When the Rathbones and Smith & Williamson merger was shelved, it piqued the interest of many in the City, who questioned why what seemed all but a done deal suddenly fell apart.
Although we do not have the answer to why what could have been the wealth mega-merger of 2017 did not work out, a look into key features of deals can provide some insight.
So why do deals fail?
‘Various factors can throw a merger or acquisition into jeopardy,’ said Kenn Taylor, head of wealth at Alpha FMC, the wealth and asset management consultancy. ‘Sometimes it is the case that two companies simply do not have compatible operating systems and the cost of streamlining the two sets of operations and platforms makes any potential deal untenable.’
He added that the proposed shareholder structure can also lead to a deal collapsing at the last moment.
‘In some cases, there may be multiple parties involved and it can often be difficult to successfully align and reconcile all of their interests. In another case, one party, perhaps a family, could take issue with some of the terms, such as the name of the newly formed company, and call the deal off.
‘It is worth bearing in mind that during any transaction, the issue of compensation, or indeed earn out periods, can be a sensitive one, and if handled badly could itself lead to a deal falling through.’
Anthony Jimenez, founder of consultancy Anthony Jimenez & Company, believes that although the transactional price will be the ‘overriding commercial factor in any corporate acquisition’, the price paid to shareholders of the exiting firm ‘is not usually the sticking point’.
He suggests that the more intricate details within a deal are likely to cause it to fail at later stage because the transaction price should already have been determined and agreed on by both parties early on.
An example of a deal that fell through at a really early stage because of the price is AFH Financial’s failed bid for Lighthouse Group. Rejecting the offer by AFH in March 2016, Lighthouse said the £17 million, a 26.8% premium, that was offered ‘fundamentally undervalued’ the group.
In contrast, Rathbones and Smith & Williamson confirmed merger talks, with the former later revealing that the two sides could not reach an agreement ‘on terms which would be in the best interest of all our stakeholders’, even after spending £5 million for expenses associated with the transaction. Instead Smith & Williamson is now preparing for a possible float.
Client and staff retention
Another issue that may come up is keeping both staff and clients happy. There can be sticking points around ‘how best to reassure existing clients about the deal, manage client retention and ensure that the combined book of clients is fully compliant,’ explained Taylor.
‘Equally clear communication to employees around the terms of the deal and ensuring a smooth transition period is key to securing staff retention.’
Jimenez agrees, arguing that it is usually common for the acquiring party to insist on certain legal protections or restrictions to assist with the retainment of clients and assets.
‘These legal protections can include anything from the transactional fee being paid over a period of time based on client retention; to certain warranties and indemnities being provided by the selling shareholders; to restrictions of staff activities during the process.’
He says one aspect that is becoming increasingly common is negotiations over ‘key persons’. This is mainly due to relationship managers, who have the strongest control as to whether a client remains with the firm or not and might leave if the key person moves after the acquisition.
‘Therefore, although the acquiring firm is doing a deal with the selling shareholders; they normally find they are also doing deals with the relevant key persons at the firm they are buying, in order to keep them (and their clients) at the firm post-transaction,’ Jimenez said.
‘The tussle is usually between the key persons representing their close and embedded relationships with the clients, and the acquiring firm double guessing whether those relationships are as strong as they are stated by the key person.
‘At the end of the day, it’s always the client that makes the end decision. On this basis, it can often be that a deal breaks down due to negotiations with key persons and thus this may have an impact on whether the overall transaction proceeds.’
He added: ‘It’s really an art. The buying company will need to have a plan in place in how to handle the key persons and retain them. Most of it is down to good communication and professional people skills.'
Why did the Rathbones/Smith & Williamson deal fall apart?
There remains a story to be told about how the Rathbones acquisition of/merger with Smith & Williamson fell apart. Not quite The Big Short or Too Big to Fail, but there must have been some quite heated and dramatic moments. After all, the two sides had been talking for months, and extensive due diligence had taken place.
That would explain part of the £5 million termination bill, but banking acquisition facility fees probably account for a chunk too, since my understanding is that Rathbones was going to offer cash.
It is possible that by the time Sky News broke the story, the deal was already on the ropes – sometimes people leak to the press to force the other party’s hand. But surely the price was agreed ages ago – why rack up such huge bills? If you aren’t talking price you aren’t talking. So someone changed their mind – or there was a mother of a misunderstanding. Any insight would be gratefully received!