The torrid pace of money manager mergers and acquisitions has created headaches for clients.
The situation appears widespread and unrelenting. For instance, 1995 was the third straight year in which the number of mergers and acquisitions hit a record. And, transaction participants included some of the larger names in the industry, including BZW Global Investors (formerly Wells Fargo Nikko Investment Advisors), Morgan Stanley Asset Management and Alliance Capital Management.
So far, few if any of the more recent mergers and acquisitions resulted in manager terminations for that reason, consultants say. And, in 1995 any potential performance problems were masked by high market returns.
However, consultants and pension sponsors agree it takes at least one to three years after a merger is announced to determine its impact on portfolios. That prolonged wait-and-see period forces clients to continue their intensified monitoring of an acquired firm for several years after the actual merger takes place.
"We definitely spend extra time monitoring (firms) we have hired that have undergone a merger," said John Gallahue, executive director of the $1.2 billion Massachusetts Bay Transportation Authority Retirement Fund, Boston. "It's our concern that firms we hired to manage our portfolio keep their autonomy and can function as before. Any changes of direction or investment style or philosophy by a manager would disturb us very much."
In recent years, several of the MBTA's money managers have been acquirers or acquisition targets. Among the participants were the Boston Co., Mitchell Hutchins Asset Management and Alliance Capital Management.
So far, this activity hasn't brought changes to the involved managers, said Mr. Gallahue, but "we have to watch closely." In his view, it's too early to tell about any longer range effects.
Several money managers of the $30 billion Washington State Investment Board, Olympia, have been involved in mergers in recent times. This created "a lot more work, beginning with our own internal monitoring process," said Philip Halpern, chief investment officer. He finds the merger wave "generally not positive, because it creates uncertainty."
Moreover, he points out mergers could be a distraction for the staff managing portfolios. "A lot of energy becomes devoted to dealing with change rather than dealing with the portfolio. While this may turn out positive, it has to divert attention."
Money managers used by the Washington fund that have participated in mergers recently were Cursitor-Eaton Asset Management, Pacific Investment Management Co., BZW Global and Brinson Partners. The latter advises the fund on private partnership investments.
Mr. Halpern said that, while the fund thus far hasn't had any problems with these mergers, "we will be watching them very closely."
The merger wave was one factor that made following money managers more time-consuming for the $1 billion pension fund of Times Mirror Co., Los Angeles. Although fund executives sought to hire more in-house staff to cope with all of the new responsibilities, they were turned down. Ultimately, the fund found a solution to its work pressure: cutting its roster of managers in half and giving 40% of the assets to two global balanced managers, said Mark Schwanbeck, who has just left as the company's assistant treasurer.
Among the issues pension executives must address: potential or immediate changes in a firm's portfolio managers; possible changes in client contact; possible changes in investment style or any possible clash of styles; whether senior people will be long distracted by the merger; and whether financial compensation will still be enough to motivate people to produce good results.
Funds also will want to know if the merger will bring in new products and technological capabilities, and if the merger will affect fees.
One case - that of the Boston Co.'s 1993 acquisition by Mellon Bank Corp. - resulted in a nightmare for pension clients: the departure of 33 staffers, including top management, from Boston Co. Asset Management.
Last year, the $4 billion Maine State Retirement System, Augusta, terminated Boston Co.'s Boston Safe Deposit & Trust Co. unit as custodian. In addition, the Maine fund transferred assets of a $75 million short-term cash account that had been managed by another Boston Co. unit - Boston Co. Asset Management - to its other managers.
The reason for the termination of Boston Safe: "a change in the delivery of custodial services" that occurred after the Mellon acquisition, said Claude Perrier, the fund's executive director. "There were certain services we were looking for, including ways of doing performance analysis, that were not available (with Mellon) that we did find elsewhere," he explained.
The Maine fund terminated Boston Co. Asset Management because the firm had put $2 million to $2.5 million of a $75 million fixed-income portfolio in derivatives, which had not been authorized (Pensions & Investments, April 17).
But not everyone is feeling burdened by mergers. John Carroll, who heads the $13 billion GTE Corp. pension fund, Stamford, Conn., believes the phenomenon is "terrific as long as there are appropriate contracts in place to keep key people. Mergers only add to resources available and bring a new dimension and greater financial strength to firms."
Mercedes Cardona contributed to this story.