CoreStates Financial Corp.'s acquisition of Rittenhouse Financial Services might have died on the vine, but its death has not dampened the prospects for bank and trust company acquisitions of money management firms.
With their deep pockets and large distribution systems, banks are acquiring money management and mutual fund companies in an effort to add more investment products for clients and more fee-based income to the bottom line.
Philadelphia-based CoreStates is not alone in wanting a money manager under its roof. The number of acquisitions of investment management companies by banks increased to 12 in 1993 from four in 1990, according to the annual Investment Management Industry Review published by Berkshire Capital Corp., New York.
Banks were the main acquirers of financial services firms in 1993 and early 1994, according to figures from Investment Counseling Inc., West Conshohocken, Pa. Of 66 transactions announced through the first quarter of 1994, 20 were acquisitions by banks and trust companies.
Even after the collapse of the CoreStates/Rittenhouse deal, the pool of banks seeking to buy investment managers is hardly shallow. Chas Burkhart, president of Investment Counseling, said he knows of at least six bank buyers seeking acquisition targets at the moment. And CoreStates is searching too, he said.
CoreStates representatives would not comment on their post-Rittenhouse strategy, but observers said the breakup of the deal in early June was a painful setback for the company. "CoreStates is right back in the market. Rittenhouse was a big disappointment," said Mr. Burkhart.
Banks are seeking to attract a share of the fee-based business that can be generated through the mutual fund and 401(k) markets, say observers, but have found their product offerings at a disadvantage.
"They all come up to the same problem. They look at their product and they say 'we can't compete,'*" said Bruce McEver, president of Berkshire Capital.
The acquisitions reverse a trend of the 1970s and '80s, when investment personnel left banks for money management firms, seeking higher compensation and the opportunity to accumulate equity in the firm. Typically the best investment personnel do not work for banks, which historically have offered less compensation or ownership opportunities, said Mr. Burkhart.
"Banks realize they can't hire the best and brightest investment management people in the business, so they try to do then next best thing and acquire their companies," he said.
The banking industry has emerged from years of consolidation to show healthier financial resources, which enables them to pay premium prices in what is still a seller's market, according to observers. Currently, there are more interested buyers than sellers, they say, so the multiples involved in deals are high and are expected to stay that way for a while.
Valuations of eight to 10 times earnings and four times revenue are the going rate for a mutual fund company, while the institutional management arena side has seen some transactions at four to five times earnings, mainly because they were good deals, said Mr. Burkhart. However, 1.5 to 3 times revenue seems to be the right multiple for institutional money managers, Mr. Burkhart said.
But banks have deep pockets, say observers. U.S. banks showed an $11.1 billion profit during the first quarter of 1994, a 23% increase from the $9 billion shown in the first quarter of 1993, according to figures from Sheshunoff Information Services Inc., Austin, Texas, a consulting firm. That is the second highest quarterly profit ever reported by the industry, after the $11.4 billion it posted during the third quarter of 1993.
Regulatory barriers are falling in the banking industry and banks need to position themselves for increased competition by going beyond traditional banking products, said Martin Walker, executive vice president of KeyCorp, Albany, N.Y.
KeyCorp and Society Corp., Cleveland, merged last year to form the 10th largest bank company in the nation; Society also bought Schaenen Wood & Associates, New York, an institutional manager with $1.3 billion in assets.
"We see a very changing landscape in the banking industry. We think of ourselves as a financial services company, instead of a bank," said Mr. Walker. "Investment management is going to play a very pivotal role in those companies that are successful."
For their part, the managers bring in fee-based income and product for the banks' nascent investment counseling operations, said Berkshire Capital's Mr. McEver. But industry observers point out the successful way to integrate a money manager to a bank company is to maintain the firm's independence and allow it to operate separately from the company, thereby avoiding the traps that led the investment talent to desert banks in the first place.