Not long ago, when asset management firms merged, a deal could be justified primarily on the basis of cost synergies—reducing duplicative back-office costs, combining sales forces, etc. But not at today’s valuations. Today, asset management businesses are valued at approximately 15 times forward PEs, up from a low of under 10 in 2020.1
Higher valuations—driven by frothy capital markets and accelerated M&A activity in asset management—mean that buyers need to think beyond cost synergies. There were more than 250 deals in each of the past three years, compared with 211 deals in 2017 and fewer than 150 deals a year back in 2014 through 2016. This year will likely break a record: 167 deals for asset managers were announced in just the first six months.2
To make these deals pay off, acquirers are increasingly focusing on revenue synergies, adding to the complexity. For deal makers who are accustomed to focusing on scale and cost synergies, adding revenue synergies to the mix is not easy. In fact, because revenue synergies are difficult to quantify and realize, deal makers have typically not factored ambitious revenue synergies into their valuation thesis or communicated such goals to investors.
In this paper, we show how leading dealmakers in the asset-management business are pivoting to seek revenue synergies as a necessary driver of value. We also describe the common challenges and ways to tackle them.
- Source: S&P 500 Industry Briefing: Asset Management & Custody Banks, Yardeni Research, August 25, 2021
- Source: Equity research