Valuing private banks for M&A transactions is a complex process, and not one that is unanimously agreed upon.
Sebastian Dovey, head of consulting for Scorpio Partnership, thinks it is not enough to look merely at assets under management when putting a price on private banks. "Looking at AUM and the level of wealth per client is not a telling sign of the company's value. You could end up with wealthy clients who are all very old, and want their money to stay static." In this case, the buyer may have overestimated the transaction-based fees that should be achieved from the acquisition.
Dovey thinks return on assets and revenue flows are more rational measures. For the buyer, offers should factor in culture fit, the level of staff education and training, as well as management communication strategy. Dovey believes it is important to know that the management will be communicating to their staff and clients throughout a merger or acquisition process to ensure both are retained.
PricewaterhouseCoopers applies a varied valuation methodology depending on the type of institution. Stephen Cater, private banking M&A expert at PwC says: "For those that manage client assets and charge their clients principally on a percentage of AUM then the AUM basis is best method. For those private banks that provide predominantly banking services then FSA imposed capital requirements exist, and a multiple of net assets will be more appropriate. While for those which charge fees such as the trust and fiduciary services sector, then a multiple of earnings will give the best result." Cater adds, however, that the complexity arises as most private banks and wealth managers do not fit neatly in one of these boxes.
For those on the selling end, putting a price on their own head is not easy either. If selling to an interested party will result in an increase in profits, and will be better for clients, then there is an argument for lowering price. Conversely, Dovey warns that sellers should be wary of "trophy acquirers". He says: "Sometimes members of very senior management like to make corporate acquisitions early in their career as it's a nice line on their CV, but what if they aren't going to stick around to see the consolidation through? It's a long-term interest after all."
