Shape of things to come
There is no smoke without fire, runs the old saw, and sure enough the long predicted – if oft denied – merger between the Royal Bank of Canada’s Global Services securities services operation and Luxembourg-based Dexia BIL has finally come to pass.
First rumoured back in early 2003, the deal will see the creation of a new entity - RBC Dexia Investor Services - headquartered in London and boasting some $1.8trn (e1.5trn) under custody, making it the eighth largest global custodian by worldwide assets. With a local presence in 15 markets on four continents, it will offer custody, investment administration and transfer agency solutions as well as asset optimisation services for the back, middle and front offices of investment managers globally. The deal is expected to receive regulatory approval and be formally closed by early 2006.
The merger certainly seems to have a clear logic about it, as it will endow each organisation with valuable capabilities, expertise and geographical presence that they previously lacked, and which would otherwise have been at best extremely expensive, and at worst nigh on impossible, for them to acquire through organic growth.
RBC fills some key holes in its offering as it looks to broaden a client base that, for all the success of its London operation in recent years, is still largely drawn from its home market. Moreover, the custody business is today more of a scale play than ever, and so an additional $500bn in client assets will clearly be welcome.
As well as gaining a valuable foothold both in Luxembourg and Dexia’s home market of Belgium, RBC acquires a vital transfer agency and distribution support capabilities – something that going forward no self-respecting custodian looking to make a mark in continental Europe can afford to be without – through long-established and highly regarded Dexia subsidiary First European Transfer Agency (FETA).
Within the last year Dexia has also acquired a specialist French fund administrator and extended its offering into the hedge fund administration space. Its operational centres in Hong Kong and Singapore should also bolster RBC’s profile in the region, which remains rather low-key despite its 2001 acquisition of Perpetual Fund Services.
While a great deal of effort has clearly been expended on structuring and presenting the deal as a merger of equals, for Dexia it can also be viewed as something of an inevitability. Europe’s fund administrators are currently having to countenance some unpleasant economic realities, faced as they are with the task of
reconciling their clients’ demands for an ever more sophisticated service offering (and, increasingly, a bundled one to boot) with an inexorable downward pressure on fees as larger custodians look to muscle in on their patch.
Consolidation among those providers now looks inevitable, an eventuality acknowledged by Michel Malpas, head of Dexia Fund Services, when I interviewed him last year. At that time, Malpas conceded that forging a partnership with another service provider, most likely from North American “makes the most sense in terms of effectively expanding our global market coverage”.
Although it involves a melding of North American and European businesses, and hence sensibilities, there appears to be a good cultural fit between the two camps. Both companies have expressed, and more importantly delivered on, a commitment to high quality client service as a fundamental plank of their business proposition and operating model.
This focus on ‘high-touch’ service will not be compromised, the partners promise, and while they will undoubtedly have to negotiate a few bumps in the road over the coming months, the proven relationship management skills on both sides should help ensure that the integration process goes smoothly.
In the short term, each of the partners will continue to service accounts via their respective existing applications. But in the longer term the plan is to move to a common technology platform, either through the use of already deployed best practice solutions across the group or by developing new solutions together. In the meantime, specific IT links will be established so that common value added products and services - such as securities lending, and performance and risk management - will be available to all. The integration process will take place as soon as the project receives the appropriate approvals.
José Placido, currently executive vice-president of RBC Global Services and soon to be CEO of the new company, said he expected some $60m in synergies - equally split between revenue and costs - to be derived from the deal over the first three years. For his part, Marc Hoffmann, the current CEO of Dexia BIL and the future chairman of RBC Dexia IS, stressed that the new organisation, like its forebears, would benefit from being backed by large parent companies with strong reputations and credit ratings. He said the new company would be looking to expand into new markets - Germany, Japan and the US all being obvious candidates - although he added that the immediate focus would be on the integration process.
While the implications of the RBC-Dexia merger will not be as seismic as Deutsche Bank’s decision a couple of years ago to sell out to State Street - a deal which proved that, contrary to popular belief, massive scale is no guarantee of commitment or staying power in today’s fast-evolving securities services environment - it may well come to be seen as a watershed in the history of the European business.
While they delight in acquisitions, historically custodians have never had much time for joint ventures. But such undertakings are without question the shape of things to come. As such, the RBC-Dexia deal will surely be only the first in a raft of similar partnerships to materialise over the next few years, as other smaller and medium-sized continental service providers bite the bullet and hitch their wagon to a larger custodian. Gravy train or ghost train: ultimately, it is not such a tough call.