Considerations for a board as Luxembourg M&A activity grows

Once upon a time Luxembourg was perceived as a rather sleepy place where firms only domiciled their funds or management companies, but strategic business decisions were rather taken abroad. Yet that is changing and is clearly illustrated by the surge in merger and acquisition (M&A) activity over the last few years.

Both consolidation and expansion – often supported by regulation – are driving what we believe to be a long-term secular M&A trend. This has in particular led to consolidation of private banks and corporate service providers, the expansion of asset managers’ management companies (ManCos) and a constant increase of M&A in the local industrial/commercial community (including through private equity investments).

For the Luxembourg corporate boards charged with stewarding these deals, there are lessons to be learned from international best practice. Taken together, they increase the chances of a transaction concluding successfully, aid due diligence and safeguard against the risk of any breach of representation or warranty. More broadly, they streamline the entire process.

Notably, though, to ensure best practice the board should take professional advice early. While some sellers wait in order to limit costs, this is a false economy. Early preparation for a deal – which gives more time to organize transparent data showcasing a business – eases the transaction process. What’s more, it’s important not to get distracted by sideshows: having the right advisors will help with this.

Underlying drivers of M&A activity

While Luxembourg’s M&A activity has risen with the deal-making tide globally, there is good reason to believe that its underlying drivers mean it will prove a long-term secular trend rather than just a passing cyclical phenomenon. This view was shared by experts at our forum, coming from not just Allen & Overy (A&O) but also from the big four accountancy firms and representatives of other industry players such as BIL and Clearstream.

Take the consolidation of private banks. Twenty years ago, there were about 180 private banks in Luxembourg, whereas now there are 120. The reason? They now need a broader model to operate. That’s led to deals such as the sale of Danske Bank’s private banking activities to Union Bancaire Privée in 2022. Similarly, private-equity backed corporate service providers are consolidating as they build scale. For instance, TMF Group acquired Selectra Management, a ManCo, in 2021.

Beyond banks and asset managers, a relatively recent phenomenon is family businesses’ greater openness to external growth capital. In some cases, they may even be sold to private equity funds. Additionally, consolidation is taking place among insurance companies.

Helping to facilitate this deal flow, local M&A advisers are becoming more sophisticated. Banks and professional services firms are setting up local M&A teams in anticipation of more transactions in years to come. That means there is more specialist expertise in Luxembourg.

Deal dynamics

Another development is the greater use of warranty and indemnity (W&I) insurance. This transaction insurance against the financial loss that may arise from a breach of warranty or claims under indemnities given by a seller was rare in Luxembourg until recently. By contrast, it’s fairly standard in financial centres such as London. Now, though, W&I insurance is at least a topic of conversation in most transactions.

As a full service M&A practice, A&O Luxembourg is one of very few firm in Luxembourg covering all aspects of a transaction. This includes not only the core elements of M&A advice but also other factors such as human resources (HR), technology/intellectual property (IT/IP) and ESG. Taking HR first, if you sell a business you transfer employees and must be aware of the legal conditions for doing so, especially in an asset management or banking business where a lot of the value resides in the people. Turning to IT, banks, asset managers, corporate service providers and ManCos own lots of data that’s subject to EU data protection legislation. So, once again that element of the transaction must comply with the law.

Finally, ESG questions are now key in pretty much all M&A transactions in all markets. What’s the impact of a business on the environment? Is it a socially responsible organisation? In the case of an asset management company, do its funds have any investments that breach environmental or social regulations or norms? In the EU, especially, the number of environmental regulations is increasing quickly.

The outlook

Looking to the medium and longer term, Luxembourg’s position as a stable place to do business makes it an attractive place from which to base a European headquarters. Following Brexit, many financial institutions are setting up in Luxembourg in addition to, or instead of, London. That suggests they will continue to use the country as a base for consolidating and expanding.

Of course, an international recession could slow M&A activity for now. Yet the forces for consolidation in finance, the likelihood that family-owned companies will continue to change hands or need external capital and even the growth of local venture capital-backed tech firms mean the longer-term outlook is bright. In a vote of confidence, banks and professional services firms, including A&O, are expanding M&A teams. It’s likely that boards will need to be more aware of M&A best practice in years to come.