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Asset Management M&A Activity Heating Up

The asset management industry is gearing up for a wave of merger and acquisition activity, as a number of private banks are seeking purchases, according to a recent report from KPMG.

The research released by KPMG shows that a third of private banks worldwide have implemented a strategy that calls for an acquisition in the next three years. Those firms looking to ink a deal expect to achieve a third of their overall growth from acquisitions.

The report is based on a poll conducted in January and February via telephone interviews with 190 executives at 186 private banks around the world. Twenty-four percent of the respondents said their firm completed an acquisition in the last three years, while 39% said they have considered making an acquisition in that time frame.

The survey identifies the Asia-Pacific region as the most attractive region for growth potential for private banking, which accounted for 41% of all private-banking acquisitions in 2003. One Swiss respondent said his firm chose Asia-Pacific because of "political opportunities, European tax regulations; offshore banking is very dynamic in this region."

In terms of demographics, the appetite for acquisition was lowest in Germany, where 71% of private banks polled said they neither considered nor planned to consider any potential deals. North American and Swiss private banks completed the most number of acquisitions. Among European and Asia-Pacific respondents that plan to acquire in the next three years, a bulk of them plan to do so on the domestic front. North American respondents had no preference in the matter.

"From a legal, cultural and regulatory standpoint, domestic acquisitions present fewer challenges," according to the report. "One may also expect fewer integration issues in domestic transactions."

When asked about their rationale for making acquisitions, the most popular responses were geographical expansion and increasing market share. However, there was a significant difference between the growth strategy of small private banks and that of medium and large private banks.

More than two-thirds of the bigger banks polled said they preferred an outright acquisition, whereas only one-third of the smaller outfits said they see an outright purchase in their future. Generally speaking, smaller banks prefer to build, whereas larger banks typically are more dependent on acquisitions for growth. The distinction between the sizes of the banks was based on the number of employees, with small banks having less than 200 on staff, medium-sized banks ranging from 200 to 499 employees and large banks having 500 or more.

Culture Clash

Other key findings from the KPMG study focused on transaction management. While cultural integration is perceived as being one of the most important components after the deal has been made, not enough attention is given to whether the target company fits the culture of the acquiring firm, according to the report. Client profiles and profitability notwithstanding, evaluating the quality of senior management is "one of the most difficult areas in which to obtain comfort."

In terms of the size of an acquisition, the study indicated that the more garden-variety transaction among private banks is a relatively small, domestic acquisition. In fact, a majority of the deals completed by the respondents in the past three years were valued at less than $500 million, with one-third valued at less than $100 million, the report said.

When gauging the success of strategic acquisitions in the private banking and wealth management industry, companies typically look at their increased profitability. A majority of private banks overwhelmingly view their acquisitions as successful, but there is plenty of room for improvement in both cultural and technical integration. That being said, KPMG highlighted a series of best practices or "golden rules" for smooth integration. They include: alignment of the management teams, clearly identified management and team structures, extensive and open dialogue and adequate incentive structures.

According to the survey, 68% of the respondents agreed that cultural integration is the most critical factor in ensuring post-acquisition integration. One German respondent remarked, "Buying a company is a quick process, which can be achieved easily. But to integrate business processes, to increase efficiency advantage, is something we could still improve upon."

Retaining clients post-acquisition is also a critical concern for private banks when entering a transaction, the report said. The study shows that an average of 10% of a target's client base is lost within the first year following the transaction. Although it can be an exhaustive process to switch bank providers, clients often reevaluate their level of service after a major acquisition. Overall, the most popular suggestions for improvement included better communication of the objectives and plans, better comprehension of the "human factor" and better assessment of cultural integration.

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