NEW YORK - Consolidation continues its march in the money management industry, although getting deals done is not becoming any easier, even in the current sellers' market, according to speakers at a recent conference.
The mergers and acquisition activity will continue unabated, including perhaps some initial public offerings of money management firms, according to speakers at the recent Inaugural Symposium on Investment Management Mergers and Acquisitions.
There is still plenty of growth in the market, but managers will have to find that growth in places other than traditional defined benefit plans, according to the speakers. Besides the continuing shift to defined contribution plans, individual retirement savings will take off, putting more assets in mutual funds, wrap-fee programs and other retail-driven vehicles.
"The investment management industry has grown in the last five years by 40% - let the good times roll. . . . (But) the next five years will be a different perspective," said Christopher Nowakowski, president of InterSec Research Corp., Stamford, Conn.
Overall, the asset management industry still has the potential to continue growing by 11% a year in the future, while mutual funds have the potential to grow by 15% annually, said Richard K. Strauss, a vice president at Goldman Sachs & Co., New York. The ratio of pension assets in defined contribution and defined benefit plans are almost even now, he said, and the next 10 to 15 years will see "a complete flip-flop" from defined benefit to defined contribution, leading mutual fund assets to grow along with it.
Consolidation will continue at a feverish pace in the next six months, and $200 billion in assets could change hands, said Milton R. Berlinski, vice president in charge of investment banking at Goldman Sachs & Co. Mr. Berlinski was one of the authors of last year's report predicting 20 to 25 investment management companies will dominate the industry by century's end.
The demands of distribution and global reach that have been driving the industry in recent years continue, while high merger prices and succession issues are still making selling an attractive option for owners, said Mr. Berlinski. Most speakers stressed size is still an important factor to success, especially where the defined contribution market is concerned, and especially with the emphasis on investing in upgraded technology to serve the market.
"The operative mantra appears to be 'survival of the biggest.' *.*. If you're in the middle, you're a target or an acquirer," said Thomas Heller, president of Total Quality Asset Management Inc., Cambridge, Mass.
Firms with less than $10 billion in assets are finding they need to leverage distribution and participate in wrap-fee programs and financial supermarkets in order to compete, said William Nutt, president and chief executive officer of Affiliated Managers Group, a Boston holding company. Additionally, the firms' founders are reaching retirement age and finding an internal transfer of equity is not feasible for a variety fo pricing and tax considerations.
Mr. Nutt noted an AMG study of 1,000 managers done in 1993 - at the start of the current M&A upswing - found the average age of firm founders was 57.5 years old, which makes them old enough to be thinking about retiring.
Buyers are still showing an appetite mainly for equity firms, but there is no area in investment management where potential buyers have not shown interest, said Mr. Berlinski.
Despite all of the pressure to buy and sell, getting deals done is not becoming simpler, said the speakers. While the buyers are becoming concerned about the growing price tags of firms, sellers are becoming concerned about the fit between their line of business and their buyers' and the effects of the sale.
The expectations for sale valuations are as high as they have ever been among sellers, said Brad Hearsh, managing director of PaineWebber Inc., New York. Some institutional manager sales - such as the 1994 sale of Brinson Partners Inc. to Swiss Bank Corp. - have gotten valuations on par with higher-priced mutual fund firms, said Mr. Hearsh. That has raised valuations for smaller firms, especially those showing good performance, he said.
Many speakers complained about a "me-too" aspect to pricing, in which every firm wants a valuation slightly higher than the last high-priced deal and often gets it. Even some private deals are not getting done because the owners of the selling firms think they can get a better price in the public market, said Mr. Strauss.
Until recently, the industry had seen very few public offerings of money management firms, but with the public markets beginning to price deals higher than the private market, that situation is on the verge of changing, said Mr. Strauss. There have been no real asset management IPOs yet, said Mr. Strauss, but that's going to change. He noted Goldman Sachs already is working with managers considering initial public offerings, and added he feels "pretty confident" there will be a money management IPO in the next six months.
Sellers also are becoming more sophisticated in their due diligence of the buyer, said Mr. Hearsh. They are asking more questions about the distribution network and infrastructure of the buyer. Additionally, as more firms become involved in several deals, the parties in a sale are more bound to ask about the other party's record in taking a deal through to closing, he said.
But closing the deal is not the end of the story, according to speakers. They noted a variety of problems arise after the closing, especially among dissatisfied clients of the newly merged firms.
Firms often have to spend much time post-merger placating clients and staff, a necessary but not very productive activity, said Sam DeKinder, director of marketing for INVESCO North America.
Clients "are unhappy about playing the role of the unlucky bystander" in an acquisition, said Frank P.L. Minard, partner in Bankers Trust Co.'s global investment management unit. Additionally, there is a "jiggle effect" where the merger can serve as a catalyst for the departure of staffers who already were unhappy before the merger.
Nicholas Reitenbach noted his firm, Pinnacle Associates, an independent money manager, has gained about one-third of its clients from "money management refugees" who left larger firms where their small accounts were being forced into commingled funds without regard for their own investment guidelines. He noted his firm has among its clients several church funds that require screens as selective as no caffeine-related investments, which can't be accommodated in a commingled fund.
Firms need to manage the post-merger environment very carefully, said Robert Weiss, executive vice president of Zurich Kemper Investments, Chicago, the organization formed by the acquisition of Kemper Financial Services Inc. by Zurich Insurance Group.
Many firms rush to restructure after an acquisition on the mistaken belief that it is better to get everyone on the staff on the same footing quickly, said Mr. Weiss. It is better to take it slowly and work on a smooth transition, allowing time for staff and clients to adjust. Among the most important things are avoiding client suprises and making sure the staffers are not worrying about their jobs rather than concentrating on the investment performance.
