The underlying risks of mergers and acquisitions
February 28, 2020 • 5 min read
Increasingly big deals are being struck within asset management, but two recent deals could draw more attention to the risks of mergers and acquisitions.
Both of these deals were announced in the same week: first, UK fund manager Jupiter Asset Management acquired rival Merian Global Investors for £390m. Then, the very next day, US giant Franklin Templeton Investments announced it was buying rival Legg Mason Asset Management for $4.5bn.
Even though these bumper deals have the potential to improve efficiency and savings (in the case of Franklin Templeton/Legg Mason by an expected $200m a year), the issue of digital risk management for asset managers becomes apparent in these crucial moments.
These deals are happening because asset managers – regardless of their size – are facing a much tougher operating environment. On top of growing criticism from cost-aware investors who claim they can get as much value (if not more) from passive funds, the industry is having to deal with mounting regulatory costs. Therefore, asset managers have become fixated on the need to scale up and this trend is also being seen across advice firms, platforms and wealth managers.
But what are the risks associated with mergers and acquisitions?
A lot of the risks of mergers and acquisitions processes derive from the combination of highly complex businesses, especially if there are mismatches in culture and processes.
Poor matches between companies can lead to mass redundancies, damaged brand names and lost market value. Sometimes when deals are struck, such adverse impacts are obvious. However, other times the risks lurking in these deals are less apparent and can take longer to rise to the surface.
A huge amount of expense and time is put into due diligence for this very reason, with firms eager to kick the tyres as much as possible before embarking on deals that could potentially have negative impacts down the line. Extensive merger and acquisition risk management checklists will be used, but there is a danger firms may overlook one critical area of risk: the digital assets of a company.
Like all regulated companies, asset managers are increasingly responsible for their digital presence and it is important to understand the dual dilemmas mergers and acquisitions can present: regarding brand preservation and potential financial promotion risk.
Asset managers put a huge amount of work and investment into their brands, in a bid to stand out in a crowded marketplace. Unfortunately, it is commonplace for one brand to be retired when two firms combine. Just because the retired brand isn’t ‘live’ anymore doesn’t mean it should be deleted entirely though.
It is becoming increasingly important for firms to preserve their brands in some way, not only for legacy preservation but for the benefit of future marketing teams. For instance, what lessons can be derived from this data? In time, could this influence future campaigns? For a lot of firms this can amount to untapped potential and, after so much time and investment, it could be unwise to do away with all of this.
With a merger or acquisition, it’s not just the companies and workforces being combined, the websites are too.
In many cases, especially for asset managers operating in multiple jurisdictions, this can mean the combination of extensive and complex websites, each including hundreds of webpages with thousands of different pieces of data, constantly being updated and changing. The fact that a regulated firm’s website is a financial promotion in the eyes of the FCA means this digital risk is an area of a business that needs to be fully monitored.
When acquiring a competitor, management will of course do their due diligence but properly researching a firm’s entire digital presence and the potential risks lurking on this (for instance, are non-compliant promotions featured anywhere on the site with out of date or misleading information) is a near impossible task.
These periods are subject to heightened regulatory focus, from both the FCA and CMA, so firms cannot afford to drop the ball here and when acquiring a competitor, they instantly become responsible for their financial promotions and digital risk. With merger and acquisition deals taking months, sometimes years, it is crucial that all of this hard work is not undone by a non-compliant webpage (and the risks it carries) slipping through the cracks.
Having the right RegTech solutions on board can make a real difference here. Website archiving is proving an increasingly popular solution, where technology ‘crawls’ a website to create a living, breathing snapshot of how every webpage appeared at a certain time. What’s more, these archives are tamperproof (unlike simple snapshots), ISO-compliant and time-stamped which means they can be legally admissible for compliance reasons and helpful with dispute resolution.
The MirrorWeb Platform is being chosen by more and more financial services firms for these very reasons. As well as helping businesses store and preserve living, breathing instances of their digital brands for future generations, the MirrorWeb Platform satisfies regulatory requirements to have thorough records of all financial promotions.