NEW YORK - Alarm over the consolidation in the U.S. investment management industry is overstating the case, but there's no overstating the pace of money management transactions, according to speakers at a recent conference.
"Consolidation is a secular phenomenon, and for us, a myth," said Chas Burkhart, president of Investment Counseling Inc., West Conshohocken, Pa., which sponsored the Fifth Annual Money Management Transaction Analysis Conference in New York.
Predictions of industry consolidation underestimate the volume of start-ups, lift-outs of investment teams, joint ventures and subadvisory arrangements that are taking place, he said.
Speakers at the conference noted that, despite the increasing volume of money management deals, assets are still growing and so is demand for managers' services. However, the big demand in the future is not in the traditional defined benefit and defined contribution markets, but among individuals and foreign investors, they said.
Admittedly, pension asset growth is slowing, but the industry still will post a 15% rate of growth in assets into the next century, said Dean Eberling, first vice president of Prudential Securities, New York.
"There's a lot of dollars flowing out there, let's not get hung up on the rate of growth," said Mr. Eberling. Despite the low savings rate among U.S. households, individuals still will manage to accumulate a $3 trillion asset pool during the next 10 years, said Mr. Eberling. With some government stimulus, such as a return of the deduction for individual retirement accounts, savings could surge, he said.
If firms want to tap that individual market, they will have to change the way they do business, said consultant Charlotte Beyer, founder of the Institute for Private Investors, New York. Firms will have to begin collaborating with their competitors to serve the market and emphasize their asset allocation services.
Individual investors don't want a warehouse of products, but rather a guide to the warehouse, said Ms. Beyer. They want estate planning and tax planning and will pay for asset allocation services, something firms are giving away for free now, she said.
"Clients do not want a slew of service providers selling and servicing them; they're overwhelmed," she said.
Some firms will respond to this challenge by making alliances to link tax and portfolio management expertise. Others will jettison distribution completely and sell their product to the investors through other firms. The market will become more organized around the clients, with a few key professionals controlling the relationships and selecting product from the warehouse of options offered by other managers, Ms. Beyer said.
International expansion is another growth area, but it has its pitfalls, said speakers. Foreign financial institutions still are eager to enter the U.S. market, but most speakers expressed doubts about the outlook for most joint ventures short of acquisitions.
Gerald Smith, Chairman of Smith Graham & Co., Houston. said it was those misgivings that led his firm to sell a 40% stake to the Dutch conglomerate Robeco Group. Robeco's subsidiary, Rotterdam-based Robeco Institutional Asset Management, and Smith Graham plan to open a global bond joint venture based in Houston and equally owned by both (Pensions & Investments, April 1).
Smith Graham's partners didn't want to sell the firm, but they needed an international product to add to their domestic fixed-income management, Mr. Smith explained. However, he added they felt they needed their joint venture partner to have an ownership stake to cement its commitment.
Together, Robeco and Smith Graham will be looking to acquire a domestic equity manager in the United States after they establish their joint venture. Both companies know they need equity products to compete for business in the U.S. market, said Mr. Smith.
The right way to achieve a cross-border transaction and maintain it after closing was a recurring theme among speakers. Many noted their organizations were cross-selling their new acquisitions' products to their existing clients to enlarge the acquisition's asset base.
Wolfgang Putz, deputy general manager of Dresdner Bank AG, Frankfurt, noted Dresdner had helped Kleinwort Benson Investment Management, London, which it bought last year, acquire $300 million to $400 million in assets from four of its clients during the second half of 1995.
Dresdner's approach is to acquire independent managers with critical mass, so they will be profitable from the start of the relationship. After the purchase, they maintain their independence and process and coordinate global marketing and distribution with Dresdner.
Dresdner is developing a bonus system to encourage its sales force to cross-sell products from Dresdner's money management units: Kleinwort Benson; RCM Capital Management, San Francisco; and Oechsle International Advisors, Boston. The bank is working on an arrangement in which all of Dresdner's money managers jointly sponsor a bonus pool for the bank's sales force to sell their products in markets around the world, said Mr. Putz.
The combination of local autonomy and global distribution is key, said Heinz Hockman, head of the asset management division of Commerzbank AG, Zurich, parent of Martingale Asset Management, Boston, and Jupiter International PLC, London. The main factors in a successful cross-border transaction are keeping the local culture in place, developing mutual goals with adequate incentives, having a joint business plan and keeping expectations low, he said. The buyer should never pay for synergies that won't materialize, said Mr. Hockman.
The coming years will have strong, but fragmented acquisition activity, said Investment Counseling's Mr. Burkhart.
There are "too many buyers with too many agendas to fill" in the market, he said. For example, he noted the 13 acquisitions of retail mutual funds last year had been mainly single mutual funds or two-fund families, and the 33 institutional acquisitions had been mainly small and medium-sized firms, with median total assets of $2 billion.
Deal pricing is still a problem, with high expectations among the sellers, said Mr. Burkhart. When setting their asking price, "nobody is worth less than four times revenue," he said. The announced sale prices in many cases are "manufacturers' suggested retail price," he said, and additional considerations are factored in the final cost.
The only way to reconcile the sellers' expectations with what the buyers are willing to pay is to structure better deals, said Mr. Burkhart. In the coming years, the industry will see more staggered deals, with payouts spread out over several milestones of performance, he said. Also, deals will show increased focus on "intangibles," the advantages the purchase brings to the target firm, as in the international focus Morgan Stanley & Co. brought to its acquisition of Miller, Anderson & Sherrerd last year.
RT Investment Management, Toronto, one of the 10 largest money managers in Canada, has to grapple with the same options when deciding how to access the U.S. market, said President B. Lee Bentley. Structure would be the key aspect of a deal in the United States, because RT has no synergies to offer the U.S. firm and it essentially would be acquiring its investment expertise, said Mr. Bentley. Yet RTIM offers a non-threatening partner that would protect the target firm's status quo, he added.
The market is concentrating, but it is still very fragmented, particularly in the mutual fund area, said Prudential's Mr. Eberling. He noted that among mutual funds, the 10 largest firms lost market share to the rest of the market during the past five years.
"This isn't the auto business. This isn't steel. We're not going to three firms, so enjoy it," he said.
