The bull market for money management firms in the United States surged in the first half of 1996, even as the bull market in stocks slowed.
In the first six months:
The number of U.S. domestic start-ups boomed, surpassing that for all of 1995.
The combined number of acquisitions, joint ventures and start-ups among U.S.-based firms was almost 20% higher than in the first half of 1995.
There were 18 cross-border deals involving U.S. and non-U.S. firms through June, compared with 27 for all of 1995.
The value of the deals in the first half of the year was almost 80% of the value of the deals for all of 1995.
The number of deals - and their price tags - in the first half of the year stayed on the rising trend they have riding on in recent years, according to tallies by several industry analysts.
Even the market correction that may have begun last week might not be able to cool the deal fever, say the experts.
Transaction activity is rapidly outpacing 1995 deals in almost every segment, according to numbers from Investment Counseling Inc., West Conshohocken, Pa. There were 61 acquisitions, start-ups and joint ventures among U.S.-based firms in the first half, compared with 52 for the first half of 1995 and 103 for the entire year. There were another 18 cross-border deals (involving U.S. and foreign firms) in the first half, compared with 27 for calendar year 1995.
The growth in international transactions (involving only non-U.S. firms) was even stronger at 30 deals in the first half, way ahead of 1995's total of 24 deals.
International and cross-border deals are on a definite upswing, with many between Canadian money managers and among foreign firms seeking an entry into the U.S. market, said Gregory Hazlett, director of research at Investment Counseling.
U.K. and Hong Kong money managers also have seen their share of deals, said Susan Long, director of investment banking at Frank Russell Capital Inc., Tacoma, Wash.
The number of domestic start-ups already surpassed 1995's total; 32 new firms opened in the first six months vs. 29 for calendar year 1995.
The strength of the stock market might have emboldened some managers to leave established firms and strike out on their own, said Brad Hearsh, managing director of PaineWebber Inc., New York.
Besides the number of deals, valuations appear to be rising as well, according to the prices of deals announced in the first six months. Berkshire Capital Corp., New York, tracked 46 U.S.-based deals worth $4.7 billion so far this year, vs. 78 deals pegged at $5.9 billion in all of 1995. Total assets under management involved in the transactions was $262 billion, compared with $458 billion in 1995, said Glenna Webster, principal of Berkshire Capital.
Comparing the total assets sold to their total price suggests the deals are being priced much higher, said Ms. Webster. While the assets sold so far in 1996 are close to half of last year's total, their price tag is far more than half the total price of all assets bought in 1995, she said.
Based on analysis of 14 U.S. money manager acquisitions in the first half of 1996 done by Putnam, Lovell & Thornton, San Francisco, the firms sold for a median price-to-assets ratio of 1.6%, and price multiples of 3.8 times revenue and 10.1 times pre-tax income. For the first half of 1995, the median price-assets ratio was 1.8%, with price multiples of 3.4 times revenue and 8.7 times pre-tax income.
Putnam Lovell's analysts caution the asset comparison could be skewed by the $171.9 billion asset base involved in the acquisition of Wells Fargo Nikko Investment Advisors by Barclays PLC.
The rich valuations are "certainly as good or better than last year," said PaineWebber's Mr. Hearsh.
Some sectors, such as institutional money managers, have been very richly priced in 1996, said Mr. Hearsh. Buyers recognize the scarcity of established, successful institutional firms for sale, and those firms can command higher multiples, he said.
The three largest deals so far this year were announced in June:
The acquisition of Van Kampen American Capital Management, Oakbrook Terrace, Ill., by Morgan Stanley & Co., New York. Morgan paid $1.12 billion in cash and debt for Van Kampen, manager of $57.1 billion in mutual funds.
Franklin Resources Inc.'s acquisition of Heine Securities Corp., Short Hills, N.J., for as much as $802 million. Heine manages the $17 billion Mutual Series Funds family.
Merrill Lynch & Co. agreement to acquire Hotchkis and Wiley, Los Angeles, which manages $10 billion in assets. Financial terms were not disclosed, but sources put the figure around $200 million.
Another big-ticket deal is expected to be announced shortly - the acquisition of Chancellor Capital Corp. by LGT Asset Management, New York, manager of the $9 billion GT Global mutual funds. Chancellor, which manages more than $31 billion, is looking to globalize and add mutual fund capability, while LGT wants a foothold in the U.S. market. Reports have placed the price at $400 million to $600 million.
"If the market environment stays the way it is, (prices) may trend up a bit more....There has certainly been a ratcheting up of the (price) multiples," said Mr. Hazlett.
Despite the heady pace of deals, valuations are not outlandish, according to John Keefe, president of Keefe Worldwide Information Services, a New York investment research firm. Mr. Keefe, who did an analysis for Grant's Interest Rate Observer, noted the median price paid for a U.S. money manager has been between six and 10 times pre-tax earnings since 1989. Mutual fund companies command prices 1% higher on average than those of institutional money managers.
Most of the 1996 deals involved purchases of institutional money managers or mutual fund companies, said Berkshire Capital's Ms. Webster. Together, the two groups accounted for 37 of the 46 sales tracked by Berkshire; the remaining nine were real estate managers, managers of individual assets, trust companies and other firms.
Holding companies were the chief buyers this year, according to Investment Counseling. Nine firms were sold to holding companies, vs. 12 in calendar year 1995 and only five in 1994. Four of those deals involved United Asset Management, Boston - the merger of affiliates Sirach Capital Management Inc. and Olympic Capital Management Inc.; the merger of affiliate Analytic Investment Management Inc. with TSA Capital Management Inc. into Analytic-TSA Global Asset Management and its later merger with affiliate Alpha Global Fixed Income Managers Inc.; and the merger of affiliates Pilgrim Baxter & Associates and Newbold's Asset Management Inc.
Strategic buyers are still active in the market and will be willing to pay the necessary prices to make some long-term impact in their business, said Russell Capital's Ms. Long. On the other hand, venture capitalists and financial buyers might need to rethink their buying strategy in light of the high price multiples and the need to show a return on investment within a given time frame, she said.
Insurance companies and banks have been almost inactive this year, according to Investment Counseling's analysis. Only two U.S. acquisitions were made by banks and only one by an insurance company. By comparison, 10 of 1995's deals involved banks, and nine involved insurers.
The prospect of a market correction won't slow transactions for the second half of the year, although the pace could be tempered by pricing pressure, said the analysts.
"The secular growth trends in this industry are very healthy and very attractive," said Ms. Long. "Even with some sort of market correction, it's still a very healthy business to be in."
The secular growth is driving transaction activity more than the financial market's behavior could, said Ms. Long. If managers believe in the long-term outlook for the industry, they will stay in the acquisition market, she said.
In the long term, a market correction won't put deals in the deep freeze, but it might give the parties pause, said PaineWebber's Mr. Hearsh. Buyers and sellers might want to hold off on closing deals until the market - and the value of their assets - stabilizes, he said.
At the same time, a negative market outlook could force the hand of firms sitting on the sidelines to jump in now or risk selling at the bottom, said Mr. Hearsh.
A correction might affect pricing negotiations initially, said Mr. Hearsh. He estimated buyers might be wary of paying more than they should as the market is dropping, while the sellers will be seeking to avoid closing a deal at a depressed price. But once the market settles and people have a chance to adjust their valuations and get comfortable with them, the action will resume, he added.