The valuations of money management firms continued to rise in 1995, although the average transaction was smaller, as consolidation in the industry continued apace.
While some experts think valuations are at a peak, most expect the mergers and acquisitions activity to continue in 1996, even though large targets are becoming scarce.
The 84 transactions in the first 11 months of 1995 represented $460 billion in assets, compared with $543 billion in all of 1994. Transaction values added up to $8.1 billion, compared with $8.9 billion last year. In 1994 there were 82 transactions, according to a report by Investment Counseling Inc., West Conshohocken, Pa.
(The acquisition of RCM Capital Management by Dresdner Bank AG, announced Dec. 15, would bring the year-end totals to $486 billion in assets and transactions worth $8.4 billion, and the Dec. 19 acquisition of Lehman Brothers Global Asset Management by Legg Mason Inc. for an undisclosed amount would bring the asset totals to $489 billion.)
Valuation multiples were on the rise, from 2.33% of assets and 3.48 times revenue in 1994 to 2.94% of assets and 3.58 times revenue. The report noted mutual fund firms continue to command the highest multiples, followed by diversified institutional managers.
Buyers focused on smaller deals, although many were still high-priced, and companies that already had undergone transactions saw an unintended side-effect: team defections and liftouts.
Countering the trend toward money management consolidation, entire management teams struck out on their own, and some met with early success.
The 84 transactions among U.S. money managers tallied in the Investment Counseling Inc. report were made up of 51 acquisitions, 11 joint ventures and 22 start-ups.
It's still very much a seller's market, warn the experts. Thanks to this year's strong capital markets, many firms have seen their businesses appreciate.
Supply is smaller and the number of attractive firms available for transactions, said Chas Burkhart, president of Investment Counseling.
"When you really get to the nuts and bolts of which are the quality companies left under $10 billion (in assets), the answer is not many at all," he said.
The main buyers were independent managers, who made 17 of the 51 mergers and acquisitions, followed by 11 transactions by holding companies including United Asset Management, 10 by insurance companies, eight by banks and five by financial services companies.
The majority of the targets were institutional money managers, which made up 28 of the acquisitions, followed by 12 acquisitions of managers of individual assets and 11 mutual fund managers.
For the past several years, institutional managers have accounted for 40% to 50% of total transactions. But this year, that rate probably topped 60%, said Glenna Webster, principal of Berkshire Capital Corp., New York.
Valuations appear to have stabilized, said Jeffrey Lovell, a principal with Putnam, Lovell & Thornton, New York. There were many deals "north of $100 million," but without the highs and lows that were seen in 1994 and 1993, said Mr. Lovell.
In fact, most experts agreed there were no "blockbuster deals" in 1995 to compare with last year's acquisition of Brinson Partners Inc. by Swiss Bank Corp. or 1993's acquisition of Dreyfus Corp. by Mellon Bank Corp.
Mr. Lovell noted there were a larger number of what he called "name-brand firms" involved in transactions; some examples were Miller Anderson & Sherrerd, Twentieth Century Cos., RCM Capital Management and Wells Fargo Nikko Investment Advisors.
Transactions in 1995 ranged from two to four times revenue and six to 11 times cash flow, but most of the name-brand transactions were done at numbers higher than four times revenue, said Mr. Lovell.
One theme that has developed among established firms has been a trend toward strategic transactions, in which value is derived from association with the other party, not from the price of the sale, said Mr. Lovell.
The largest firm targeted in 1995 was Wells Fargo Nikko, San Francisco, manager of $171 billion in indexed assets, which was acquired by Barclays Bank PLC, London, for $440 million in cash. It was followed by:
Kemper Corp., Long Grove, Ill., with $62.3 billion in assets, acquired by Zurich Insurance Group in a $2 billion cash and stock transaction;
Barings PLC, London, which managed $46 billion, which was purchased by Internationale Nederlanden Groep N.V., Amsterdam, for a nominal payment and assumption of the bankrupt bank's debt; and
The purchase of Miller Anderson & Sherrerd, Philadelphia, with $33 billion in assets, by Morgan Stanley Group, New York, for $350 million in cash, notes and stock.
2 categories of deals
The higher-profile deals break into two broad categories, said Glen Casey, a consultant with Cerulli Associates, Boston. One group was capability-based transactions, where one party was looking for very basic capabilities, such as adding product or expanding rapidly, he said. The mergers of Miller Anderson and Morgan Stanley; Benham Management International with Twentieth Century; Phoenix Home Life Mutual Insurance and Duff & Phelps Corp.; and Criterion Investment Management Co. with Nicholas-Applegate Investment Management, all fall into that category.
The second category was distribution-based, in which companies were looking for market penetration and significant capital to make investments in the business. Those had "a bit of an international flavor," such as the Wells Fargo Nikko and Kemper acquisitions, said Mr. Casey.
Cross-border transactions were high on the agenda for 1995. The continuing globalization of investment management put additional pressure on U.S. firms to seek ventures abroad, while foreign players were seeking entry into the U.S. market. At the same time, the weaker dollar made transactions more affordable.
"The weaker dollar and strong climate has helped many more sellers come out of the woodwork. It caused higher interest from the foreign point of view," said Mr. Burkhart.
The highlights of the year:
One consequence of the pace of mergers and acquisitions was teams of managers spinning off from their parent companies. According to Investment Counseling's numbers, U.S.-based start-ups nearly tripled, from nine in 1993 to 26 in 1994 and 22 in the first 11 months of 1995.
"This was the year of the liftout. It was the year of Howard Marks and Desi Heathwood and John Race and their firms," said Mr. Burkhart. He was referring to Boston Partners Asset Management, a firm started by Desmond Heathwood and a large team of managers from Boston Co. Asset Management; Oaktree Capital Management, the firm formed by Mr. Marks and a team from Trust Co. of the West; and DePrince, Race & Zollo, the firm started by Mr. Race and two other managers from Sun Bank Capital Management.
"The demise of the start-up phenomenon? I don't think it is in the cards," said Mr. Lovell. "It's still an attractive business, particularly in the institutional side, with limited capital requirements for start-ups...it makes it possible for a group to venture out on their own."
Mutual funds settle down
While institutional money managers were mixing and matching all over the spectrum, mutual fund companies were rather quiet. No deals of the scope of the 1994 Mellon-Dreyfus deal were announced. The Benham/20th Century merger, Oppenheimer Management Corp.'s acquisition of the Quest for Value fund family, and the Kemper funds' acquisition by Zurich were among the largest sales in 1995. It was different from 1994, when a number of very significant mutual fund companies were acquired, noted Mr. Casey.
One reason for the slowdown is expense. The multiples for mutual funds "are a little staggering," said Mr. Burkhart.
The bullish capital markets boosted assets and bottom lines, so many mutual fund firms became more expensive and were under less pressure to sell. A robust capital market so far has provided profitability and revenue expansion for mutual fund firms almost regardless of their size, said Mr. Lovell.
"Anytime you have a 25% and 30% market (increase) you're going to mask a lot of selling considerations," said Mr. Burkhart.
But when the market flags, firms without substantial market share or flagship products will come under pressure again, said Mr. Lovell.
Once the pressure resumes, there are still good acquisition targets left, especially in the middle market area, said the experts.
"If you're $5, $10, $15 billion (in assets) - you have some distribution there. You're bound to be attractive to someone," said Ms. Webster. "Even a much larger organization could use a different channel of distribution."
The attack of the UAM clones continued in 1995, as more firms sought financial buyers as a way to bring in liquidity and settle succession issues.
New firms came along to challenge UAM's hold on the market, including Convergent Capital Management Inc., Chicago; Affiliated Managers Group, Boston; and Value Asset Management Inc., Westport, Conn. Berkshire's Ms. Webster said she had counted eight or nine additional financial buyers that did at least one transaction this year, and she expects to see more of them.
"The clones seem to have broken through. A lot of them have done what I think is the hardest thing, which is to do their first deal," said Ms. Webster. "The hardest thing is to do the first one, to convince that company that there is a good reason to choose this firm over a known quantity, a known quantity being UAM."
The clones are distinguishing themselves by doing deals in the smaller end of the market, firms with $500 million under management or less, which fall below the radar of big investment firms, said Mr. Burkhart.
On the other hand, Mr. Lovell said UAM did only one transaction of note this year, the acquisition of Pilgrim Baxter & Associates, Wayne, Pa.
Expect more of the same
And the outlook for 1996? More of the same, say the experts. Based on the level of interest among prospective buyers and the stockpile of available firms - especially in the mutual fund area - the activity won't wind down anytime soon.
Besides the continued appetite among the financial buyers, banks and insurance companies are coming on strong, said Ms. Webster.
The wild card would be a sharp correction in the stock and bond markets, one large enough to affect the asset base of firms and, in turn, affect their value. Mutual fund investors in particular are a factor because no one knows whether they will ride out a sharp drop in the market or rush out, taking their assets with them, said Ms. Webster.
"A correction would have a disproportionate effect on value and on buyers' appetite to buy," she said. "The new mutual fund investors are real wild cards."