Six firms have expressed an interest in acquiring a stake in RCM Capital Management, but the firm is still sorting out which would fit best with its global goals.
And one of the interested parties, Goldman, Sachs & Co., is defending its decision to switch sides from broker to bidder.
Potential bidders - including Goldman, Merrill Lynch & Co., Dresdner Bank AG and ANB Amro Inc. - have had discussions about replacing Travelers Group as a limited partner in RCM.
A source close to RCM said the firm had been looking for a partner with international capabilities to develop that side of its business and Travelers had agreed it would sell its stake if the right buyer could be found. The entire firm is not on the block, he said.
But Goldman is being criticized by other investment bankers for switching sides from investment banker to bidder, which they see as an inherent conflict of interests. Goldman was hired to explore options for the San Francisco money management firm, but was replaced by PaineWebber Inc.
The bankers could not recall an investment banker ever changing sides in an asset management transaction. One banker, who asked not to be identified, said the move "very definitely" has the potential of a conflict of interests.
"It's quite unusual. It certainly raises some question marks about Goldman's role," said the investment banker.
But Goldman went out of its way to avoid a conflict, said a source close to the firm. Goldman withdrew before any other potential bidders could have signaled their target prices, and it has had no talks with Travelers since PaineWebber became involved, he said.
The source said Goldman had completed a study on how to boost its own asset management capabilities when it was hired to find a global partner for RCM. The study concluded that an acquisition was an option. When Goldman executives shared their internal study with RCM's and Travelers' management, all sides agreed Goldman should resign, he said.
The investment bankers' criticism "is largely competitive stuff," said William G. Nutt, chief executive officer of Affiliated Managers Group, a Boston holding company that has acquired stakes in five money management firms in the past two years.
This situation could repeat itself as more Wall Street firms seek to boost their money management capabilities through acquisition, but there are always Chinese walls between departments to alleviate the potential conflicts, noted Paul Schaeffer, partner at Investment Counseling Inc., West Conshohocken, Pa.
"You have these integrated financial services companies - these things are going to happen," he said.
Why Travelers would sell RCM
RCM wanted to broaden its international asset management business when it approached its parent early this year about a sale of its interest, said the RCM source. He would not disclose what percentage of the firm Travelers owns but noted it is the only limited partner; the general partners are RCM's principals.
Observers speculated Travelers Group Chairman Sanford I. Weill decided to sell because the company stands to get a good price in the current mergers and acquisitions environment.
"Sandy Weill is one of those guys who says 'if the price is right, I'm a seller,'" said the banker.
The price likely will be right for someone, because there is a dearth of firms with the scope and size of RCM in the market, said Mr. Schaeffer.
"RCM has been on the top of everyone's list. There just isn't enough left of those kinds of firms," he said.
RCM is not an essential business to Travelers, say observers, thanks to Travelers' ownership of other asset management businesses within its subsidiaries Smith Barney Inc. and Travelers Insurance Corp.
A series of mergers in the past two years has placed a mass of assets under the Travelers umbrella that totaled $133.8 billion as of June 30. Smith Barney and its subsidiaries have $87.4 billion in total assets under management, including separate accounts, mutual funds and other investment products; RCM has $25.5 billion; and Travelers Life and Annuities, another $20.9 billion.
The investment banker who looked at the RCM offer said Travelers has been in a "selling mode" since the sale last year of American Capital Asset Management, Houston, to Van Kampen Merritt Management Inc., Chicago.
The sale could create advantages for RCM and for Goldman's money management subsidiary, Goldman Sachs Asset Management Co. According to Pensions & Investments' 1995 Money Managers Directory, RCM ranks 38th among managers of U.S. tax-exempt assets and GSAM ranks 88th; together, the combined firms would jump to 18th, ahead of well-known players like Putnam Investments and Vanguard Group (Vanguard Groupand Vanguard Group (P&I, May 15).
Money management attractive
Wall Street brokerage and investment banking firms are committing to asset management to smooth the ups and downs of the market and to take advantage of existing distribution channels and expensive financial services technology they have already acquired for their other operations. The traditional business of large securities firms has a large fixed-cost component, so downturns in the markets will cause drops in revenue without a corresponding drop in expenses, while asset management will still produce predictable revenue streams.
Goldman, along with Morgan Stanley Group Inc., is one of the Wall Street firms most concentrated on institutional money management, said Glen Casey, a consultant with Cerulli Associates, Boston.
The RCM deal appears similar to Morgan's recent acquisition of Miller Anderson & Sherrerd L.L.P., in that it is driven by the wire houses' desire to add institutional domestic equity assets to their asset base.
GSAM has been very successful managing cash and short-term instruments, but not as much in the long-term asset management side, said Mr. Casey. The firm has been interested in building more of its long-term and institutional asset base, so RCM fits into that goal.
RCM might be a bit of an odd lot within the Travelers organization, said Mr. Casey. The bulk of its assets are institutional and it has no mutual fund business, while with Smith Barney, Travelers appears to be concentrating more on the retail side of the money management business.
RCM, while a significant player and highly regarded firm, has not grown much in recent years, said the investment banker. It is possible the synergies with its parent company didn't work to its advantage.
One area where RCM could benefit from a sale would be in mutual funds, where it has no presence, said observers. Mr. Casey noted it has only $300 million in mutual fund assets under management.
RCM's price tag, reportedly $500 million for the whole firm, would be approximately 2% of assets, which is "certainly within the ballpark for a firm that doesn't have mutual fund assets," said Mr. Casey. By comparison, Morgan Stanley agreed to pay $350 million for Miller Anderson, which has $33 billion under management including approximately $4 billion in mutual funds.
Miller Anderson sold for less, but it has a high fixed-income component, which typically produces less fee revenue, the investment banker said. Taking that into consideration, the revenue and earnings multiples for both deals work out to be similar, he said.
"$500 million is high, but it is going to be a premium-price property," he said. RCM has good name recognition, a good track record, qualified senior executive management and "a blue-chip client list," all of which make it a potentially attractive business, said the investment banker.
The source close to RCM would not speculate on prices, but noted that, although $500 million is a good price for the firm, only the portion owned by Travelers is for sale. There are no bids on the table yet; PaineWebber will choose three finalists for bids, he said.