Merger demand growing

Listed dealer groups and fund managers are increasingly seeking merger opportunities within the sector to offset the affects of falling share prices, according to KPMG’s head of mergers and acquisitions, Robert Bazzani.

Share price falls have been “so dramatic and fast” in the sector that some dealer groups and fund managers no longer have a strong potential to deliver growth organically to their shareholders, he said.

“There have been price to earnings falls among financial services organisations of up 60 per cent in the current market, forcing firms to try to add value to investors by achieving synergies through mergers and acquisitions.”

KPMG is currently having “a number of discussions with counterparties in the financial services sector” on behalf of its clients, Bazzani said, although he acknowledged it was “not always giving the green light to execute”.

“Counter party confidence is a big (restraining) issue,” he said.

“A number of our clients are still concerned about whether capital markets are stabilising, and are assessing the likely impact of all their other options (to drive organic growth) before they implement a merger transaction.”

In the meantime, he said, these firms are trying to get their cost to income ratio down by focusing on headcount, controllable overheads such as marketing, IT, and back-office, but they are “finding they can only take this so far”.

“You can’t achieve the same level of synergies by cost cutting as a standalone entity.

“This is especially true in standalone financial services firms, which “benefit from volume and scale efficiencies driven by technology,” Bazzani said.

“There are significant cost synergies and also large potential revenue synergies to be gained from putting together two firms that are in similar fields. These synergies can help a firm to drive future earnings by showing the market it has good growth prospects and consequently driving extra value into the business, he said.

By contrast, a falling share price “can distract a firm from its medium to long-term strategic focus in a number of ways, thereby limiting their ability to deliver sustained growth to shareholders.”