WHK Group in merger discussions

More consolidation is on the cards for the finance industry

Accounting and financial planning business WHK Group (ASX: WHG) will be counting its pennies after releasing a statement to the ASX confirming an approach from wealth management group SFG Australia (ASX: SFG).

As the fifth largest accounting firm in Australia, WHK has an enticing and strategic market position with entrenched access to literally thousands of small and medium sized business owners in Australia. This is an asset which WHK has had some success in capitalising on by cross-selling financial planning solutions to its client base. However, some would argue that WHK has failed to take full advantage of the opportunity.

Wealth management and financial advice businesses are leveraged to higher volumes. This makes WHK an appealing target for SFG as it will increase Funds under Management and Advice (FUMA) and create access to a large accountant-linked client list.

As a merger, WHK shareholders are unlikely to enjoy the immediate share price gains which come along with a takeover but they will be able to share in the long-term potential of a larger and stronger business. If the merger does eventuate, it will leave Countplus (ASX: CUP) as the only significant accountancy business listed on the ASX.

IOOF (ASX: IFL) has been a regular and successful acquirer of smaller players. It took over DKN Financial in 2011 and recently acquired Plan B Group . Having been successful at using tuck-in acquisitions to increase its scale, it wouldn’t be surprising to see IOOF emerge again to snap-up some of the smaller listed players.

There are numerous potential targets at the small end of town which could be enticing to larger players looking to increase scale. These may include diversified financial service provider My State Ltd (ASX: MYS) and financial planning minnow Prime Financial Group (ASX: PFG).

Foolish takeaway

Merger and acquisition activity may be starting to creep back into the market. While it is always hard to pick the successful targets, owning undervalued smaller companies with solid balance sheets can potentially allow Fools to be “in the right place, at the right time” and provide the catalyst for the stock price to reach fair value.

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Motley Fool contributor Tim McArthur owns shares in WHK Group and Prime Financial.. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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