Rathbones confirms talks with Smith & Williamson

Confirmation of a potential £2bn merger between wealth manager Rathbones and rival Smith & Williamson was met with muted excitement on Monday as the market mulled over future challenges.

Shares in Rathbone Brothers, which was set up in 1742 as a timber trading business, were broadly flat on Monday after the FTSE 250 firm confirmed it was in exclusive talks with the London-based group.

While City brokers welcomed the potential deal, Peel Hunt analyst Stuart Duncan said excitement was likely to be tempered by challenges in completing a megamerger. If the two combine, they would boast almost 3,000 staff and more than £50bn in assets, with details over cost cuts and board members yet to be fleshed out.

N+1 Singer analyst Andrew Watson added that while the deal would require "material cost synergies" to deliver strong shareholder value he did not expect the axe to fall on huge numbers of staff.

"I hope that any cost synergies captured would focus on non-staff costs – namely property and reduced infrastructure spend," he said. "There may be some reduc- tion in non-client facing headcount but I would not expect material cost synergies from this."

The move is the latest example of consolidation in a sector battling against rising competition and upcoming regulation such as Mifid II. Canaccord Genuity agreed to acquire wealth manager Hargreave Hale last month, with more M&A deals expected as the industry bulks up.

For Rathbones and Smith & Williamson, a merger is seen as a way to grow in this environment rather than to slash costs, one source said. As well as managing around £19bn of funds, Smith & Williamson is also one of Britain's largest accounting firms, meaning a deal would hand Rathbones access to a new pool of advisers.

It is not yet clear who would run the merged group should a tie-up get the go-ahead, another person close to the talks said. Smith & Williamson is run by co-chief executives David Cobb and Kevin Stopps while Rathbones is headed up by Philip Howell.

In its statement on Monday, Rathbones said that "whilst these discussions have been under way for some time" there can be no certainty any transaction would be agreed.