The record pace of mergers and acquisitions seen in 1994 will continue this year, as insurance companies and banks keep snapping up targets among an increasingly more merger-minded group of money managers, say industry observers.
Bystanders in this latest buying spree note insurers and banks, latecomers to the asset management game, have the financial resources to complete an acquisition. Plus, they already have the distribution networks to fulfill the targeted company's strategic ambitions. But they're faced with a sellers' market, which is bound to keep prices relatively high, and they will have to compete against a growing trend of acquisitions by foreign buyers.
"You're not going to see much abatement of activity or pricing in '95. There's still too much demand for acquisitions by banks, insurers and financial services companies, and the supply of known sellers is still relatively scarce," said Chas Burkhart, president of Investment Counseling Inc., West Conshohocken, Pa.
Acquisitions have been on an uptrend for years, according to numbers tallied by Berkshire Capital Corp., New York. The number of transactions announced annually grew to 60 in 1994, from 48 in 1992 and 53 in 1993, said Glenna Webster, vice president. The range of valuations also has grown: The price-to-revenue ratio of deals ranged from 1.39 times revenue to 5.21 in 1994, much greater than the 0.2 to 4.37 ratio of 1993, she said.
The trend is not expected to slow in 1995, according to merger and acquisitions professionals. The market is still perking thanks to an imbalance in the number of sellers and buyers, said Mr. Burkhart.
Valuations are nearing their peak, although they still might go up more, he said. Mutual fund complexes are selling for about 4 times revenue and 10 to 12 times pre-tax earnings, while institutional managers are selling for 2.5 to 4 times revenue and 7 to 9 times pre-tax earnings.
The high valuations are pressuring buyers to come up with more inspiring and value-added stategies in terms of what they can bring to the table in distribution and resources to offset the financial considerations, say the experts. "Valuations will drop a little bit because the strategic buyers believe they're bringing part of the transaction value to the table themselves," Mr. Burkhart said.
Also, a market correction or a continued slow or flat stock market could alter the balance in favor of the buyers, by setting some sellers loose on the acquisitions market.
"People won't have the stomach to see the value of their firms drop," said Brad Hearsh, managing director of PaineWebber Inc.
Next year's targets are likely to include Kemper Corp., which already was the target of GE Capital Corp. and a failed merger with Conseco Corp. Mr. Burkhart also mentioned mutual fund companies such as Nuveen Advisory Corp. and Pioneer Group as other likely candidates.
"Companies in the middle (range) on the retail side will feel the need to keep pace with their larger brethren," said Mr. Hearsh.
There has already been great consolidation among the high-end mutual fund companies - complexes with more than $10 billion in assets - and there are few remaining attractive targets, said Mr. Burkhart. Mutual fund activity will wind down toward the end of 1995 as firms will concentrate instead on making sense of the consolidation, he added.
The institutional side will remain active, however, because of the managers of different types and asset sizes, said Mr. Burkhart.
Another factor keeping the institutional segment perking will be the increased presence of foreign companies seeking to enter the U.S. market. Aided in part by currencies strong against the dollar, the companies can afford to outbid other buyers, while U.S. managers are seeking to broaden their international capabilities, say observers.
Berkshire's Ms. Webster noted the number of transactions involving foreign buyers grew from six in 1993 to 18 in 1994, including what is arguably the year's largest non-mutual fund transaction - Swiss Bank Corp.'s $750 million acquisition of Brinson Partners. Mr. Burkhart estimated nearly half of Investment Counseling's clients seeking transaction advisory work are foreign-based firms.
On the institutional side, candidates for sale are found among what Mr. Hearsh called "*'boutiquey' firms needing liquidity" -small, specialized shops founded in the 1970s and 1980s by managers then in their 30s and 40s. The founders are now nearing retirement and would sometimes need to turn to acquisitions as an exit strategy, he said.
Although several investment management holding companies are now in the market for money management firms, the main clearing agent for a financial transaction in this marketplace is still United Asset Management, said Bruce McEver, president of Berkshire Capital. Managers who are going to do an acquisition as a financial transaction will still prefer to do it with a known entity such as UAM, he said.
In the end, there will be no shortage of buyers, said Mr. Hearsh.
"So long as the banks and insurance companies and other financial services firms feel they need to be in the business, they will be there as potential acquirors," he said.
