Swiss Bank Corp. paid at least eight times earnings for Brinson Partners Inc., believed to be a record amount for a purely institutional money manager.
Although what's foremost on the minds of most money management executives is just how much Gary Brinson will pocket - and Mr. Brinson isn't saying - the industry also is abuzz with talk of the significance of the deal.
Simply put, it's a blockbuster.
The deal carries a price tag of $750 million, of which $200 million in cash and/or stock will be paid at closing to San Francisco investment banker Hellman & Friedman and Yasuda Fire and Marine Insurance Co., Tokyo, who own a combined 23.5% stake in the company.
Brinson Partners' management and employees have agreed to an 11-year pay-out for the 106 staffers - out of a staff of 233 - with an ownership interest in the firm. Mr. Brinson said a non-compete clause for management may be negotiated later as part of the final agreement.
The Brinson transaction seems to top the charts for institutional money manager acquisitions, said Glen Casey, a consultant with Cerulli Associates, Boston. Earlier this year, BlackRock Financial Management was acquired by PNC Bank Corp. for $240 million, he noted.
By comparison, Clayton Dubilier & Rice's 1992 acquisition of Van Kampen Merritt Management Inc., a manager with $33 billion under management - roughly the same size as Brinson - was priced at $360 million, less than half Swiss Bank's bill.
But despite the high price, the deal is by no means overpriced, said Mr. Casey. He noted the price is approximately 2% of assets under management, only slightly higher than average for money manager acquisitions. The percentage is higher than BlackRock, which sold for about 1% of assets, but lower than last year's merger of Mellon Bank and Dreyfus Corp., which cost about 2.3% of assets.
Mr. Casey said the high price reflects the nature of Brinson's assets, mainly high-fee international and equity investments. Van Kampen and BlackRock are fixed-income specialists.
Analysts say SBC had good reason to pay so much for Brinson Partners. Indeed, some say the price could have been even higher - although none can remember anyone paying such a price for a firm that wasn't a mutual fund manager.
The deal is likely to put the Chicago-based global money manager among the top 10 managers of tax-exempt assets, leapfrogging over such giants as Alliance Capital Management L.P. and Capital Guardian Trust Co.
"I'm almost surprised its price was not higher," said Chas Burkhart, president of Investment Counseling Inc., West Conshohocken, Pa.
Brinson's profit margins are more than 50% of pre-tax earnings, and 1994 earnings are protected at $90 million to $100 million on revenue of $185 million and assets of $38 billion, said Mr. Burkhart.
Brinson is "one of the leading if not the leading U.S. boutique independent manager managing foreign institutional assets," said Mr. Burkhart. "From what I can see on the surface, this is not overpriced."
R. Christopher Spofford, an associate with Putnam Lovell Inc., New York, estimated the purchase price multiple at roughly 12.5 times pre-tax earnings based on unofficial newspaper reports.
Institutional managers usually trade at seven to eight times earnings, so a more average manager would have sold for a figure closer to $500 million, he added.
The last time the market saw multiples like that was in the 1980s, when the Japanese were in the market for minority stakes, he said.
Mr. Burkhart guessed the valuation is approximately four times revenue and eight times earnings.
Under the agreement, Brinson absorbs the investment management operations of Swiss Bank and become a part of SBC, although it will keep its own name and remain independent of the parent company. The resulting Brinson Partners will remain based in Chicago and retain its current management; Mr. Brinson remains as president and managing partner.
The motivation for the deal was strategic, said Mr. Brinson. Swiss Bank's research, capital and technology will help Brinson Partners expand its global capabilities, particularly in the area of emerging markets equity and debt. Mr. Brinson also noted access to technology and research on derivatives from Swiss Bank's Chicago-based affiliate O'Connor & Associates would be valuable.
Mr. Brinson said he is not planning to trade in derivatives, but the research would be useful in determining their impact on markets in which the firm invests.
"I think from Swiss Bank's standpoint, their primary motivation was to be able to create over one entity - Brinson Partners - the global investment capability that they desire," he said. "For us the advantage will be that, outside the U.S., this will provide us with better opportunity to provide services to non-U.S. institutions."
Clearly, the merger will open up both investment and client markets worldwide for Brinson.
By itself, Brinson ranked 18th among managers ranked by U.S. institutional tax-exempt discretionary assets in Pensions & Investments' 1994 Directory of Money Managers, with $30.4 billion under management. With the addition of more than $12 billion in institutional assets from Swiss Bank, it would rise to 10th place.
"This is a quantum leap for us in becoming a first-rate provider," said John Dugan, chief executive officer of North America for Swiss Bank.
The bank chose to acquire Brinson rather than build up its own asset management operations because of the quality of the firm, its size and reach, he said. By acquiring Brinson, Swiss Bank could become a sizable player in the institutional market right away, he said.
"Building on your own - how long does it take to do that, to get the right people and to get the assets? We don't want to be there 10 years from now, we want to be there today. There's going to be tremendous growth in that business in the next 10 years," he said. Also, by acquiring Brinson, Swiss Bank is getting a known quantity of high quality, he added.
"You don't know if you're going to build something that's going to fly," said Mr. Dugan. "This is a jet."
Brinson clients include the state funds of Virginia, Mississippi, Wisconsin, Illinois, Kansas and California; California and Illinois teachers' funds; the corporate pension funds of Ford Motor Co. and General Motors Corp.; and many other high-profile clients. All clients were informed by letter shortly before the public announcement, said Mr. Brinson.
Claude Perrier, executive director of the $3 billion Maine State Retirement Systems, Augusta, said he wanted to talk to Brinson representatives to find out more and analyze any possible impact in their relationships. Maine has an equity account of approximately $80 million to $85 million with Brinson that is managed in a country allocation strategy.
Mr. Perrier said it isn't apparent whether the partnership will make any difference.
"We've been through other mergers before. ... In many cases the mergers tend to be transparent," said Mr. Perrier. "We've seen many of these types of mergers, and we've seen little effect on our account."
John Bell, assistant treasurer of Consolidated Edison Co., New York, said it is too early to know what the combination with Swiss Bank will do for clients, but he is not concerned. The $4 billion Con Ed pension fund has one global account and one equity account with Brinson; Mr. Bell would not disclose the amounts.
"We hired Brinson for good reason and we trust that Brinson has every interest - as Swiss Bank has every interest - that Brinson's clients are well served," he said.
