Owners of money management firms did better than their clients last year - at least those money managers who sold or merged their firms - according to two recent reports tallying merger and acquisitions activity in 1994.
Despite the weakness in the investment markets, the size and number of money management transactions was higher than in many years, according to annual reports issued by New York-based advisory firms Berkshire Capital Corp. and Putnam, Lovell & Thornton Inc. There were more deals, and larger deals, in 1994 than in many previous years; more foreign buyers appeared and banks and trust companies continued their acquisition spree, according to the two reports.
According to Berkshire's 1995 Investment Management Industry Review, a record 62 acquisitions and joint ventures were announced in 1994, compared with 57 in 1993. The aggregate value of $4.9 billion was less than 1993's $5 billion due to the $1.8 billion acquisition of Dreyfus Corp. by Mellon Bank Corp. in late 1993. The size of the acquisitions was also larger; 10 transactions were worth more that $100 million.
Putnam Lovell tallied 41 acquisitions announced in 1994 among privately owned firms valued at a total of more than $4 billion. Twelve firms sold at valuations of more than $100 million.
More importantly, the Putnam Lovell report noted, was that many where established name-brand firms, which indicates strategic motivations drove the transactions. Financial buyers were nearly shut out of the industry in a more rational and liquid market seen in 1994, according to the report, The Markets for Investment Management Companies.
"In 1994, private transactions were motivated by the demographics of founders, as always, and more so by strategic considerations. These are signs of maturity in an industry dominated by craftsmen and entrepreneurs," said the report.
The owners of name-brand management firms were faced with going public in a weak equity market, while a private transaction offered strategic advantages and high valuations, according to the report. The financial buyers have shorter investment horizons than strategic buyers and their valuations are bound to be affected more by the weak markets, while the strategic buyers are able to absorb market volatility better, said the report.
Both reports concluded the increase in strategic acquisitions and joint ventures are signs that industry is reaching maturity. The investment management industry entered a new stage in its development in 1994 when growth gave way to consolidation, according to the Putnam Lovell report.
"A growth spurt has given way to a time of consolidation, as managerial strength and strategic sophistication catch up to the scale of client expectations," it concluded.
Putnam Lovell expects 1995 to set more records in M&A activity. The report predicts the industry will see 50 private transactions, involving $300 billion in assets under management.
The report also projects more of the transactions will involve foreign buyers, following the $750 million acquisition of Brinson Partners Inc. by Swiss Bank Corp. Product-driven mergers also will continue, such as the combination of Twentieth Century Investors, Kansas City, Mo., with Benham Management Corp., Mountain View, Calif., or the merger of Nicholas-Applegate Capital Management, San Diego, and Criterion Investment Management Co., Houston. Additionally, the report projects some areas will experience renewed vigor, including the high net worth market, as banks try to increase their presence as managers of assets for wealthy individuals during 1995 and 1996.
The Berkshire report noted the Republican sweep in the November election and certain repeal of the Glass-Steagall Act will encourage more acquisitions - particularly purchases by banks. Congress appears more likely to lower the capital gains tax rate, which would encourage more individual managers to sell their firms, and the repeal of Glass-Steagall will encourage growth in non-traditional banking products such as investment management, said the report.
Banks and trust companies already dominate the ranks of acquirors, according to Berkshire's numbers. They were responsible for 16 of the 54 acquisitions studied by Berkshire, followed by institutional asset managers, which acquired six of the firms. Additionally, new categories of buyers entered the market, including insurance companies, which have now solved most of the real estate problems that had held them back, and a number of firms following the holding company approach of United Asset Management, Boston. Insurance companies and real estate managers each acquired five firms each; mutual fund companies, United Asset Management Corp., Boston, and securities firms where the next categories, acquiring four firms each and three purchases were management buyouts. Seven firms were acquired by other kinds of companies, such as private equity firms and firms modeled after UAM.
Additionally, both reports noted a surge in foreign firms as buyers and partners in joint ventures. Berkshire's report noted that, in 12 acquisitions, the buyers were foreign firms, compared with seven buyers in 1993. Foreign firms bought five institutional managers, four bank and trust organizations, two mutual fund companies and a securities firm. Foreign firms also dominated the joint ventures; six of the eight combinations announced last year involved a non-U.S. firm, according to Berkshire's analysis.
Berkshire noted real estate managers are also making a comeback as both buyers and sellers, paralleling the comeback of that asset class.
Eight real estate firms were sold in 1994, the same number as in 1993, but that is a jump from the rate of two acquisitions per year in 1991 and 1992, according to the Berkshire report.
The report also added that the size and pricing level of the acquisitions far exceeded that of 1993, most notably the $200 million sale of JMB Institutional Realty Advisors and its affiliates by Heitman Financial Ltd.
That sale signifies the strategic thinking going into acquisitions in that area, said the report.