NEW YORK - The market for institutional money managers and mutual fund families is still very healthy, according to a review of 1995's investment management merger and acquisition activity by Berkshire Capital Corp., New York.
Seventy-eight transactions worth $5.94 billion were announced in 1995, compared with 62 transactions worth $4.87 billion in 1994, according to Berkshire's 1996 Investment Management Review. The 1995 transactions - including acquisitions and joint ventures - involved $458 billion in assets under management, a 6.5% increase from 1994's transactions. Of the 1995 transactions, 73 were acquisitions, compared with 54 in 1994.
Institutional managers were the most popular acquisition targets, making up 30 of the acquisitions announced, compared with 20 in 1994. Mutual fund companies also were frequent targets, making up 21 of the acquisitions, compared with 16 in 1994. According to Berkshire's estimates, the institutional acquisitions alone involved $340 billion in managed assets.
The size of manager sales in 1995 seemed to back up the widely held assumption that the investment industry is splitting into a two-tier structure that is squeezing out midsized managers.
While 1994's acquisitions were spread evenly among all sizes, 1995's activity was concentrated in the middle segment: 62% of the institutional managers acquired sold for $10 million and $100 million, while only 33% of 1994's acquisitions were in that price range.
Smaller acquisitions are bound to increase in 1996, as small firms find it impossible to compete for business, said H. Bruce McEver, Berkshire's president.
"More smaller firms are floundering. Single-product firms have nowhere to go," said Mr. McEver. Many are not sufficiently diversified and have not planned for their founder's succession, which leads them to sell, he said.
Another change was in the group of firms making acquisitions in 1995, according to the report. Berkshire's research found new categories of buyers emerged in 1995, while some established buyers took a break from the M&A market.
Banking organizations dropped to 23% of acquisitions in 1995 from 30% in 1994, while insurance companies went to 13% from 5% of institutional acquisitions. Among the overall M&A activity, insurers spent $2.5 billion to acquire firms making up 42% of the value of all money management acquisitions announced last year.
"They're sort of looking over their shoulders to being acquired themselves," during a year of big bank mergers, said Mr. McEver. "I think they'll be back to it as soon as they complete their strategic acquisitions." Banks will come back because many mergers have created large organizations short on track records or talent, and they will have to go outside to acquire both, said Mr. McEver.
While bank acquisition activity was down among institutional managers, bank and trust companies were active in many fronts, according to Berkshire's numbers. Banks acquired five mutual fund families, three personal investment advisers, six institutional managers and one real estate firm. Additionally, non-depository trust companies bought two trust companies and one institutional manager.
As restrictions on interstate banking continue to drop, banks are trying new lines of business and extending their distribution channels, said Berkshire's report. Additionally, bank megamergers also have caused consolidation among large pools of bank-managed investment assets, and that trend is expected to continue, said the report.
In the mutual fund arena, the strong equity market eased some of the competitive pressure on smaller companies, but many still found their way into the M&A market searching for economies of scale and critical mass, according to Berkshire.
Twenty-one mutual fund families were sold in 1995, compared with 16 in 1994; the acquisitions were worth $3.1 billion and the companies involved had $100 million in assets. However, those figures are skewed by the $2 billion sale of Kemper Corp. to investors led by Zurich Insurance Co., which involved $63 billion in assets. Without the Kemper acquisition, the average asset base for fund families bought was $1.9 billion, compared with $6.1 billion in 1994, and the average price paid for a mutual fund family in 1995 was $55 million, less than half of the $114 million average for 1994's acquisitions.
The volume of mutual fund acquisitions has been on an upswing for several years, aided by strong valuations, according to Berkshire's report. The price multiples ranged from 1.5 to 6.1 times revenue and from 1% to 4% of assets under management, while last year's highs were 4.7 times revenue and 3.6% assets.
Other developments in the report:
The bloom is off the joint venture rose, according to the report, which notes the cross-border combinations have not lived up to the promise they held at the beginning of the decade. There were only four joint ventures announced last year, all of them between U.S. and foreign firms, compared with eight - six cross-border and two domestic ventures - in 1994. The most notable among the 1995 joint ventures was the combination of Hypo Foreign & Colonial Ltd., London, and Massachusetts Financial Services Co., Boston.
Joint ventures are still considered an option for cross-border expansion, but many have been unwound after a couple of years because of control and strategic issues, said the report.
Boston's United Asset Management slowed its pace of acquisitions, announcing only one transaction in 1995, compared with four in 1994, and concentrating on establishing its marketing and operations support for affiliates. But other financial buyers -the so-called UAM clones - have stepped into the breach, announcing 15 acquisitions during the year, compared with only three in 1994. Management buy-outs - often considered an alternative to a UAM-type acquisition - were non-existent among institutional managers in 1995, compared with three institutional MBOs in 1994.
Managers of individual assets were popular targets for acquisitions last year. Nine personal asset managers changed hands in 1995, compared with four similar transactions in 1994. While strong market performance helped many firms reap strong revenues, many are still experiencing difficulties maintaining systems and adding clients by themselves, which leads them to seek strategic partners, according to Berkshire's analysis.
The transactions are likely to increase in 1996, according to report.