The financial services market has been internationalising itself for decades. But in the last few years, competition has decreased in number as a few big banks and advisories have merged with, and acquired, other competitors. A significant factor in this is the continuous internationalisation of global markets, and global production processes. Perhaps there is no longer space for region-specific or generalised advisory firms. A recent sign of this trend was the announcement last week of the proposed takeover of Booz and Co, an American medium-sized management consultancy firm, by Price Waterhouse Coopers (PwC), the British professional services giant – PwC itself is an amalgamation of several accountancy and audit firms.
PwC-Booz and the Professional Services Industry
There is some opinion that PwC’s motivation for taking over Booz is more closely related to competition among the ‘Big Four’ British-based auditing firms – the others being Deloitte, EY and KPMG (although Accenture’s probably there or thereabouts nowadays too) – than a shift in the dynamic of global advisory. The acquisition of Booz would boost PwC’s stake in the management consultancy market, dominated by Deloitte and the big American firms: McKinsey, Bain and BCG. However, this does not explain the relative ease with which Booz as a company have been coerced into selling up. A more likely explanation for the rapid and smooth agreement would be the pragmatic mind-set of the Booz board, who may have considered that it will be difficult to maintain market share as the global services industry shifts and firms covering all multitude of advisory continue to grow. Companies such as Booz found new life post-Enron crisis as US law forbad firms from providing audit and consultancy services to the same client in the interests of avoiding false accountancy. This doctrine is now lapsing, allowing companies such as the Big Four to re-expand into previously neglected sectors.
Schroders-Cazenove and the Asset Management Industry
A slightly different merger occurred this summer in the investment management industry – Schroders, a British-German private bank, bought what remained of Cazenove Capital, an asset management firm. Cazenove, known for its low profile, is widely believed to be the assigned Royal broker for the crown fund, but had sold off various departments of its management business, primarily to US giant JP Morgan, weakening its position as one of the last independent asset managers in the City of London. The merger brought together two historic companies with expertise in distinct areas of financial management, strengthening both of their positions. It is reasonably probable, given the high number of small investment firms active in the UK, that the market will see more mergers of firms, or their acquisition by much larger banking houses looking to wipe out competition from boutique companies and increase their success against each other. A similar trend occurred in the 1990s in the retail-banking sector, that saw high-street banks such as NatWest and Midland absorbed by RBS and HSBC respectively. See (http://wp.me/p3g0mz-3v) for discussion on such developments.
Bank of America-Merrill Lynch and the Global Crisis
There is of course the argument that the instability of the world economy is contributing to the increased frequency and scope of mergers and acquisitions. This view, however, is intrinsically linked to the globalisation argument, as with globalisation comes wider-spread insecurities. The Bank of America acquisition of investment firm Merrill Lynch is a prime example. Merrill Lynch lost out heavily, along with Lehman Brothers, in the aftermath of the 2007 US Mortgage crisis which helped to trigger the global economic downturn that still plagues areas of the world system today. After floating on the New York Stock Exchange, Bank of America bought the failing company for around USD50bn, bringing the Merrill Lynch brand and asset base entirely under BoA’s wing. Since, the strength of the single company has continued to grow in all sectors – retail, corporate finance, investment etc. – to the extent that BoA now holds over USD2tn in assets, sitting up there with the big Chinese and Japanese banking groups and the surviving European lenders in France, Germany and the UK.
What the professional and financial services sector needs to be wary of, however, is the tendency to over-expand. The global financial crisis exposed critical flaws in the system, including the negative effects of holding too many assets and business ‘limbs’. For example, the Royal Bank of Scotland Group will most likely be split off, and subsequent shed a significant amount of assets, in order to make business viable. This is in accordance with upcoming Basel III regulations set to come into practice later this decade. A more detailed discussion of assets and size is available here (http://wp.me/p3g0mz-3M). In the meantime, market demand for global insight and expertise will continue to drive mergers and acquisitions across the globe. Smaller-scale deals are already being finalised – how long might it be until we see two financial giants joining forces to take on the world economy?