The sharemarket has also responded favourably to the deal. On July 8, just before the Financial Review‘s Street Talk column first reported the mooted merger, Praemium shares were trading at 37¢. They shot up the next day to 46¢ and have gradually risen since, albeit with a bumpy ride reflecting the still-volatile climate of the coronavirus markets.
On Friday, Praemium shares closed at 69¢.
It’s not difficult to see why investors have seemingly backed the development.
The new-look Praemium has more than doubled its funds under administration, combining its existing $8.9 billion with Powerwrap’s $8.5 billion, based on the numbers as at June 30.
In so doing, it overtook rival Hub24, which had $17.2 billion in total FUA at the last count. Its platform market share rose from 0.7 per cent in Australia to 1.7 per cent, slightly below Hub24 at 2.1 per cent and Netwealth at 3.8 per cent. However, Hub has since kicked off its own consolidation campaign, initiating a trio of acquisitions which would add at least $15 billion to its FUA position.
The major banks and institutional wealth managers such as Macquarie, AMP, IOOF and the big four retail banks still hold the vast majority of assets in the market, albeit a rapidly diminishing lead.
“We are supportive of Praemium’s acquisition of Powerwrap, believing increased scale and diversification helps Praemium become a better business and a more attractive investment proposition in a rapidly changing marketplace,” says analyst Nicolas Burgess, of stockbroking firm EL & C Baillieu.
“If Powerwrap can increase its share of the funds migrating away from legacy platforms over the next few years, we believe it would be a significant catalyst for the share price and may see the valuation gap to its listed peers close.”
For other observers, that gap is already closing.
“Fundamentally, Praemium is an attractive investment prospect as it
continues to disrupt financial services in the wealth management sector,” says Shaw & Partners senior analyst Danny Younis.
Pep Perry, chief executive of private wealth firm Escala Partners – a longstanding client of Powerwrap and now major shareholder of the combined group – says, following the deal, Praemium is on “on a par with Hub and Netwealth”.
“There is no downside to this transaction. It will lead to better capabilities for Praemium,” Perry says. “There are immediate synergies from the transaction.”
‘Everyone’s a winner’
Praemium chief executive Michael Ohanessian readily admits that Escala’s support was crucial in cementing the deal and fending off a challenge from a powerful camp of rebel shareholders.
The renegade group was reported to represent about 43 per cent of Powerwrap’s share register and included Rich Listers Bruce Mathieson and Rick Smith (of food distributor PFD Foods), Melbourne stockbrokers George Varlamos (father of former Powerwrap CEO Andrew Varlamos) and Colin Campbell, and ex-Perennial Growth Partners fund manager Lee Mickelburough.
It was happy with the logic of the merger but not the price.
In addition to Escala’s public support, and that of the Powerwrap board and chairman Anthony Wamstaker, the tensions were smoothed also by the surging share price of both companies.
“The two share prices appreciated together,” says Ohanessian. “It was as if the market was increasing its understanding of the benefits of these companies coming together. People got over the disappointment of not getting more money. In a sense, it was almost like everyone was a winner.”
But he also admits the process of integrating the two companies and their respective fintech solutions may be more difficult than the two-and-a-half off market takeover campaign.
“The easy part is getting everyone together in one organisational structure, which we have already done,” says Ohanessian “The hard part is the deep work that we are going to have to do.”
Lacking a ‘salesy culture’
Powerwrap was founded by Nick Owen, a longtime Praemium shareholder, and Andrew Varlamos, who would subsequently become a Praemium executive.
The two companies have deeply intertwined technological and people-to-people ties.
They had the same underlying “DNA”, Ohanessian describes it as, which makes this integration perhaps easier than some other technology company mergers.
Nonetheless, their technology solutions have evolved separately since and the process will still be “very complex” although “highly rewarding”, the CEO says.
However, it is not the technology integration upon which Praemium’s chances of success ultimately lie.
“The main prize is new business,” says EL & C Baillieu’s Mr Burgess, adding that it remains below its peers for acquiring customers in the fragmented financial advice market, reliant instead on revenue from a handful of key accounts such as Escala’s.
Ohanessian is confident that technology-wise the combined Praemium-Powerwrap is in the top tier of providers and will appeal especially to the growing cohort of independent private wealth firms splintering from the big US-domiciled investment banks.
But he concedes that relative to its competitors, Praemium has not had a “salesy culture” and has been slow to claw market share from the big incumbents.
Netwealth and Hub24, by contrast, are seen in the market as having well-oiled sales and marketing operations, in addition to investing heavily in tech – especially the former, which lured across one of Praemium’s major clients, ANZ’s private bank, in 2019.
Some sources say the exit of former Powerwrap chief executive Will Davidson could present another headwind, given he held many close personal relationships with independent private wealth firms.
Plus, Praemium continues to face the distraction of an underperforming global business, primarily in Britain, which has dragged on its share price and made it more exposed to the pandemic than its rivals.
But Ohanessian swears the offshore business is soon to achieve profitability and says he plans to invest in sales and marketing to win more business back home.
His defiance has served him well in the past, fending off not only a challenge from rebel shareholders over the Powerwrap deal, but a previous threat to his own leadership, which saw him sacked briefly in 2017 before being reinstated later that year.
With $820 billion in client assets up for grabs, it’s a market worth fighting for.