An explosion of money management mergers and acquisitions could occur in 1994, as banks clamor for added management capabilities and aging independent managers look to sell out.
Although those trends were clearly evident in M&A deals done in 1993, experts say 1994 could be a year when activity really takes off.
Bruce McEver, president of investment banker Berkshire Capital Corp., New York, said 1993 was a record year for his firm in terms of number of deals.
"It's been busier than we've ever seen it," he said, adding there are indications 1994 could be even busier.
In 1993 there were 38 deals announced, according to investment banker Putnam Lovell Inc., New York, with the total value of acquired firms estimated to be at least $2.95 billion. (Putnam Lovell assigned values to 21 of the transactions, and not all deals were for 100% of the firm). Putnam Lovell puts total assets under management of firms purchased at $269.6 billion.
Mary Pat Thornton, an investment banker at Putnam Lovell, agreed 1994 looks to be a big year for money management M&A transactions, with much of the activity surrounding mutual fund managers.
"Everyone is going after the household," and mutual funds are one way to do that, Ms. Thornton said.
Banks were big buyers of many types of managers in 1993, including mutual fund companies, institutional managers and managers specializing in high net-worth in-dividuals.
The $1.8 billion buy-out of mutual fund manager Dreyfus Corp. by Mellon Bank Corp. is one notable example. Others include: First Union Corp.'s purchase of Lieber & Co., (manager of the Evergreen family of funds); Meridian Bancorp Inc.'s purchase of McGlinn Capital Management; and Cleveland-based Society Corp.'s buy-out of Schaenen Wood & Associates Inc.
But with the increased interest by banks in the mutual fund industry, and the proliferation of thousands of mutual funds, Mr. 25
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McEver said, "I don't know" how all the bank mutual funds can succeed.
The recent spate of bank-related deals is a contrast to the 1980s, when banks were spinning off money management firms to increase their capital ratios. Banks were shedding money management subsidiaries because they weren't considered a part of their core businesses, said Brad Hearsh, first vice president for PaineWebber Inc., New York.
Now that banks are healthier, the revenue of money management again looks attractive.
It's "pretty clear" they want back into the business in "a big way," Mr. Hearsh said.
In addition, some experts say banks pose a real threat within the money management industry. Some of the "well-heeled" regional banks with large client bases could become "formidable competitors," Mr. McEver said.
Noted Ed Oppedisano, chairman and chief executive of Oppedisano & Co. Inc., an executive search firm that does a limited amount of M&A activity: "Some of the smaller regional banks have much more realistic goals in what they can accomplish" in buying a money management firm. "It's a wonderful marketing tool."
Other potential buyers of management firms are money managers themselves, particularly those trying to broaden product offerings or distribution channels, experts say. Managers with a broader array of services are viewed as more valuable and better able to compete. That is reflected in the lower price-earnings multiples of some publicly traded firms with more limited offerings, such as Dreyfus before it was bought, and John Nuveen & Co. Inc., Chicago, which specializes in municipal bonds, PaineWebber's Mr. Hearsh said.
Moreover, firms "with untapped distribution channels have a real asset," Berkshire's Mr. McEver said. But, "a lot of traditional firms are just missing the boat" in broadening their product focus.
A capability in mutual fund management and international management are the most sought-after skills by management firms, experts say.
Another trend that could increase the number of deals done in 1994 is the increased interest on the sell side of money management M&A deals. Owners of independent firms, many of whom are nearing retirement age, are looking for some way to cash in on the value of their firm, experts say.
Charles Burkhart, president of investment management consultant Investment Counseling Inc., West Conshohocken, Pa., said many owners of independent firms, who in the past "wouldn't even talk about" selling out, are now giving it serious consideration. As those principals begin to reach retirement age - and the high value of the firm makes it difficult to sell to younger partners - selling out to or merging with an outsider becomes more attractive, Mr. Burkhart said. Those types of transactions could increase in 1994, he said.
"A lot of people view passive ownership as a solution" to that issue, and there is some talk of UAM-type firms being formed, PaineWebber's Mr. Hearsh said, referring to United Asset Management Corp.
Creditanstalt Global Asset Management, New York, a subsidiary of an Austrian bank, is one firm taking a similar tack, buying minority stakes in U.S. and non-U.S. money management firms.
Nonetheless, Boston-based UAM is "far and away" the leading buyer in passive ownership, Mr. Burkhart said. "No one will catch them," he said, noting UAM recently surpassed the $100 billion level in assets under management for firms it owns or with which it is affiliated. UAM has added international firms to its stable in the past year.
Foreign buyers, previously a presence in the U.S. money management M&A scene, have stepped out of the picture, experts say. Economic slowdowns in other parts of the world, particularly in Japan, have curbed all types of overseas expansion, including money management expansion.
The Japanese are "really out of the market," said Hal Strong, director of investment banking at Frank Russell Securities, Tacoma, Wash. But, "you could see a little more interest from Europeans."
Another limiting factor in the number of transactions in 1993 was the record level of prices in the overall stock market. With higher prices, potential sellers of money management firms demand a greater price, stalling deals.
If the market corrects in 1994, more deals could occur, experts say. Owners might be more willing to sell in a less-positive investment environment, they say.
It would "at the very minimum would rebalance supply and demand," Mr. Hearsh said.1
Berkshire Capital's Bruce McEver said his firm completed a record number of money management mergers in 1993.