Less is more in tougher markets

No one should be surprised by the rash of merger and acquisitions (M&A) that have suddenly emerged in the financial services industry, with AXA Asia Pacific Holdings acquiring Challenger’s financial planning business and AMP Capital bidding for MacarthurCook.

The motivation for all this M&A activity is simple: tougher market conditions have forced boards to look more closely at their balance sheets and, where required, make the tough decisions necessary to sustain shareholder value.

In the case of AXA’s decision to acquire the Challenger financial planning business — Genesys Wealth Advisers and the Synergy platform — the transaction appears to not only reflect the desire of the AXA Asia Pacific board to grow the company’s retail distribution capacity but also the steely pragmatism of the Challenger directors.

The bottom line of the transaction is that Challenger picked up the $1.3 billion annuities portfolio from AXA, building its annuities, allocated pension and superannuation portfolio to $5.1 billion — a move the Challenger board clearly found more palatable than persisting as a mid-range player in the highly competitive financial advisory game.

We will never know whether Challenger and AXA would have been moved to enter into such a transaction in the absence of tougher market conditions, but it is a fair bet that if double digit growth had continued to be the order of the day in investment markets, there would have been substantially less motivation to seal the deal so promptly.

Given that all the recent data suggests annuities-linked products represent one of the future growth areas for financial services in Australia, it is easy to discern at least some of the factors that motivated Challenger. In the case of AXA Asia Pacific, there was never any doubt that it harboured a desire to expand its reach in the planner space.

While there are tentative signs the market is in a recovery phase, it seems likely we will be witness to further change and consolidation as dealer groups and individual companies continue to pursue scale and reach in an increasingly competitive environment.

With rising costs and regulatory complexity a day-to-day reality, ongoing market uncertainty and investor conservatism will represent a real challenge for those firms that lack scale.

It seems certain that we will see more market consolidation in the coming months.

— Mike Taylor