The financial services sector has spent a decade redefining business models, using divestments to focus on core competencies and markets. It now faces a new digital challenge. New distribution channels are emerging, customer expectations are changing and automation is offering potential cost savings across the back, middle and front office. The development of robo-advisors in the wealth and asset management space is just one example of front-end technological disruption.
After years of restructuring prompted by regulatory reform, the sector has demonstrated that it is prepared to deal with disruption. Financial services executives are asking whether potential buyers are right for the divestment being considered or whether they should be casting their net wider.
Macroeconomic volatility and geopolitical uncertainty are the two major external forces leading financial services businesses to divest. In these uncertain times, the benefit of having a clear view of how much a business is worth, both to you and to a potential buyer, cannot be overstated.
To understand the relative value of your portfolio to your business and to potential buyers, the first steps are defining synergies across divisions, allocating capital according to the latest regulations and assessing risk-adjusted returns. This exercise offers insights into whether holding on to a business is the right course of action or whether capital could be better deployed elsewhere.
Be proactive. Identify assets that may be valuable to a buyer rather than waiting for a catalyst.
Anticipate shareholder activism. Financial services businesses remain on watch. In the sector, 45% say they are more likely to divest because of concerns around shareholder activism.
Leverage enhanced data collected as a result of structural reform. Regulatory pressure has improved data granularity in financial services. Two-thirds say it has enabled them to identify key people, systems, assets and agreements that would need to be addressed in a separation. Yet, far fewer are deploying this data for strategic, value-enhancing decision-making, including M&A.
With 51% of financial services executives saying an opportunistic approach was a trigger in their most recent divestment, companies need to build optionality into divestment planning. Companies need a clear vision of how a business can be carved out with minimal disruption, how long that separation will take and what actions should be taken. Yet the complexity of business separation is often underestimated. Even business lines that may at first appear to be distinct are often intertwined with other areas.
Do the preparation work early. Ensure you have an in-depth understanding of where there are synergies with other group businesses and what it will take to carve out the business. Thorough preparation conducted well in advance enables both speed and value retention in the long term.
Invest in structural reform to sort out potential separation issues. Regulatory reform means that more and better-quality data is available to define the perimeter of a business. Use this information to shorten divestment lead times and avoid value erosion that can be caused by drawn-out sales processes.
Examine business functions in detail. Consider where buyers will need to be fully accountable from day one, such as the aspects of risk and compliance that can’t be outsourced under transitional service agreements.
Don’t neglect data issues. Consider who owns the data and how it will be migrated. Recognize that data can dictate transaction structure in certain situations.
Create modular businesses. When establishing new business lines, think ahead. For example, consider how shared services contracts are devised and find ways to ensure that these can be easily carved out.
Foreign financial institutions operating in a developed market are considered the most likely types of buyers this year while foreign financial institutions operating in an emerging market have dropped to second place. PE and sovereign wealth funds are also rising on the list. Sellers need to invest time in understanding these new potential bidders.
Pre-empt likely questions and concerns from buyers. It’s likely a private equity buyer will require separate systems that are ready to go from day one. For strategic buyers, it’s worth considering their current systems and how they would fit with the business to be divested.
Balance efficiency with certainty. Where stand-alone systems are required, sellers need to understand and communicate both the cost efficiency of these systems and the ability to execute such a transfer. Think ahead to determine the long-term costs, as well as potential efficiencies that could be gained. Such transparency can help reduce buyer uncertainty.
Consider buyer synergies. Examine the various business functions in the potential divestment and determine where there may be overlap with potential buyers.
Look closely at shared services. Shared service centers can make some aspects of the business easier to separate. However, they can also present challenges in transferring businesses because sellers may not be equipped to serve as third-party service providers.
Consider due diligence on buyers. Verify that buyers can both execute quickly and transfer the business to their own platforms within a given time period.
Pre-empt regulator concerns. Ensure you can demonstrate that the disposal does not put the customers of the disposed business or your remaining business at risk, and consider how regulators may view potential buyers.
Joint ventures and alliances. Symbiotic alliances enable financial institutions to offer innovative products to customers through new channels. They reduce complexity by cutting through webs of legacy systems and processes with digitization. And FinTech innovators benefit from established players’ distribution and brand recognition. With blockchain likely to be the next big disruptor for banks, many have already teamed up with innovators on pilot projects. Insurance companies and wealth and asset managers are not far behind. Having an exit strategy or end-state in mind from the start will ensure the business can benefit through the full life cycle of such arrangements.
Private equity. Given the industry’s record amounts of “dry powder,” coupled with the rise of financial services specialist funds and increasing experience of the sector, PE could represent an even greater buyer pool than many currently anticipate. In more challenging and uncertain market conditions, sellers should look to PE firms that can invest in subsidiaries and exit when market conditions improve.
Future-proof your business
Financial services companies need to keep options open and ensure they are fit for the future by: