The merger of Duff & Phelps Corp., Chicago, and Govett & Co. Ltd., London, will create a sizable money management firm with new joint products, starting global fixed income and international utilities funds.
It is a good fit, according to the heads of both firms, and industry observers tend to agree.
Francis E. Jeffries, chief executive and chairman of Duff & Phelps, said global fixed income is one area existing clients had been interested in for some time, but the firm didn't have the capabilities to offer the product. It could be one of the first products the merged firm makes available, he said.
"The same thing (happens) with some of our equity clients, who want us to branch out to small-cap domestic or international. We will now have the capabilities to branch into those things. And for some of Govett's international clients who want more exposure in U.S. securities, we will be able to offer that to them, too," he said.
Arthur I. Trueger, Govett's executive chairman, said the two companies can bring some of Duff & Phelps' research products to Europe, and can put together Govett's international and emerging markets experience with Duff & Phelps' experience in utility funds to offer international and emerging utilities funds.
Additionally, he said the merged company could use Duff & Phelp's experience in closed-end funds to launch some new ones.
The two companies reached an agreement to merge into a new firm, called Govett Duff & Phelps Ltd., which will have $50 billion in assets under management. Duff & Phelps now has approximately $17 billion in discretionary assets and another $23 billion in advisory accounts, while Govett has almost $9 billion in mutual funds, separate accounts and trust assets.
As part of the deal, Duff & Phelps shareholders will receive Govett convertible preference shares worth $230 million, or the equivalent of $13 for each Duff & Phelps common share, and a $20 million dividend. The shares will be convertible into stock in the merged company.
Duff & Phelps shareholders will own just more than a third of the merged company, said Mr. Jeffries. Duff & Phelps Credit Rating Co., a unit of Duff & Phelps that was spun off last October, is not included in the deal.
The $250 million price tag is approximately 3.4 times price-to-revenue ratio and approximately 7 times pre-tax earnings, said Bruce McEver, president of Berkshire Capital Corp., New York. It's a full valuation in terms of a price-to-revenue ratio for a fixed-income manager, he said.
Some of Duff & Phelps institutional clients said the deal holds promise, if it is as seamless as both firms' management claims it will be.
"I think they have the tools with the merger that will lead us going forward," said Russell Niemie, chief investment officer of the $10 billion Employees Retirement System of Texas, Austin. Duff & Phelps is the adviser for a $5.3 billion active domestic fixed-income portfolio for the fund.
"It sounds like that relationship is going to help them bring in some new tools in the international markets (such as global fixed income). That is an area of interest to us that we don't have any contacts in," he said.
Roger Howeiler, executive director of the $820 million Seattle City Employees' Retirement System, said as long as the personnel remains the same and with the same authority, the merger should not affect the fund's relationship with Duff & Phelps, which manages a $202 million domestic fixed-income portfolio.
"I believe it probably will be advantageous," he said. "We have international investments now that are managed by other managers, so that's a possibility. I haven't explored Govett yet, but it appears they would be good."
Govett already has U.S. trust, annuity and mutual fund businesses, but it remains centered on the retail market. Besides more than $40 billion in mainly institutional business, Duff & Phelps adds investment banking, research and an entry into the Canadian market through a 49% stake in Beutel Goodman & Co. Ltd., Toronto, a Canadian money manager with more than C$10 billion in assets.
Duff & Phelps, on the other hand, gains access to the European market and the capability to offer a range of new products to clients.
Observers noted Duff & Phelp's domestic fixed income is more of a commodity investment strategy, while the value now seems to be in international investments, particularly the international equity component Govett brings to the deal.
Duff & Phelps is gaining more of a market niche than Govett thanks to the merger, said Eli Neusner, a consultant with Cerulli Associates, Boston. But he added the merger does provide Govett with a strong domestic fixed-income player, and especially one with access to the U.S. high net worth and institutional market, which it didn't have before.
"I think both sides come out equally well," he said. "You've got a very strong fit and synergies in terms of this square fitting into this square hole."
The international angle could be very beneficial to Duff & Phelps, he said.
Both Messrs. Trueger and Jeffries said it was the search for complementary products and markets that led both firms to the decision to merge.
Duff & Phelps' strategy was to gain global investment capabilities and diversify its products, said Mr. Jeffries. The firm's orientation toward core domestic fixed income and domestic large-cap equity was too narrow, he said.
Developing international management expertise internally would have been too time- and cost-intensive, said Mr. Jeffries. Govett has small-cap capabilities as well as international equity and fixed income, he said.
At the same time, Duff & Phelps wanted to expand its client base to include more retail sales through mutual fund or trust company operations. Again, starting from scratch would have been prohibitive, while Govett offered both things.
"All of a sudden, all of those boxes are filled," he said.
Initially, Duff & Phelps sought to establish a joint venture, but while discussing the possibility with Govett, executives decided a merger would make more sense, said Mr. Jeffries.
"The joint ventures we looked at were not that satisfactory or successful," said Mr. Jeffries. "It's hard to manage them, because nobody knows who's in control. A merger just works better."
While Duff & Phelps is looking at Govett's retail base, its new partner is eyeing the institutional market. The deal is the continuation of its acquisition trend in the United States. The firm acquired Bank of America's institutional asset management group in 1992, since renamed Govett Asset Management Co., San Francisco, and the trust department of the Bank of San Diego in 1993, which is now North American Trust Co.
"It is very difficult to build an institutional business from a small base. Consultants tend to be biased against small companies. This enables us to really play in a much bigger league," said Mr. Trueger.
It is too soon to know exactly how the two firms will be integrated, said Mr. Trueger, but he noted there are few redundancies. Mr. Jeffries will remain as chief executive until his retirement, which is expected at the end of the year.
"We're coming in very high on the people and the fit, and thinking of building up the business, rather than cutting the business back," said Mr. Trueger.
Both sides are hoping the deal will close by May 1. It will require approval by shareholders of both companies and the Securities and Exchange Commission, as well as by the New York and London stock exchanges, which must approve the equity swap.
