First Quadrant Corp., Pasadena, Calif., has reached an agreement to separate from its parent, Xerox Corp., after a three-year effort.
Affiliated Managers Group, Boston, a money management holding company, agreed to buy the quantitative manager in a cash transaction. Eventually, First Quadrant's management could own nearly half of the firm.
AMG will buy the firm from Talegen Holdings Inc., a wholly owned subsidiary of Xerox. AMG will be majority partner and management will own a minority stake in the firm.
While neither side would disclose figures, analysts put the price tag for the deal somewhere around $40 million to $60 million. First Quadrant manages more than $11 billion, about 98% of which are for tax-exempt clients.
"The firm will remain much as it has been, but with one very important difference: that the distraction of being for sale is not present anymore," said Robert D. Arnott, chief investment officer of First Quadrant.
The sale is expected to close by mid-February, but Mr. Arnott said he was optimistic it could close as early as Jan. 31.
Xerox announced in January 1993 that it planned to "disengage" its financial services operations, including First Quadrant (Pensions & Investments, Jan. 25, 1993). At the time, Mr. Arnott said he wanted to talk to Xerox about a management buy-out. Mr. Arnott would not elaborate on why it took so long or why the buy-out idea changed to include AMG's participation.
Mr. Arnott said the structure is advantageous for all three parties - Xerox, AMG and First Quadrant's management - and the firm's management has an incentive to stay.
"The fact that we have a meaningful stake and options for additional ownership are compelling motivation for folks to stay and build the business," said Mr. Arnott. He would not say how big management's stake is, but said it has the potential to grow to 49.9%, "based on moderate growth over the coming 10 years."
Despite the distraction of the sale attempt, the firm has been able to hold its own, doubling assets during the sale period, despite the sale of its New Jersey office. That office, which managed $8.4 billion in insurance assets, was sold to American Re-Insurance Co., Inc., Princeton, N.J., in August 1993.
First Quadrant had just $5 billion in assets (not including the insurance assets) at the end of 1992, when the sale process first began. It managed to grow to $8.8 billion - not including the New Jersey unit - at the end of 1994; it now manages $11 billion.
Most of the increases were a result of new contributions from existing clients coupled with market appreciation, said Mr. Arnott. While the development of new business had been inhibited by being for sale, existing clients have committed considerable new assets to the firm, he said.
"One of the things that impressed us most was how well the firm had done during this (sale) period.......From our standpoint, we think First Quadrant has performed extremely well, so we're excited," said Sean Healey executive vice president of AMG. "We saw an excellent investment management discipline, a very strong motivated, well-known, well-liked team with great prospects of growth."
The First Quadrant acquisition is the largest deal AMG has completed, at least in terms of assets under management. Its five other affiliates - J.M. Hartwell L.P., Paradigm Asset Management, Renaissance Investment Management, Skyline Asset Management and Systematic Financial Management - account for a combined total of approximately $5 billion under management.
As for estimates on the sale price, assuming an average fee of about 20 basis points, not unusual for a quantitative manager, First Quadrant's $11 billion in assets would result in about $22 million in annual revenue, guessed one investment banker. If the sale were valued at two times revenue, not unreasonable for a mainly domestic quantitative manager, the firm might be worth just more than $40 million, he said. If AMG only bought half, the sale would be worth about $20 million.
Glen Casey, a consultant with Cerulli Associates, Boston, noted that last year's sale of Wells Fargo Nikko Investment Advisors, which has a similar quantitative orientation, was priced around 1% of assets. If First Quadrant were priced similarly, the cost for the whole firm would be about $110 million, and half of the firm would be around $55 million to $60 million. But given the more global assets managed by Wells Fargo Nikko - since renamed BZW Barclays Global Investors - First Quadrant's sale would probably fetch a lower valuation.