The stock market’s deep decline in 2008, combined with one of the worst recessions in decades, resulted in fewer mergers and acquisitions among registered investment advisory firms last year, according to the latest data from Schwab.
But Dave DeVoe, managing director of strategic development at Schwab, says that several positive indicators point to a pickup in deals in 2010.
There were a total of 71 deals completed in 2009, representing $103 billion under management. In 2008, by comparison, there were 88 deals representing $137 billion in assets under management. The average deal size last year remained just under $1.5 billion.
RIAs were the most active buyers, making up approximately 55% of the deals. Holding companies accounted for roughly 30% of transactions. Meanwhile, activity among regional banks remained flat from 2008 at about 10%.
The stock market decline in late 2008 and the early part of 2009 hampered many transactions, DeVoe says. He notes that M&A deals generally take about nine months to negotiate, so there was a “six-to-eight month period where it declined fast and the buyers walked away from the table in a lot of situations.” The aggressive stock market rally since March bodes well for 2010, but there was a lag effect on revenues and cash flow last year. In fact, the three main underpinnings of M&A deals—revenues, cash flow and risk—all moved in the wrong direction in late 2008 and early 2009.
DeVoe, however, points to several positive indicators to support deal activity in 2010: improving cash flow, risk becoming more attractive and private equity coming back to the market.
DeVoe also has seen rising interest from advisors in M&A deal making. Demographics are also playing a role, as the average principal of an RIA firm is 54, with over 30% more than 60-years-old. Many of these owners are now looking to exit the business.
DeVoe says that when we look back at 2009 “we’re going to see a near-term dip” in an otherwise steady upswing in M&A deals. In fact, before 2009, there were four successive years of increasing M&A activity. He now expects five to seven years of a steady incline.