Considering some of the mammoth M&A transactions in recent years, a mere $1.2 billion acquisition doesn’t raise many eyebrows. But for Principal Financial Group, its purchase this year of Wells Fargo’s retirement and trust business was something of a game-changer.
It was the third-largest acquisition in Principal’s history, and the other two were only slightly bigger, notes the firm’s CFO, Deanna Strable, who recently visited CFO’s office in New York.
More importantly, the deal, which was announced in April and closed on July 1, approximately doubled Principal’s retirement assets and significantly boosted its status in the U.S. retirement market.
“We were around number six or seven in the market in terms of the number of plan participants, and this took us to number three behind Fidelity and Empower,” Strable says. “The strategic fit was there. Principal historically has been much more focused on small and medium retirement plans, and Wells Fargo tended to [focus on] medium and large.”
With an investment bank, Lazard, involved in the deal, there was substantial competition for the Wells Fargo block of business. “They start by taking bids from anyone that’s interested, then narrow down the field multiple times,” notes Strable.
To be sure, one thing that frequently dooms acquisitions is simply paying too much. But, Strable is asked, was the Wells Fargo business discounted at all as a result of the company’s public flogging over its shady business practices?
“No, I don’t think we got a bargain — it was a fair price,” she says. “But as you go through that [winnowing] process, you get more and more access to [the target’s] team and the business and you get a better understanding of what you’d be willing to pay for it.”
Arriving at that understanding involves modeling how the value to be derived from the acquisition could vary from the assumed value. In this case, the most sensitive assumption had to do with how much of Wells Fargo’s retirement business Principal retained following the acquisition. The potential for such variance was factored into the deal.
“We built an earnout with Wells Fargo that said we’d be very comfortable if we were able to retain a certain amount of the business, but if we were actually able to retain more, we’d pay an additional amount of money,” says Strable. “That aligned our interests in retaining as much as possible.” The companies will be measuring client retention until two years after the deal announcement date.
Meanwhile, although the trouble Wells Fargo got into wasn’t directly related to the retirement business, it presented Principal with an extra due diligence challenge. “We needed to make ourselves comfortable that the practices that were under scrutiny didn’t impact that business,” says Strable.
Interestingly enough, the unsavory practices helped improve the cultural fit between the two organizations. “Their sales were [down] the last few years because of the reputational issues, so their employee base was very excited to get out from under the black cloud,” the CFO says.
But there weren’t significant cultural issues to overcome, according to Strable, even though Principal took on approximately 2,600 new employees. Even so, gaining that understanding was yet another important aspect of the due diligence for the acquisition.
Indeed, for Strable, cultural fit is the most significant factor in an acquisition’s degree of success. “When you look at case studies of unsuccessful acquisitions, a lot of it comes down to not really assessing that fit,” she says.
Actually, cultural fit has been more of an issue with some of the smaller deals Principal has made. One example was the 2018 acquisition of RobustWealth, a fintech firm that operates a robo adviser business.
Strategically, the deal made great sense. “More and more people are making investment decisions online, and having robo advice could be the wave of the future,” Strable says.
But RobustWealth was a very entrepreneurial, high-growth company, which made for a difficult fit in some respects. “You want them to continue to be nimble and move fast, but you’re a big company that does things different ways,” the CFO notes.
“For example, our HR department wants to know why they have a cooler of beer in their common area when we don’t have that. Some people don’t directly see the business value of keeping them nimble and want to apply the same standards for them that we do for everybody else. So, you have to reinforce that it’s OK for them to be different.”
Looking ahead, Strable sees more consolidation for the U.S. retirement market. “As is happening in many industries, fees are coming down,” she observes. “And so the revenue from that business is coming down. That means you have to find ways to make your operation efficient, and I think that will be harder and harder to do with smaller blocks of business.”
That doesn’t mean Principal is ready to jump right into another acquisition.
“Give us a few years to integrate and feel comfortable with this,” Strable says. “Yes, I think we’d assess that, although at some point you get diminishing scale advantages, so you have to assess that as well.”