Morgan Stanley Group Inc.'s purchase of Miller Anderson & Sherrerd L.L.P. likely will rank as one of the best money management deals of the decade, industry observers predict.
The price tag wasn't a blockbuster, they say, but the combination is a bold strategic move.
Morgan Stanley reached an agreement June 29 to buy the Philadelphia firm for $350 million in cash, notes and stock. The deal is expected to close in the fall, pending regulatory approvals.
Morgan Stanley's acquisition of Miller Anderson will create the 20th largest U.S. money manager with approximately $83 billion under management.
Miller Anderson has $33 billion in assets - 86% of that U.S.-based - in separate accounts and its institutional mutual fund family, the MAS Funds. Morgan Stanley Asset Management, Morgan Stanley's money management unit, has $50 billion under management and is known for international and emerging markets products.
Chas Burkhart, president of Investment Counseling Inc., West Conshohocken, Pa., said the deal allows the younger partners at Miller Anderson to add global capabilities and technology and to be compensated with phantom equity, while the older partners realize some of their embedded equity in the firm.
Morgan Stanley gains a strong domestic asset base and increases its fee-based business much faster than it would by growing its asset management unit.
The acquisition appears to be worth about 3.5 times revenue, a decent valuation but not in the high end of the spectrum, said Mr. Burkhart. "The rationale is that Morgan Stanley is bringing something to the table," he said.
The sale is worth slightly more than 1% of assets, which looks like a fair valuation for a mainly domestic manager with more than half of its assets in fixed income, said Glen Casey, a consultant with Cerulli Associates, Boston.
By comparison, the sale of Provident Investment Counsel to United Asset Management was valued at 2.4% of assets, he said. And, Lincoln National Corp. bought Delaware Management Co. at approximately 2.5%, while BlackRock Financial Management sold to PNC Bank for about 1% of assets. Both Provident and Delaware are equity managers, while BlackRock is a fixed-income manager, which usually brings in lower fees and lower sale prices.
Surprise at selling whole firm
Mr. Burkhart said he was surprised to see the whole firm sold, because it is well-respected, profitable and not a likely acquisition candidate. Firms of that magnitude rarely do something as drastic as selling 100%, which shows how much Miller Anderson wanted to develop global reach, said Mr. Burkhart.
With this sale, the firm is making a big statement, saying "we need size and scope," Mr. Burkhart said. "Independence seems to be less and less prized these days."
Miller Anderson's management had been through a strategic planning process and concluded it was important to position the firm as a strong multiproduct manager, said Richard Worley, chairman of Miller Anderson. Management decided developing international scope would be prohibitive, so finding a partner made more sense, he said.
Given the firm's partnership structure, a sale to another firm was the best way to structure the deal, and Morgan Stanley was the first and only prospect called, said Mr. Worley.
For Morgan Stanley, the firm is committed to expanding its investment management business and increasing its fee-based revenue, said Jim Allwin, chief operating officer of Morgan Stanley Asset Management. At the same time, MSAM wanted to increase its domestic asset base and felt bringing in Miller Anderson's products would create a deeper core U.S. business, he said.
Morgan Stanley has no specific goal for how much of its business should be domestic or international, but a 50-50 split "is not a bad rule of thumb," he said.
Morgan Stanley is viewed as a good partner for the acquisition, because it is one of the more entrepreneurial of the money managers owned by Wall Street parents.
Late last year, a proposed merger of Morgan Stanley with S.G. Warburg Group, London, was aborted after opposition from the shareholders of Mercury Asset Management, Warburg's money management arm. Morgan Stanley also had been a candidate to buy Barings PLC, London, when it was placed in receivership.
The purchase of Miller Anderson is not related to the others, said Mr. Allwin. He added Morgan Stanley was not in serious discussions with Barings, and MSAM's potential merger with Mercury came by way of its parent's bid for Warburg.
Not looking for acquisitions
"We have a clear objective for growing the business," said Mr. Allwin. "But we were not out looking for acquisitions."
Miller Anderson will remain in Philadelphia under its current management and name.
The partners have signed five-year employment agreements, and incentive packages were established to encourage staffers to stay.
"There are incentives to keep anyone from moving," said Mr. Worley. He did not elaborate, but observers noted the incentives most likely include "phantom equity" for the investment staff.
Observers note the price tag is in line with other transactions of the same type and provides a healthy valuation for the firm.
In 1994, purely institutional managers sold for about three times revenue and mutual fund companies brought 3.5 to 3.6 times revenue, so the valuation may reflect the $4 billion Miller Anderson manages in the MAS family of funds, said Mr. Casey.
The five-year payout for partners and phantom equity for staffers show Morgan Stanley is looking at a long-term relationship, said Mr. Casey.
Messrs. Worley and Allwin both said the estimate of 3.5 times revenue is low, but would not elaborate, noting Miller Anderson is privately owned.
As for the incentives, "the incentives and the payoff in both parties are related to what we can do in the future, other than any consideration," said Mr. Allwin.
The clear financial benefits of the deal will come as both firms continue to grow, said Mr. Allwin. Each firm is growing and requires increasing investments in operations and technology, areas where they can work well together, he said. In that regard, eliminating redundancies is not an issue, said Mr. Worley.
Both Mr. Allwin and Mr. Worley said they don't expect the two firms to combine products or staff. Together, the two will be able to develop new ideas in both equity and fixed-income products, said Mr. Allwin.
Miller Anderson is eager to incorporate some Morgan Stanley investment products into its multiasset portfolio management, said Mr. Worley. The firm had noticed its balanced account assignments had developed in recent years from a combination of domestic stocks and bonds to a more global mandate, he said.
There will be no effort to change any of the investment products, said Mr. Worley. He added he expects the two firms to work on integrating their systems and portfolio accounting capabilities and coordinating marketing efforts.
The deal may encounter resistance from consultants and clients who will feel this is a big item in the agenda that will distract from the investment processes, said Mr. Burkhart. They also may object to some of the consolidation of client service and distribution that will follow, he added.
Miller Anderson's clients contacted by Pensions & Investments did not show concern; most said they will watch the firm but don't expect the sale to affect their investments.
"We'll be watching them, but we have no plans to make any changes," said Robert Hyer, deputy treasurer of the Tulsa County (Okla.) Employees' Retirement System. The $80 million fund hired Miller Anderson in March for a $20 million core equity account.
"Certainly we're interested in the impact of the acquisition on Miller Anderson's philosophy and staff," said Dennis Furey, director of investment management at Armco Inc., Pittsburgh. The company's $1.8 billion pension fund has had a long-term relationship with Miller Anderson, which manages $300 million in domestic and international equities and fixed income for the fund.