The other Magnificent 7

Throughout the 1990s and 2000s, the M&A market was healthy but it sustained a slow and steady pace. We heard of a major transaction every few months. They were big news because they happened so rarely.

M&A activity has undergone a fundamental paradigm shift. Why?

The last 15 years has seen multiple factors which have combined to cause global pressures on the buy-and-sell market.

In the past year alone, we have seen CI Financial taken private in a transaction with Abu Dhabi-based Mubadala Capital. BMO Wealth Management bought Burgundy Asset Management Ltd. IA Financial Corp. purchased RF Capital Group Inc. And National Bank of Canada’s takeover of Canadian Western Bank received regulatory approval.

This rate of M&A activity can be attributed to seven reasons:

1. The urgent need for buyers to acquire asset diversification. It means buyers are looking for solutions that add to plain equity strategies. These include ETFs, private equity and debt, infrastructure, music royalties and other private instruments.
2. Buyers are looking for product distribution. In all of the above-mentioned deals, the buyer is either acquiring products together with distribution channels, or else they already have them and are marrying the two together. They are paying healthy premiums to avoid having to build it or expand what they’ve already got.
3. Scale matters. All the above buyers have it. But in an ever competitive marketplace, they demand greater scale. Investor pressures for stronger dividends requires the acquisition of asset management businesses that generate strong margins.
4. Wealth management businesses are in demand. Whether brokerage, planning or private wealth, these businesses offer some of the healthiest margins in the investment industry.
5. The M&A business has gone global. Traditionally, M&A activity in this country was purely Canadian. It’s now fully global. The Mubadala acquisition is only the start of deals of that nature. U.S. buyers are now competing with European and Asian counterparts for strong wealth management businesses. That will drive up the bidding price. More good news for wealth managers that can show healthy growth.
6. Small-and-struggling syndrome. Many Canadian wealth managers with less than $500 million in assets under management have flatlined. With no capital commitment to grow their businesses, they are ripe for sale albeit at a discounted price. M&A is a rationalization of an industry that simply has too many players. Unfortunately, many of these firms have little place or purpose in a market they have an insufficient share of. For buyers, their existing registration, infrastructure and clean regulatory machine makes them turnkey businesses ripe for acquisition.
7. The buyers are changing. In the old days, banks, asset managers and insurance companies did the purchasing. They remain active participants in the market. But the new guests to the party include venture capital and private equity firms — inside and outside Canada. Once known for quick flips, private equity firms understand the long-term potential of these businesses. Many private equity and venture capital firms offer real independence and autonomy from operational management. This often makes them attractive to firm owners who want to exercise their liquidity while continuing to run the business. Over the last five years, Wellington-Altus Financial, Harbourfront Wealth Management and others have been acquired — in full or part — for this very reason.

There are many wealth managers structuring their succession plans for buy-outs, while other boutiques struggle for growth. What they have built, or failed to build, will determine their market value.

Mark Toren

Industry

Mark Toren is president & CEO of Toren & Associates. He’s at mark@torenassociates.com.