Despite 237% M&A surge, half of deals go up in smoke, Fidelity says

June 30, 2023 1:17 PM

Fidelity Investments is considering having a global research base or two separate pools of clients and research in response to MiFID II, according to the firm’s head of global equities.

The pandemic era doubles as the dealmaking era for wealth management, and the past three years have played host to a flurry of M&A moves that leave previous eras in the dust.

But new research from Fidelity suggests that for every M&A success story, there is likely a tale of failure as buyers report walking away from the table more than half the time.

The 2023 Fidelity Investments 2023 M&A Valuation & Deal Structure Survey revealed a 237% increase in RIA mergers and acquisitions from 2020 to 2023. A reported 492 transactions took place during that period, up from just 146 deals in the 2017 to 2019 study period.

The survey, which examines trends and buyer perceptions related to RIA M&A transactions, also uncovered that the deals are getting bigger, with the median AUM of acquired firms increasing from $250 million to $400 million.

The second of its kind and the first conducted by Fidelity Investments since 2019, the analysis polled serial acquirers involved in nearly 75% of all RIA transactions tracked by the company from 2020 to 2023.

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"Despite market headwinds, the wealth management industry continues to be a vibrant space for M&A, with the environment rewarding high-quality firms with strong multiples," Laura Delaney, Fidelity's vice president of practice management and consulting, said in a statement. "Although activity has increased substantially versus the previous study period, it's important for RIA business owners to align on valuation drivers and understand the dynamics involved in the motivations and expectations of buyers and sellers."

The research also revealed that when it comes to making a deal, buyers and sellers that end up at the negotiating table together are often brought there by very different motivations and expectations.

"If buyers and sellers can better understand each other's key motivations, each can ensure they are effectively communicating the value their firm brings to the table," the study says.

The Fidelity study was fielded between Feb. 13 and March 28, 2023, and covered M&A deals between January 2020 and March 2023. The 2019 study covered M&A deals between January 2017 and July 2019.

A total of 23 firms participated in the study. Scroll down to see more key takeaways from the research.

Quicker deals, but they don't all get done

In addition to there being more deals, they're getting done faster. Respondents said the average M&A deal now takes roughly seven months to complete, down from nine months in the 2017-2019 period.

However, more than 1 in 3 buyers agrees that market volatility has had an impact on deal completion timelines.

When asked about deal sourcing, the majority of firms reported they were either sourced by in-house experts or investment bankers. Nearly half (45%) of firms said deals were financed using in-house capital, with a quarter reporting the use of private equity partners or draw loans.

Even with the uptick, the past three years have seen plenty of deals go up in smoke as one or both parties leave the table. Buyers reported walking away from 52% of evaluated deals. The key drivers leading to this were the misalignment of valuation expectations (87%), culture (73%) and the firm's vision (50%).

Where things falls apart

In regards to the deals that bottomed out due to valuation expectations, unrealistic comparison multiples (83%), the lack of understanding of valuation drivers (77%) and being too close to the business to see weaknesses (47%) were the major factors leading sellers to overvalue their businesses.

Meanwhile, nearly half of sellers (49%) utilized a third party for firm valuation. From a buyer's point of view, 33% of deals had higher valuations for firms who used a third party compared to firms who self-calculated.

"The nature of deals will continue to evolve," Delaney said in a statement. "We're seeing strategic acquirers become increasingly efficient which is reflected in reported deal completion time, however, opportunity can be left on the table due to misalignment of dealmaking fundamentals. There's an element of emotion behind every transaction."

By the numbers and looking forward

The study also examined changes in deal structure and found that buyers have evaluated nearly four times as many deals since January 2020, with median deal size increasing from about $250 million in the 2019 study period to about $400 million in the 2023 period, representing a 60% increase.

Revenue multiples climbed from 2.25x to 3.25x, and median EBITDA multiples also increased from 7x to 9x, with sellers' expected EBITDA multiples rising from 9x to 11x in the past three years.

Firms in the Fidelity study identified rising interest rates, significant private equity capital entering the market and increased demand as some of the reasons for the change in EBITDA multiples compared to three years ago.

When asked about expected M&A activity in the next five years, three out of five firms plan to do more deals. Respondents said that desire stems from a fragmented wealth management industry, advisors aging out of the business and firms continually seeking access to talent and scale.