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Trouble at the altar

Money managers spurned acquirers in 2011

Economic zigzags make year a poor one for M&A deals among asset managers

010912 temple
Cambridge International Partners’ John Temple: “Jittery buyers and uncommitted sellers made a poor recipe for baking transactions.”

Merger-and-acquisition activity in the money management industry last year was more about broken engagements than successful marriages.

Volatile financial markets hampered deal-making in the industry, leading to another year of depressed activity.

Freeman & Co. LLC, the New York based M&A advisory and strategic management consulting firm, dubbed its annual report on asset management industry deals, “The Year that Wasn't.”

Worldwide, 181 money manager M&A deals were announced in 2011, with a total transaction value of $17.3 billion. That's one more deal than in 2010 but less than that year's $18.2 billion total transaction value, according to a report by New York-based investment bank Cambridge International Partners Inc.

The problem: a less-than-rosy economic environment meant buyers weren't willing to meet the price demands of sellers, said Eric Weber, a managing director at Freeman & Co.

“Buyers were being stingy,” Mr. Weber said.

Whether 2012 will be a better year largely will depend on whether the economy stabilizes and spurs new transactions, according to M&A specialists.

One continuing trend that could create new activity, even without economic improvement, they noted, is banks being forced to divest money management units to raise cash and meet tighter regulatory constraints. In fact, one potential deal in 2012 could be bigger than any of the transactions in 2011 in terms of deal value. Deutsche Bank Group is shopping its Deutsche Asset Management unit, with $730 billion in assets under management, and has set a price tag of around $2 billion.

2011 started out with markets performing well, fueling hopes that it would be a strong year for M&A activity.

It didn't turn out that way.

Up slightly

U.S. deals and transaction totals in 2011 were up slightly from the previous year, but international activity was down, according to the Cambridge report.

The report found 88 announced deals involving the acquisition of U.S.-based money managers in 201l, with an aggregate transactional value of $5.4 billion. That compared with 84 deals and $4.8 billion in 2010. Deals involving the acquisition of non-U.S. asset managers in 2011 totaled 93 compared with 96 in 2010. The transactional value of those deals amounted to $11.9 billion in 2011, down from $13.4 billion a year earlier. (The Cambridge report includes only transactions in which money management operations account for more than 50% of an acquired firm's revenue.)

Seven of the top 10 money manager transactions in 2011 were outside the U.S., the Cambridge report noted.

It was also the second year in a row Cambridge noted that the aggregate transactional value of non-U.S. deals was more than double those of U.S. transactions.

The market turmoil for the last six months of 2011 was a dominant theme, as behind-the-scenes negotiations to build deals fell apart before they got to the announcement stage, said John Temple, a Cambridge managing director in New York.

“The failure rate was high, “ he said.

The “messy and protracted political negotiations to solve the eurozone debt crisis“ dragged on for the second half of 2011, making dealmakers wary, he added.

“Jittery buyers and uncommitted sellers made a poor recipe for baking transactions,” Mr. Temple said.

It's hard to value a money manager when the markets swing so suddenly and so dramatically, he said.

“There is a lack of confidence in the marketplace,” he said. “Buyers and sellers don't know if the markets will rise 10% or plunge 10%.”

Sam Yildirim, M&A lead partner for PricewaterhouseCoopers LLP New York, said the desire for M&A remained high globally for 2011 because achieving organic growth has been difficult for money management firms due to increased competition for assets, volatile asset values, investor pressure for lower fees and higher compliance costs.

But despite that demand, many deals were not completed because of valuation disagreements, Ms. Yildirim said.

Before the financial crisis, she said, asset manager sales ranged from a low of 10 to 11 times earnings before interest, taxes, depreciation and amortization to a high of 15 EBITDA. More recently, sales have been around seven to eight times EBITDA, a reality that some sellers have not been willing to accept, she said.

“There is a huge gap between buyers and sellers,” Ms. Yildirim said.

Still, deals announced in 2011 were bigger in terms of assets under management than in 2010. Freeman estimates total AUM value of 2011 deals will be around $829 billion, up 20% from 2010's $691 billion.

Those numbers are still far below $4.7 trillion in 2009, the year BlackRock (BLK) Inc. (BLK) acquired Barclays Global Investors, or even 2008, when the total AUM involved in M&A was $1.673 trillion.

5 largest transactions

The five largest announced transactions in terms of deal value according to Cambridge, were all divestitures from large financial institutions:

  • the $1.4 billion purchase by Precision Capital of KBL European Private Bankers SA, the private banking arm of KBC Group;
  • the $1.19 billion management buyout of the Neuberger Berman Group from Lehman Brothers Holdings;
  • Safra Group's $1 billion acquisition of the controlling stake in Bank Sarasin & Co. Ltd. from Rabobank Group;
  • CBRE Group Inc.'s $940 million purchase of ING Real Estate Investment Management; and
  • Canadian Imperial Bank of Commerce's $850 million purchase of a 41% interest in American Century Investments from J.P. Morgan Chase & Co.

Some sales forced

Three of the five — KBL, Neuberger Berman and ING Real Estate — also could be characterized as forced sales stemming from the financial crisis, Mr. Temple said.

Belgian bank KBC Group had been trying to sell KBL European Private Bankers for two years as part of a restructuring plan mandated by the European Commission in exchange for government aid to shore up its assets. A deal announced in 2010 to sell the unit to Mumbai, India-based Hinduja Group fell apart in March 2011 when it did not receive regulatory approval.

The sale of Neuberger Berman stems from the Lehman Brothers bankruptcy in September 2008 and ING Group sold its global real estate businesses, including ING Real Estate, as part of the firm's broader restructuring plan following a Dutch government bailout during the financial crisis of 2008.

Mr. Temple said one significant difference in 2011 from the previous year was that three of the top 10 deals involved management buyouts, but without funding from private equity partners.

He said the ability of the management teams to raise debt to complete the three deals — Neuberger Berman; London-based Mondrian Investments Partners Ltd.'s $775.9 million buyback of a 27% stake held by private equity firm Hellman & Friedman; and London-based BlueCrest Capital Management LLP's buyback of Man Group PLC's 26% interest in the firm for $633 million — was indicative of an improvement in the lending environment since the credit crunch.

2012 forecast

Whether 2012 will be different from 2011 is unclear.

Freeman's Mr. Weber said more activity could occur if European banks remain under pressure to raise capital. One example is Paris-based Societe Generale SA, and its subsidiaries TCW Group Inc. and Lyxor Asset Management.

Another possible deal, he said, involves Dexia SA, the French-Belgian banking group, which is seeking buyers for some of its operations — including its Dexia Asset Management unit — after government bailouts.

Cambridge's Mr. Temple said that ultimately, more confidence is needed in the economic outlook for the stock market to rise on a longer-term basis, creating the foundation for more M&A activity.

While the U.S. economy has shown some resilience, Europe's sovereign debt crisis still remains a problem as well as slower growth in China and other emerging markets.

“The question is how it all balances out,” he said.