Private Banking M&A: Share or Asset Deal?
It, of course, is a truism to state that the Swiss Private Banking industry is undergoing very significant structural changes, which are being driven by the new tax (and regulatory) paradigm as well as by the changing competitive landscape, both in Switzerland and internationally. A consequence of those changes is that the gross profitability of Private banking books of business have eroded, while their market value have plummeted since 2007 – generally having been divided by a factor of 3 or even 5 times, a perfect example of operating leverage at work!
In this context, it is also generally accepted that Private banking businesses in Switzerland should be viewed from a perspective of M&A with extreme caution and that, from a prospective buyer’s perspective, the caveat emptor principle should be adhered to rigorously. As a result, selling a Private Banking business by way of a share deal (i.e. selling the corporation) has become extremely difficult and asset deals (i.e. selling certain assets of the corporation) have nowadays become the preferred route for most prospective buyers, the aim being to cherry pick certain groups of clients or geographic markets.
While we recognize that it is generally better to be safe than sorry, we do also wonder whether the new conventional wisdom has not taken things too far and that opportunities are being foregone. In other words are we throwing the baby out with the bath water?
We do believe that in a buyer’s market, there are opportunities to be reaped by acquirers able to shoulder the risks of a straightforward share buy-out. Such risks have to be adequately mitigated, both through focused pre-deal due diligence and careful structuring of contractual representations and warranties. Expert advice by seasoned industry practitioners will no doubt prove to be very valuable in that context.
For those buyers who have the necessary negotiation and execution skills, as well as being financially able to play the consolidation game, share deals might well just be the perfect way to acquire good businesses at rock-bottom prices and thus generate substantial returns on those investments.
So caveat emptor, by all means, but also bear in mind that winners generally do not follow the crowds…