Where’s the value in the value chain?

Jon Benson, Gilles Gerber, Silas Proft, Louise Lu

The value chain

Across the asset manager, wealth manager and platform clients we work with, we see a range of strategies to maximise the value of product sets and gain additional access to customers.

  • Asset Managers – Wealth strategy (albeit typically only the larger managers)
  • Platforms – DFM strategy
  • Wealth managers – Asset management/platform strategy

Advantages of Vertical Integration

There are three key advantages of vertical integration that firms should consider:

Provides firms with greater control over their operations

Vertical integration allows firms to reduce reliance on third parties throughout their operating models, centralising control and creating opportunities for cost efficiencies.

Proximity to the end customer

By offering more services and reducing the number of firms the end customer needs to engage with, vertical integration can increase revenue for the integrated firm while passing savings achieved through economies of scale and time efficiencies to the end-client. Additionally, firms will be able to take a more holistic approach to client relationship management across the lifecycle.

Drives innovation

Through increased ownership of customer touchpoints, vertical integration can facilitate the creation of customised in-house solutions. Vertical integration works best when the skillset and knowledge to operate integrated firms are similar, with sizable cross-sell potential.

Disadvantages of Vertical Integration

There are three key disadvantages of vertical integration that firms should be wary of:

Detracts focus away from a firm’s purpose and unique selling point (USP)

Firms can lose sight of what their clients truly value.  A race to own suppliers or more of the value chain can lead to the perception that a firm ends up becoming a “Jack of all trades, master of none,” materially eroding client confidence and new business potential.

Loss of agility

Vertical integration often adds IT application and development costs while reducing time-to-market and scalability.

Confuses clients

Firms need to be famous for something and the best can concisely explain their USP. Too sprawling a range of services and clients can become confused.

Benefit Overview

Pros and Cons of Vertical Integration

Divestitures

Vertically integrated firms have an opportunity to shed less attractive business units and reinvest in product, marketing, distribution, and internal optimisation efforts.

It’s time for firms to view their business units through a critical eye and assess them against the following tests:

  • Does the business unit require investment to grow materially?
  • Is there significant uptake of the service, and is there a material level of cross-selling?
  • Does the business operate in a strategic geography?
  • Could the proceeds of a sale enable significant growth in another business unit or an alternative strategy?

We often see firms making divestitures of businesses that they only recently acquired themselves – which begs the question: What has gone wrong in these cases?

It is likely that the intersection of strategy, execution and culture between the acquirer and the target did not align as expected. Management time is valuable, and firms need to be cautious about wasting it with failed acquisitions. Investing more time into establishing strategy, execution planning and bringing a culture assessment into the due-diligence process during the transaction phase can lead to multifold savings down the line.

How can Alpha help?

A strategic review sheds light on areas of your business that might be suitable for divestiture while identifying new areas for expansion. Our strategy and M&A support brings market insights from SMEs dedicated to the sector. To learn more or speak to one of our experts, please reach out to Alpha.

About the Authors

Jon Benson Alpha FMC
Jon Benson
Executive Director

Jon is an Executive Director Alpha with deep experience in project management, strategy and proposition development. He has over 15 years of consulting experience, with over 10 years directly within the Asset and Wealth management industry. Jon has led many industry-changing Merger & Acquisition projects and heads up the Alpha M&A Practice.

Gilles Gerber
Senior Manager

Gilles is a Senior Manager at Alpha FMC Luxembourg with 9 years of experience in the fund industry, delivering projects across target operating model design and change management. Before joining Alpha, Gilles worked in a Securities Department and in the client relationship area within two different banks.

Silas Proft
Manager

Silas is a manager at Alpha and part of the M&A Practice with over 8 years of consulting experience. Silas has experience working with global asset and wealth management firms across the operating model with a particular focus on commercial due diligence, post-deal integration planning and execution, outsourcing and vendor negotiations.

Louise Lu
Consultant

Louise is a Consultant at Alpha with over 4 years of experience across strategy, law and consulting. Prior to joining Alpha’s UK M&A Practice, Louise gained experience working on transactions at EY’s Wealth and Asset Management Consulting practice, including change in control applications and target operating model design, in addition to conducting commercial due diligence at a high-growth UK-based VC firm.