1997 looks to be another busy year for transactions involving money management firms, after coming off a year that set records.
The demographic trend among firms that led to many buy-outs in 1996 still exists, said Eileen Delasandro, managing director of Quadra Capital Partners L.P., Boston. Many firms that were started in the early to mid-1970s have reached the point of maturity where their founders want to be bought out, she said.
Firms such as Neuberger & Berman, Oppenheimer Capital and Sanford C. Bernstein & Co. have been testing the market. Others are considering transactions:
Weiss, Peck & Greer L.L.C., New York, reportedly is discussing a sale to Dutch banking conglomerate ABN-AMRO Bank N.V.; sources have speculated the deal could be worth nearly $200 million based on assets. WPG has $13 billion in assets under management in equity, fixed-income and alternative investments, including the 14-fund WPG mutual fund family, which has slightly more than $1 billion in assets. ABN-AMRO has been seeking U.S. acquisitions for several years to complement its Chicago-based banking unit, LaSalle National Corp., and its acquisition of Chicago Corp., an equity and fixed-income manager with more than $2 billion in assets (Pensions & Investments, Dec. 9).
United Asset Management, Boston, reportedly is negotiating to acquire Palley-Needelman Asset Management Inc., an equity and fixed-income manager in Newport Beach, Calif. Palley-Needelman, an 11-year-old manager still owned by its founders, has $3.6 billion in assets.
Trust Co. of the West, Los Angeles, one of the largest independent money managerst, with $53.3 billion in assets, is mulling its options. In a letter to clients, TCW Chairman Robert Day said the firm has been approached by so many suitors management felt the need to explore options, including an acquisition, merger, alliance or public offering (P&I, Oct. 14).
"There's significant activity in the pipeline," said Jeffrey Lovell, managing director of investment bankers Putnam Lovell & Thornton, Los Angeles. "I would expect the year would be at least as active as 1996."
And 1996 was very active, turning into a record year for transactions.
Mergers and acquisitions, joint ventures and start-ups topped 1995's lofty highs, and price tags continued rising as well. However, observers note buyers and sellers are approaching deals more cautiously, seeking out strategic advantages that go beyond the final price tag.
The number of total U.S. transactions for the first 11 months of 1996 was equal to the total for all of 1995, according to figures tallied by Investment Counseling Inc., West Conshohocken, Pa., Additionally, international and cross-border deals involving U.S. and foreign firms were up sharply from 1995 levels.
Of the 183 transactions tracked by Investment Counseling in the first 11 months of 1996, 103 involved U.S. firms only, 32 were cross-border deals and 46 were transactions involving only international firms. By comparison, of the 154 transactions in all of 1995, 103 were U.S. firms, 27 were cross-border and 24 international.
The largest deal was AIM Management Group's acquisition by INVESCO PLC in a transaction worth $500 million in cash and $1.1 billion in stock. The two firms will merge under a new holding company called AMVESCO PLC but will remain separate and under their current names after the deal closes in February. The two firms said they expect to launch products using each other's investment approach to offer multistrategy product lines to plan sponsors and mutual fund investors. (P&I, Nov. 11).
Following was the acquisition of Van Kampen American Capital Management, Oakbrook Terrace, Ill. by Morgan Stanley & Co., New York, for $1.12 billion in cash and debt, and Franklin Resources Inc.'s acquisition of Heine Securities Corp., Short Hills, N.J., for as much as $802 million.
Other, smaller deals still included high-profile firms:
Merrill Lynch & Co., New York, agreed to acquire Hotchkis and Wiley, Los Angeles, for about $200 million. Hotchkis and Wiley, which manages $10 billion in assets, will operate under its own name as a unit of Merrill's capital management group, a division organized in 1995 to handle institutional business.
Liechtenstein Global Trust, the European bank parent of LGT Asset Management, agreed to acquire Chancellor Capital Management in a sale valued at up to $300 million in cash (P&I, Aug. 5).
First Union Corp., Charlotte, N.C., acquired Keystone Investments Inc., Boston, for stock worth about $183 million and assumption of $106 million in debt. The two firms will remain separate and based in their respective cities.
New England Investment Cos., Boston, acquired real estate manager Aldrich, Eastman & Waltch L.P., Boston, for about $103 million in cash and units in NEIC, a publicly traded partnership. AEW merged with New England's affiliate, Copley Real Estate Advisors, into a new firm called AEW Capital Management L.P. with $7 billion in assets (P&I, Sept. 16).
Putnam Lovell & Thornton tallied 42 acquisitions announced in the United States through mid-December, which represented an aggregate value of approximately $4.7 billion and assets under management of about $255 billion, compared with 56 deals in 1995 with a transaction value of $3.3 billion and assets under management of $420 billion.
The differences in the asset and price totals for each year could stem from several larger transactions in 1996 that skewed the aggregate value, such as the AIM/INVESCO and Van Kampen/Morgan Stanley deals, which by themselves represented more than half of the total value of the year's activity, said Mr. Lovell. On the other hand, the deals in 1995 included several transactions where large amounts of assets changed hands, such as the sale of indexer Wells Fargo Nikko Investment Advisors to Barclays PLC, which skewed the asset totals.
Valuations remain on an upward trend, with 3.8 times revenue and 2.4% of assets being the average price tag in 1996, according to Investment Counseling's estimates. By comparison, valuations were 3.6 times revenue and 2.46% of assets in 1995, 3.48 times revenue and 2.33% of assets in 1994, and 3.09 times revenue and 1.74% of assets in 1993. The stabilization of the ratio of assets to sale price suggests acquisitions are being more strategic in nature, rather than just consolidation among firms seeking to grow.
"Most of the M&A activity we had seen in 1996 was reflective of companies trying to increase competencies across lines they had not been traditionally strong in or involved in, as opposed to gathering assets," said Peter Starr, consultant with Cerulli Associates, Boston.
The acquisition of AIM by INVESCO and the acquisition of Van Kampen by Morgan Stanley were perfect examples. INVESCO, a value-oriented institutional manager, acquired AIM, a growth-oriented manager with a strong retail mutual fund line. Morgan Stanley's acquisition of Van Kampen added a well-known mutual fund family with $57.1 billion in assets to its product line.
"They're looking at the critical success factors in the money management industry going forward, assessing where they're strong or not and making acquisitions to support some areas . . . recognizing you have to have broad-based product lines and multiline capabilities," said Mr. Starr.
Strategic dealmaking works better than strictly financial acquisitions because it strengthens the capabilities of a firm and not just its cash flow, said Ms. Delasandro of Quadra, which functions as operating officer for small firms that want to remain independent. But she cautioned strategic mergers have more potential risk of culture clashes than financial acquisitions where the buyer keeps firms separate, as United Asset Management does.
"Think of Chancellor and LGT. That's a good example of the marriage of capabilities," she said. "They have lots of good people. It remains to be seen if they can become one family."
While the year's largest deals - AIM-INVESCO, Van Kampen-Morgan Stanley, Heine-Franklin - were clearly strategic in nature, there were a number of financial acquisitions among the middle tier of firms below the $5 billion range, said Mr. Lovell.
But even among the holding companies such as UAM and New England Investment, the case can be made for a more strategic bent, he said.
Both firms are looking less like financial buyers and more like holding companies trying to create synergies and economies of scale, said Mr. Lovell.
UAM, for example, saw the mergers of several affiliates under its umbrella - Sirach Capital Management Inc. and Olympic Capital Management Inc.; Analytic Investment Management Inc. with TSA Capital Management Inc. and later with sister company Alpha Global Fixed Income Managers Inc., and Pilgrim Baxter & Associates and Newbold's Asset Management Inc.
Outright acquisitions on the U.S. market were down to 42 from 59 in 1995, according to Investment Counseling's tally. But transactions overall were up, thanks to spikes in start-up and lift-out activity. Start-ups continue to be popular, with 53 new firms opening in the United States during the first 11 months of 1996, six cross-border start-ups and 13 overseas, according to Investment Counseling's figures. In 1995, Investment Counseling counted 29 U.S. start-ups, 10 cross-border start-ups and eight new foreign firms.
Maybe the highest profile start-up was Vinik Asset Management, the hedge fund firm started by Jeffrey Vinik, former manager of Fidelity Investments' flagship Magellan fund.
Lift-outs of investment teams by outside firms included the recruitment of a fixed-income team from Hotchkis and Wiley by Metropolitan West Securities Inc. to start Metropolitan West Asset Management, Los Angeles; and the move of the team from NatWest Investment Management - which was being shut down after its parent's acquisition of Gartmore PLC - to State Street Global Advisors.
