U.S. money management M&A up, Europe down in 2012

Deal values rise 43% in U.S., but EU debt crisis hurting Continent

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Cambridge International's John Temple: “Economic growth may not be as fast as we like, but the economy is much stronger than a few years ago.”

Buyer confidence seems to have gradually returned to the U.S. money management industry in 2012, as the deal value of U.S. mergers and acquisitions transactions increased from the previous year.

But in Europe the reverse was true, with the debt crisis helping to cause transaction value to decline from 2011.

Transaction value of announced deals involving U.S.-based asset managers was $7.7 billion in 2012, up 43% from $5.4 billion in 2011 and 60% from $4.8 billion in 2010, according to investment bank Cambridge International Partners, New York.

Deals involving the purchase of European money managers totaled $4.7 billion in 2012, a decrease of 41% from the prior year's $8 billion in transactions and down 47% from $8.8 billion in 2010.

The European statistics also included acquisitions of money managers in the Middle East and Africa, but almost all the transaction value was from Europe, said John Temple, Cambridge's president.

Mr. Temple attributed the growth in deal volume in the U.S. to an improved economy, even with such distractions as the fiscal cliff. “Economic growth may not be as fast as we like, but the economy is much stronger than a few years ago,” he said.

2012 was a decent year economically in the U.S., helping deal volume, said Eric C. Weber, managing director and chief operating officer at Freeman & Co., a New York M&A advisory and strategic management firm. “Even with the fiscal cliff, the budget nightmare and every other disaster, the (S&P 500) still returned 16%,” he said.

Not changed

The actual number of deals involving U.S.-based money management firms has not changed much in the past three years. The Cambridge data showed 88 deals in 2012, the same number as in 2011, and 84 in 2010. But what did change was the size of the deals, Mr. Temple said.

One transaction that could have helped the sluggish European numbers and might help kick-start 2013 is a bid by Australia's Macquarie Group Ltd. to buy Robeco Group, the asset management unit of Dutch bank Rabobank NV, Utrecht, Netherlands.

The deal between Macquarie Group, with $353 billion in assets under management, and Robeco, with $248 billion, could bring Rabobankas much as $4 billion, sources say.

But an obstacle involves Robeco's U.S. asset management arm, Robeco Investment Management and its primary business, Robeco Boston Partners, sources say. Macquarie does not want Robeco Boston Partners, which has about $22 billion under management, and is trying to sell the unit. Complicating the situation, those same sources say, are attempts by officials at Robeco Boston Partners to strike their own deal to gain independence.

Mr. Temple said whatever happens regarding Robeco, it won't change the fundamentals in Europe that have stopped deals: the euro debt crisis, banks required to have more capital on hand under Basel III and negative economic growth.

“It's a very damaging backdrop, which is not corrected by one transaction, however large it is,” he said.

Fifty-four European money management firms changed hands in 2012 vs. 58 in 2011 and 2010, according to Cambridge data. (Canadian transactions are included in the European figure.)

Mr. Temple said there are not enough buyers to accommodate the sellers, mostly banks wanting to dispose of asset management units to free up money to meet new capital requirements ordered by European banking regulators.

In the past few years banks have met with mixed success in selling their asset management arms. Deutsche Bank said in June 2012 it failed to reach agreement with Guggenheim Partners to sell RREFF, its U.S.-based real estate investment business. That followed a May announcement that talks with Guggenheim about selling other DB units — DB Advisors, Deutsche's institutional asset business; DWS Americas, its U.S. mutual fund business; and Deutsche Insurance Asset Management — had concluded without a deal. Deutsche officials have not commented on why the deals fell apart.

In April 2011, Italian bank UniCredit Group abandoned efforts to sell Pioneer Investments, its asset management unit. Published reports at the time said UniCredit was unable to find a buyer willing to meet its price of at least $5 billion.

Mr. Temple said the European debt crisis made it difficult to agree on valuations for money managers. Another issue is that bank money management subsidiaries get much of their assets from bank customers. Mr. Temple said that raises the question of whether the money will stay with the unit once the manager is no longer associated with the bank.

Stability in Europe

Whether European leaders can bring more stability to the eurozone will affect how many deals are done this year, say investment bankers.

“More deals will happen if buyers see good news coming from Europe,” said R. Bruce Cameron, president and CEO of investment bank Berkshire Capital Securities LLC, New York. He believes if there is a resolution of the ongoing Greece debt crisis or signs that definite steps are being taken to resolve European debt issues, money manager M&A activity will likely pick up.

Mr. Cameron also sees increased M&A activity in Australia and China in the coming year. He said the firming up of new Chinese leadership in November helped remove uncertainly about whether the Chinese economy can continue at a positive pace and could lead to increased M&A activity. Australia, a big exporter to China, would also see an increase in M&A activity as a result, he said.

While the hope was that 2012 would bring a major increase globally in M&A activity, the reality was different, as broken deals continued to be a big factor as they were in the prior year, said Sam Yildirim, U.S. asset management M&A leader with PricewaterhouseCoopers, New York.

“There was a lot of pent-up demand but it wasn't turning into actual realized deals,” she said.

Big deals in Mexico, Chile

The two biggest money manager M&A deals of 2012 were in Mexico and Chile, a sign of the growing middle-class in Latin America that is driving a boom in retirement savings in those countries, Mr. Temple said.

In the largest transaction, Afore XXI Banorte — a joint venture between Mexican bank Banorte and the Mexican Social Security Institute — purchased money manager Afore Bancomer from Spanish bank BBVA for $1.6 billion. The transaction will enable Afore XXI Banorte to increase capital levels to satisfy demands of banking regulators. The transaction boosted Afore XXI Banorte assets to $39.8 billion from $18.4 billion.

The second biggest transaction involved Des Moines, Iowa-based Principal Financial Group, which purchased money manager AFP Cuprum of Santiago, Chile, for $1.5 billion in October. The transaction for AFP Cuprum, which has $32.1 billion in assets under management, gives Principal a market-leading position in the Chile retirement savings market, where a combination of political stability and strong economic growth have fueled savings growth, Mr. Temple said.

Principal also purchased a 60% stake in a Brazilian mutual fund company, Claritas Investments Ltd., in 2012 for $65 million, he said.

The 2012 transactions follow Principal's $200 million purchase of Mexican money manager HSBC Afore in 2011.

Principal has nearly $17 billion in assets among the three companies, according to a November report posted on Principal's website. It also owns a 25% stake in Brasilprev Seguros e Previdencia SA, which manages $30 billion for corporate pension plans and individual retirement accounts in Brazil.

Mexico, like Chile, has a mandatory defined contribution pension system.

Colombian transaction

Another major Latin American transaction in 2012, involved Horizon Fund Management in Bogota, Colombia, which was also owned by Spanish Bank BBVA. The money manager, with $11.2 billion in assets under management, was sold to Grupo Aval, the largest financial conglomerate in Colombia.

The third largest money management transaction overall in 2012 involved Charlotte, N.C.-based Bank of America, which announced the sale of its Merrill Lynch International Wealth Management unit based in Geneva, Switzerland, for $880 million to the Zurich-based Julius Baer Group.

Bank of America also announced the sale of its Merrill Lynch private bank joint venture in Japan to its joint venture partner Mitsubishi UFJ Financial Group for $471 million on Dec. 13.

The largest announced sale of a U.S. asset manager in 2012 involved Los Angeles-based TCW Group. The $780 million sale by French bank Societe Generale to TCW employees and two funds run by private equity firm Carlyle Group was announced in August.

Before the transaction came to light, Societe Generale officials denied TCW was for sale, insisting that an initial public offering for the money manager, with $131 billion in assets under management, was a possibility some time in the future.

Time apparently ran out, according to Cambridge's M&A report at the time of the deal.

“SocGen had intended to wait for TCW's IPO to sell its stake, but with the timing pushed off due to a very messy and public divorce between TCW and bond manager Jeffrey Gundlach, a cash sale today — even at a price that required a significant write-down — appears to have been attractive to the capital-starved French bank,” Cambridge wrote in a note to investors.

Mr. Temple said TCW's announced deal price was 6.3 times its earnings before interest, taxes, depreciation and amortization, a strong contrast to the second-largest deal involving a U.S. money manager. In that deal, New York-based Epoch Holding Group, a public company, sold itself to TD Bank Group in Toronto for $670 million, a 28% premium to its public market price or 11.6 times EBITDA, he said.

Mr. Temple said what was remarkable about the strong pricing in the Epoch deal was that the money manager, with $24.2 billion in assets, was only founded in 2004.

The Carlyle Group was also the subject of M&A activity when it went public in a $671 million IPO, a move that senior management said will help it expand beyond private equity.

The fourth largest U.S. deal in 2012 was the September announcement that The Hartford was selling its 401(k) retirement business to Mass Mutual for $400 million. The Hartford has $54.9 billion under management in its retirement fund business. Mass Mutual will have approximately $120 billion in assets once it is combined with the Hartford.

One cross-border deal in the U.S. involved the strategic investment by Tokyo-based Dai-ichi Life Insurance Ltd. in Denver-based Janus Capital Group. The insurance company invested an estimated $288 million for a 15% to 20% stake in Janus. The deal also included a strategic partnership between the two firms. Dai-ichi agreed to invest $2 billion in various Janus products and distribute its funds in Japan.

Big European deals

Despite the muted activity in Europe in 2012, there were some big deals. One was the sale of Dexia Asset Management, the $103.7 billion asset management arm of Luxembourg's Dexia Bank. A deal was announced in early December that Dexia was to be sold to Chinese private equity firm GCS Capital for $490 million, Mr. Temple said the sale entailed a discounted price. Published reports had said Dexia management originally hoped to get more than $650 million from the deal.

In another major transaction involving a European bank, Sao Paulo, Brazil-based Safra Group in October 2012 acquired the remaining 25% of public shares of Bank Sarasin, the Swiss private bank, for $700 million.

The Safra Group announced in 2011 that it was acquiring 75% of the public shares of Bank Sarasin from Rabobank.

Another large European transaction announced but not completed in 2012 was the deal by Deutsche Bank in September to sell off Frankfurt-based BHF-Bank, a wealth manager and investment bank, for $500 million to Brussels-based RHJ International's Kleinwort Benson Group. The deal still requires the approval of Germany's banking regulator, which shot down a deal with another buyer last year, LGT Group, a bank tied to the prince of Lichtenstein.

Among those injecting capital into RHJ to help with the deal, investment funds managed or subadvised by BlackRock (BLK) Inc. (BLK), according to a statement by RHJ at the time the deal was announced.

This article originally appeared in the January 7, 2013 print issue as, "U.S. activity up, Europe down".