How to avoid a failed fund merger

With just one in four superannuation fund mergers proceeding beyond a memorandum of understanding (MOU), it’s imperative to evaluate common reasons for failure, according to legal experts.

Despite existing in the same industry, there could be many moving parts in merging super funds, such as different technology platforms, operating models and products, said Niki Short and Scott Charaneka, partners at Ashurst.  

“History has shown that only a very small number of mergers succeed, with only one in four proceeding beyond an MOU. Coupled to this, those that do proceed are often sub-optimal in terms of the outcomes realised for both the super fund and its members,” they observed. 

“Consolidation, when done well, is good for everyone. For members, benefits include better fund performance secured through the efficiencies gained from being a ‘bigger player’ with increased buying power. 

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“For the super funds involved, there's an opportunity to improve competitiveness, as well as market and brand position.”

But unsuccessful integration could land super funds in the Australian Prudential Regulation Authority (APRA) spotlight for the wrong reasons and lead to disappointing outcomes for members, they added.

Among the top reasons mergers failed was a lack of strategy clarity on the ‘end game’ of the merger.

The legal experts explained: “Many mergers fail because there’s simply no strategic clarity around defining the ‘why’ or business case for a merger - including the strategic objectives and perceived benefits of merging, as well as why it is in the members’ best financial interest.

“Working this out ‘as you go’ is a recipe for failure. Knowing your ‘end game’ will help you ensure every step in the merger process is handled with the strategic objectives in mind to ensure what success looks like is clear to everyone.”

Other reasons included a lack of clarity on who would make merger-related decisions, forgetting to involve shareholders, hiring an inexperienced project manager, and failing to agree upfront on what the new entity would like.

In neglecting due diligence, funds could find themselves facing significant liability later.

“Details such as the incorrect valuation of assets or interrogating whether the merging funds have pay parity are often overlooked,” Short and Charaneka stated.

“When a final attestation is signed by [the registrable superannuation entity], they’re giving their assurance that the merger can proceed. This can only be done in confidence when their due diligence has been thorough. 

“Failure to discover anything that should have been obvious at the due diligence phase of a project will often lead to probing from APRA and lengthy liaison with the regulator.”

Finally, the legal experts also outlined the importance of clear communication, having a transition plan, and not underestimating the effort to integrate. The devil was in the detail, they highlighted. 

“Bringing employees, members and stakeholders on the integration journey requires regular, two-way communication so that issues can be dealt with when they arise. Identifying flow on impacts upstream and downstream through the value chain is essential. 

“Underestimate the complexity at your peril – whilst there are two entities new issues are created and it is essential that enough space is created for leaders to lead, BAU activities to continue and integration activities to occur concurrently.”