While the front-page headlines may be all about Brexit (and indeed Brexit is also making headlines in the financial section), for the asset-management industry, the current wave of mergers and acquisitions could be (almost) as much of a challenge.
The year 2018 saw a massive upturn in mergers and acquisitions in asset management
While “the merger of the year” in the asset-management industry was probably Invesco’s $5.7 billion purchase of OppenheimerFunds from MassMutual, there was no shortage of smaller-scale mergers and acquisitions, quite the opposite in fact. According to figures from PricewaterhouseCoopers, the year 2018 saw a total of 140 deals with a combined value of $14.9 billion. This was an increase of no less than 72% as compared to 2017, making it the biggest annual increase since 2009, which, of course, was the year after the global financial meltdown and hence also a time of significant economic uncertainty. While the majority of these deals were on a far smaller scale than the OppenheimerFunds acquisition, there was more than a sprinkling of large-scale deals, for example, Q4 2018 had no fewer than 3 deals worth $1 billion or more.
In times of change and challenge, people (need to) stick together
Throughout human history, people, as a whole, have shown themselves willing to put aside personal differences, even significant ones, to deal with serious threats which could cause serious damage to all concerned. The current trend of mergers and acquisitions essentially just applies that concept to the area of business. Smaller companies may give up some (or all) of their individual identity when they join with larger ones, but in return they gain the protection of the larger company, which means that overall their chances of survival increase. Of course, there are usually winners and losers in every situation and in the situation of mergers and acquisitions the losers tend to be the people who lose their jobs due to work being streamlined in an attempt to improve profit margins.
Streamlining workflow is not the only threat to asset-management jobs
While the never-ending forward march of technology may seem like it is only an immediate threat to lower-skilled jobs, the actual fact is that even those with a higher level of skills are now being challenged to justify their salaries. In terms of asset management, that means that asset managers not only have to beat passively-managed funds (with lower costs) but also show potential customers that they can outperform amateur investors who are plugged into the sort of data which was once reserved only for professionals. Asset managers may feel under pressure to meet short-term goals such as beating benchmarks, even if they feel that doing so would actually run counter to the best medium- to longer-term strategy. Added to all of this, they face the prospect of people reducing their assets under management and moving to “safer” options such as real estate or the purchase of other tangible assets (e.g. precious metals).
The way forward
While everything mentioned so far may paint a very bleak picture, it’s not all bad news. What many investors want to see is growth, ideally sustained and sustainable growth. This means that when companies hit a growth barrier with their internal resources, it can make complete, logical sense to look to external purchases to drive further expansion, especially if a company is publicly traded and hence can pay in stock rather than cash (at least in part). As a result, even though some jobs may be eliminated (or at least threatened), these may be replaced by other roles as the new, expanded company moves forward and seeks to continue to develop.