Money management transactions are becoming increasingly complex and global, according to a just-released study of money management mergers and acquisitions.
Lift-outs, start-ups and joint ventures are becoming a larger part of the transaction environment in the United States and abroad, according to the study by Investment Counseling Inc., West Conshohocken, Pa. Additionally, buyers are taking smaller stakes in firms, according to the report, "Re-Thinking Strategic Activity."
Deals are becoming more strategic and less driven by adding mass, said the report, which questions whether the much-vaunted consolidation of the industry is really happening or the industry is just reorganizing. According to Investment Counseling's research, the 50 largest money managers handled 43% of the total invested assets in the United States in 1996, compared with 50% of the assets in 1989.
Among the study's findings:
Lift-outs - the hiring of an entire investment team by a rival firm - might eventually supersede traditional M&A activity. As acquisition prices keep climbing, potential buyers are seeing lift-outs as a more efficient way to get expertise without the cost and risk of an acquisition.
The same lush market that is bidding up prices for money managers also is encouraging start-ups. Managers continue to strike out on their own thanks to low entry costs and a recent ruling by the Securities and Exchange Commission that gives them more leeway in using their records with other firms as their own. But the increasing trend of dissatisfied managers striking out on their own after mergers is disturbing for buyers, according to the report.
"If the root of this activity is not addressed, clients will continue to be disadvantaged and ultimately dissatisfied," the report concludes.
Joint ventures also are gaining acceptance, according to the report. Thirty-six joint ventures were announced in 1996, compared with 23 in 1995, but the majority involved firms outside of the United States. While the number of U.S.-only joint ventures dropped to six from 11 in 1995, cross-border joint ventures involving U.S. firms grew to 14 from eight in 1995, and joint ventures among non-U.S. firms quadrupled to 16 from four. Most were joinings of niche players seeking access to particular products, rather than large-scale strategic combinations of firms, according to the report.
M&A activity "outside the box" - purchases of firms completely outside of the buyer's area - are having a greater impact in reshaping the money management industry than straight money manager acquisitions. According to the study, deals such as Mellon Bank Corp.'s acquisition of Buck Consultants are driven by distribution concerns and, by creating service platforms, will have more of an effect on the movement of client assets than the grouping of several like managers under one roof.
The number of buyers taking stakes of more than 80% in firms dropped from to 56% from 79% in 1995, while the number buying 50% to 80% increased to 19% from 11%, and those buying less than 50% grew to 25% from 8%.
Subadvisory relationships also are gaining as an alternative to buying expertise for new products. The study found 165 subadvisory agreements were signed worldwide last year, driven mainly by pension consultants building fund-of-funds products.
The study concludes that strategic activity will remain strong in the next few years as players position themselves for changes such as the development of private pension systems overseas. If the U.S. markets undergo a correction, the M&A activity will slacken and alternative transactions such as joint ventures and subadvisory agreements will increase, which in turn provide a foothold for more acquisitions when the markets regain their strength.