Mergers and acquisitions Spook Investors

Chidem Kurdas

Getting more capital together is often the main motive for a merger or acquisition. But the resulting business is often less than the sum of the parts. It ends up with less assets than the two combined managers had separately because some investors  redeem in response to the change. 

One reason customers exit is always on the minds of acquirers. If a successful portfolio manager leaves, then the track record that attracted clients in the first place is no longer germane. But because this is a major issue, acquirers almost always take steps to retain the investment professionals via incentives and long-term contracts.

Another concern is that the cultures of the two firms may not mesh well, with the resulting organizational disarray hurting investment performance.

But there are other reasons investors leave. With hedge fund M&A reportedly on the rise, large investors face situations where the managers of two or more funds in their portfolio merge.   When that happens, some argue that a decision should be made as to which of the funds is better for the portfolio and get out of the other. The reasoning: being invested in multiple funds under a single management creates extra operational risk, in case there are managerial problems after the consolidation.

“We redeem 100% from one fund when two funds merge,” says an investor. “Otherwise, you will increase your operational risk.”

But investor policies vary on this point.  And one manager says that to his mind investors should wait and see how the funds do after the merger, instead of taking action immediately. Of course, managers prefer investors not to withdraw.

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