is currently sitting re: mergers? Are they still an appealing option, or has the current economy put a damper on the trend/plans?

Sarah Bartram-Lora Reina: “There is still interest in mergers depending on the strategic aims of the industry participant.  In a typical scenario, it is critical to be informed of prospective acquisition opportunities, where an exit is required from existing shareholders,  in order to avoid missing them. Additionally, potential buyers may identify ideal targets they want to approach, that match their future business strategy and make approaches to determine interest. The current climate of tight liquidity and higher interest rates where leveraging is involved will have dampened some enthusiasm or ability to progress opportunities.”

James Fox: “It is very hard to give a single industry wide answer or view.  Each sector and business will have its own drivers.  The current economic outlook can increase the likelihood of mergers.  Businesses across the industry and sectors will be looking to defend their own position and market share.  Often bulking up and being part of a larger group can have benefits in terms of economies of scale and strength of balance sheet.  The current levels of interest rate make highly leveraged deals with large debt facilities less likely so anyone sitting on cash or with an attractive business and able to offer shares as consideration will likely be in a strong position.”

Clare Archer: “There is always going to be somewhat of an appetite for mergers within the legal industry and private wealth market. The bringing together of resources, buying power in the marketplace and skills sets is appealing in the long-term vision to the majority of organisations. Given the rise in inflation and interest rates, paired with an uncertain political landscape, mergers have slowed. With a UK and US election providing a changing political landscape and the unrest in the Middle East and Ukraine continuing we may see a continued slower rate of mergers.”

How are clients affected by mergers, both positively and negatively? What can be done to mitigate any impacts on the clients during any teething problems post-merger?

Sarah Bartram-Lora Reina: “The benefit of mergers is that they extend the widening of a service offering, both in traditional and new areas (such as digital assets) with access to expertise, knowledge and business networks in additional locations; as well as potentially offering cost savings to the clients due to economies of scale. The negatives are if there is a culture and value mismatch, this may mean that relationship leads employed by the company do not remain following the merger, and move on. Invaluable knowledge of those clients is then lost, that will need to be rebuilt. Unfortunately, sometimes the cost to serve increases, rather than decreases.

Relationships are built on trust, so being able to respond quickly to any teething problems are key and ensuring the client continues to feel valued after acquisition.  It is important to listen to clients, as there will be key takeaways that many will be honest about, that can then be implemented to make client service even better and may be affecting other clients, leading to overall better client retention.   Additionally, it is essential to prioritise ensuring a strong cultural alignment and take advantage of the opportunity to learn from both the acquired company and the acquiring company. By implementing the best practices from both sides, you can achieve the best of both worlds and ultimately improve your service levels and achieve quicker integration.”

James Fox: “If a combination of businesses results in a better all round business in terms of service delivery and the client experience then this is great.  Also if there are cost savings involved in the merger  (although these can take some time to come through) then ultimately a well implemented merger can have positive cost implications for clients.  One possible negative is a particular client group not fitting with a new business.  This typically involves unhappy clients who leave the business and move elsewhere.  The best executed mergers are those with a sound integration plan.  This will cover the basics like IT systems, risk appetite, policies and procedures and terms & conditions but more importantly will make sure that staff and clients are aware of and are part of whatever the enlarged culture is. Cultural fit and the continuation of a successful culture is the most important (but probably most difficult) part of any merger.”

Clare Archer: “Clients are effected by mergers in various ways. Culture is the key to a good merger, to not only be less than the sum of ones parts but also gaining strength from the merged organisation having being inclusive of their new colleagues and having a shared vision. On the positive side, the organisations merging may benefit from increased level of technical skills and expertise, in some situations, there will be greater reach for clients national and internationally and combining operations may lead to reduced costs, purchasing power and efficiencies, that then get passed onto the client. On the negative side, a merger brings cost savings to the organisations in the long run, but with the duplication of roles of advisors and teams this may result in teams being reduced or sold off.”

How do industry mergers affect competitors of the merged companies? Are there steps/adaptations that companies make when other companies in the industry merge?

Sarah Bartram-Lora Reina: “If an industry merger is done well, it can give a market lead over competitors for new and existing business, as well as developing a strong profile and brand, which is attractive for recruiting staff. If a merger has not been successful, not only will competitors be approached by clients looking to move service providers, but  the competitor firms will also be able to recruit employees and talent, who will also be looking to leave… It is important for boards of companies to be forward looking – where companies have merged in the industry, what does this new offering provide, that the company does not, and what should it be considering to remain competitive as part of its own risk profile.  Consideration should also be giving as to the potential strengths and weaknesses of the industry merger and whether any action should be taken to develop employees and talent, retain clients and market segments.”

James Fox: “As is the case with so many things there are threats and opportunities.  The main threat is a larger competitor in the market may be hungry to grow more and take market share from smaller businesses.  The flip side of this is a big competitor may have a pool of clients that it can no longer service in the manner they are accustomed to.  The single best way to succeed is to know yourself and your business and to turn up and do your job well daily.  If everyone from the reception staff to the CEO/owner operates at that level good things tend to happen.”

Clare Archer: “A merger is an opportunity for competitors in that same industry. With a merger it can be rare for a whole organisation to go together, you may have breakaway teams or big names in the industry that use this as an opportunity to look for pastures new. This can lead to competitors offering them to join them, in turn strengthening their teams. This can happen post-merger too, if the grass wasn’t green as first thought. A merger also takes months and sometimes years to bed in and see the benefits, this gives competitors the chance to appeal to those clients whose needs are not being filled by the newly formed organisation.”

What are your feelings on industry mergers: do you think they are ‘good’ or ‘bad’ for the industry and why? Is your opinion influenced by current economy?

Sarah Bartram-Lora Reina: “Over 70 to 90% of mergers and acquisitions fail according to Harvard Business Review, due to failure to prepare and having expertise in that area. When executed successfully, industry mergers can create opportunities for organisational growth and profitability, as well as provide comprehensive solutions for clients and potentially open up additional career prospects for employees. Where an industry merger has not gone well, it can have an impact on the wider industry, where employees may leave the industry for good, clients wealth suffer or perhaps there has been regulatory failings and reputational risk due to bad governance from failing to integrate.

It is important to ensure that employees that come with the merger feel valued. If they do not, they will become unhappy and leave, taking know how with them. This could unsettle clients and if they are also experiencing changes that do not align with their values and reasons for choosing the original service provider, they too will leave. It is crucial to ensure that employees have a voice throughout the merger journey and integration process, providing opportunities to identify where a business can improve overall and give them the ability to develop quickly their new network.  This is particularly important as it enables employees to familiarise themselves with new team members and feel a valued part of the new wider team, to prevent a them and us mentality.

[My opinion is not influenced by the current economy.] Nevertheless, the short term environment will continue to get harder for mergers, as the regulatory world continues to expand, new technologies and sustainable reporting are introduced and further pressure to return value to the shareholders increases.”

James Fox: “A good well implemented merger is positive for everyone.  A badly executed merger or “marriage of desperation” tends to work less well.  Whether the economy is in an up or down cycle there will always be demand and opportunity for mergers.  Picking successful targets and cultural integration are key.”

Clare Archer: “Each merger is different, a good example is Tilney and Smith & Williamson. Both well regarded names in the industry, by bringing together their skills, well regarded brand and geographic reach they appear to have created a strong business in the form of Evelyn Partners and a strong brand. There are on the other hand, examples in the past of different organisations where the cultural fit maybe hasn’t been thought through, it has back fired leading to less benefits getting passed onto the clients. Whenever looking at a merger thinking about a cultural fit for the clients and staff is important rather than just the economics of the merged group.”

Thank you to all of the professionals who contributed to this article.