The purchase of Wells Fargo Nikko Investment Advisors, San Francisco, by Barclays PLC, London, is expected to create advantages for both organizations and their combined client rosters.
The transaction "helps both sides move the ball forward," said Paul Schaeffer, partner in Investment Counseling Inc., West Conshohocken, Pa.
Barclays has offices in the United States, where it has "tried to grow the business organically, and that never got very far," he said.
For its part, Wells Fargo Nikko's international asset base is a very small portion of its total business, he said. The combination will give Wells Fargo Nikko access to Barclays' distribution base in Europe for its defined contribution products, said Mr. Schaeffer. Despite the stagnant U.S. indexing market, Europe is still a growth area as more countries privatize their pension systems, he said.
Wells Fargo and Barclays officials say the combined entity, a massive company with more than $200 billion in assets, will be able to expand its securities lending and investment product line worldwide while offering lower fees.
"Our clients will benefit from increased representation in markets, lower costs, more product innovation, more securities lending activities and the business itself will prosper as a result of expanding our services to the clients," said Fred Grauer, chairman and chief executive officer of Wells Fargo Nikko.
Barclays reached an agreement to acquire Wells Fargo Nikko from the joint venture's owners, Wells Fargo & Co. and The Nikko Securities Co., for $440 million in cash. Barclays also will acquire Wells Fargo's MasterWorks division. MasterWorks, which provides bundled 401(k) products, has $6.6 billion under management, the bulk of which is managed by Wells Fargo Nikko. Nikko Securities will maintain 50% ownership in Wells Fargo Nikko's Japanese operations. The transaction is expected to close sometime between October and December, pending client, shareholder and regulatory approvals.
Wells Fargo Nikko will be combined with BZW, a subsidiary of Barclays, a British banking company, bringing together the largest manager of indexed assets in the United States and the largest indexer in Europe. The combined firm will have $205 billion in assets, 70% of which are in U.S. securities and 30% in international assets. The combined entity will be based in San Francisco, and will operate under a new name to be chosen later. Mr. Grauer will remain as chairman and chief executive.
The combination with Barclays' asset base will allow increased opportunities for crossing between the two firms, which will allow them to charge lower fees, said Mr. Grauer. Crossing can reduce 30 to 100 basis points in securities lending transaction costs, an advantage that can be passed on to clients, he said.
The combined entity will have significant entry into key European markets thanks to Barclays' operations and Wells Fargo Nikko's own presence in the Netherlands, where it is the third largest institutional manager and the largest indexer, said Mr. Grauer. He noted the United Kingdom, Barclays' home country, and the Netherlands are Europe's top two pension markets, while Germany and France - two markets where Barclays has a presence - are developing pension pre-funding schemes that will provide more potential growth opportunities.
The combination also will have an entry into top markets in Asia, including Japan, through Wells Fargo Nikko's Tokyo office - which Mr. Grauer anticipates will retain the Nikko name - and Australia, where both Barclays and Wells Fargo Nikko have a presence.
Emerging markets are going to be "very high in our agenda," said Mr. Grauer. Wells Fargo Nikko has 11 emerging market index funds, while BZW has 16; about half of the index funds overlap, he said. Additionally, Wells Fargo Nikko offers asset allocation strategies among emerging markets and alpha-tilt strategies within those markets.
For Wells Fargo Nikko, the merger achieves what the firm set out to do when it first put itself into play last April, namely to find a partner with international capabilities that would allow it to grow globally.
The final bids for the business were fairly close in their valuations, but Barclays was the preferred buyer because they are a global player, said Mr. Grauer. The bidders - which reportedly included Merrill Lynch & Co., New York, and State Street Bank & Trust Co., Boston - met in San Francisco June 8 to place their bids in an auction process. Mr. Grauer wouldn't comment on other bidders.
For Barclays, the deal is an entry into the U.S. market - a market it had tried to access unsuccessfully in fits and starts during the last decade, said Brad Hearsh, managing director of PaineWebber, New York. He noted Barclays had formed a joint venture with Franklin Resources in the late 1980s to distribute Barclays' retail funds in the United States. That venture ended when Franklin bought Templeton Galbraith & Hansberger in 1992, he said.
Thanks to this latest combination, Barclays will be able to export Wells Fargo Nikko's defined contribution products and technology to the U.K. market, said Lindsay Tomlinson, chief executive of BZW Asset Management, London.
Because there is so little overlap between the two firms, the combination will result in very few cuts, said Messrs. Grauer and Tomlinson. There will be very few layoffs, if any, said Mr. Grauer.
"There is a perfect geographic fit between our businesses. The businesses dovetail perfectly," said Mr. Tomlinson. "There is no need to rationalize the business in any way."
Despite the good fit, the pricing appears low when compared with price tags such as the $750 million paid by Swiss Bank Corp. for Brinson Partners, whose $37 billion in assets pale compared with Wells Fargo Nikko's $171 billion. Several merger and acquisition specialists noted the assets involved are low fee generators because indexing fees are at best in the 20 to 30 basis-point range. In some cases, said one consultant, Wells Fargo Nikko has been known to charge fees of less than 10 basis points for a large enough client.
Mr. Grauer said indexed assets tend to generate approximately one-fifth of the revenue generated by typical active manager of the same size. Given the firm's $140 million in revenue in 1994, the deal comes in at a multiple of roughly three times revenue.
Jeff Lovell, principal of Putnam Lovell & Thornton, New York, noted the deal has limited upside in terms of adding assets in the United States, where indexing has been stalled for years.
Indexing in the United States is a zero-sum game, with competitors stealing market share from each other, said Glen Casey, consultant with Cerulli Associates, Boston. In that respect, the merger may give Wells Fargo Nikko more economies of scale that it can translate into a competitive edge in pricing, he said.
The transaction is "an institutional marketing opportunity" that gives Barclays access to Wells Fargo Nikko's extensive list of U.S. institutional clients to use as a foundation to expand its presence in the defined contribution marketplace, said Mr. Lovell.
"It's a good thing for both companies. Wells Fargo Nikko gets access to international markets and Barclays gets access to an impressive client list of U.S. institutional investors," said Mr. Casey.
For most of those institutional investors, however, Barclays is an unknown quantity. Still, the prospect of a sale had little impact on how Wells Fargo Nikko's clients view either firm. Most experts point out mergers and acquisitions are not likely to seriously affect the management of indexed assets as much as they do actively managed assets.
David Van Benschoten, vice president-finance and investments at General Mills Inc., Minneapolis, said he isn't that familiar with Barclays but he remains "confident in the ability of Wells Fargo and their strength in the marketplace. Based on what we know so far we are comfortable."
He said General Mills does not now use active international equity managers "but I'm sure we will be hearing more about that now" from Barclays. The $1.65 billion General Mills pension fund has a $40 million international equity index fund with Wells Fargo Nikko.
Kie D. Hall, executive director of the $2 billion Arkansas Public Employees Retirement System, Little Rock, said he expects the merger to have little impact on Wells' business activities. He said the Arkansas fund uses Wells to run a $150 million domestic fixed-income index fund and doesn't expect Barclays to gain any inroads in international indexing.
"Wells Fargo is the only indexing we do. We are more interested in active management," he said.
Most of Wells' clients, while not surprised at the merger, were caught off-guard by the timing of the announcement.
Jerry Justice, treasurer and administrator for the $2.5 billion Army & Air Force Exchange Service pension fund, Dallas, said he had not yet heard officially about the proposed merger of the two indexing giants but doesn't anticipate any major impact on Well's U.S. business operation. AAFES has $400 million invested in a Wells Fargo Nikko domestic equity index fund.
"We will have to take a look at it now; this is the first I've heard about it......Wells had told us there was this possibility. The information we have been getting is that most likely it will not affect the way they conduct their business," said Mr. Justice.
Fred Williams contributed to this story.