Financial services companies spent billions of dollars to acquire mutual fund managers over the past decade, but the success of that expensive spree has been mixed, industry observers say.
Experts pointed to a number of "mixed marriage" deals in which culture clashes between the staid atmosphere of the buyer and the more entrepreneurial mutual fund target led to an exodus of important staff and institutional clients. The most successful mutual fund deals, said consultants, were those that created an integrated financial services entity, rather than a conglomerate of disparate managers.
Among the most notable deals of the past decade were:
Mellon Bank Corp.'s purchase of Dreyfus Corp. in 1994.
Morgan Stanley Group Inc.'s acquisition of a stable of mutual fund managers: Van Kampen American Capital Management Inc. in 1996; Miller, Anderson & Sherrerd in 1996; and Dean Witter, Discover Co. in 1997.
Franklin Resources Inc.'s acquisition of Templeton, Galbraith & Hansberger Ltd. in 1992; and Heine Securities Corp., which managed the Mutual Benefit Shares series of funds, in 1996.
Invesco P.L.C.'s purchase of A I M Management Group Inc. in 1997.
Of these, observers said only the oldest acquisition, the Franklin- Templeton union, as an unqualified success.
Foresight lacking
Seduced by the prospect of grabbing a big chunk of mutual fund assets, the leadership of some acquiring companies failed to plan well enough for the difficult post-merger integration, according to mutual fund consultant Darlene DeRemer of DeRemer & Associates L.L.C., Wrentham, Mass.
"It sometimes seems that the chairman's office (at financial services companies) becomes enamored of doing deals," she said.
"The hardest part is post-merger, at the stage when companies and cultures and people have to be integrated and the company reorganized. With all the aborted joint ventures and acquisitions we've seen over the past couple of years, it's been clear that the foresight spent in planning a good business strategy post-merger is critical to the success of the deal," she said.
Ms. DeRemer and other observers said the efforts of traditional investment managers to add mutual funds to their investment management structure have tended to create "conglomerates" of separate managers, rather than integrated money management companies.
And such conglomerates, said Ms. DeRemer, tend to act as oligarchies, which don't take the "people" considerations into account well enough.
Mellon learns hard way
Mellon might have learned the hard way the importance of the cultural aspects of acquiring money managers when it lost much of the equity management team and a number of clients from its Boston Co. subsidiary in 1995 (Pensions & Investments, May 1, 1995).
Hopes Mellon might have had for penetration into the bundled 401(k) plan business also seemed to fizzle, said consultant, James Johnston, a managing director of Paradigm Partners International Inc., West Hartford, Conn.
Dreyfus "built a 401(k) bundled business, but couldn't keep up with the administration and basically gave that business away," he said.
Defined contribution plan assets managed by Mellon entities grew to more than $19 billion as of Sept. 30, 1997, from $6.9 billion as of Dec. 31, 1993. But much of the business, said consultants, is investment only.
However, in terms of assets under management - especially in mutual funds - Mellon got a better deal with Dreyfus than anyone expected, said Mr. Johnston.
"Dreyfus was seen by everyone on the street as being quite overpriced, but it ended up a big winner because of the stock market's terrific performance at the time Dreyfus introduced new equity mutual funds. I wouldn't have guessed that Dreyfus would have worked well with Mellon, but it has been an asset attractor," said Mr. Johnston.
According to published reports, the transaction was valued at $1.8 billion and was accounted for as a pooling of interests.
Mellon's total assets under management pre-merger were $186.8 billion as of Dec. 31, 1993, and were more than $300 billion as of Sept. 30, 1997. Mutual fund assets across the whole Mellon complex zoomed to $102 billion at the end of the third quarter, up from $3.1 billion as of Dec. 31, 1993.
Morgan not integrated
Morgan Stanley Group has yet to integrate its disparate money management businesses, although observers agreed it's still too early to tell how successful its acquisitions will be because Morgan Stanley began acquiring mutual fund companies in 1996.
Van Kampen American and especially Dean Witter, Discover remain very focused on the retail market, while Miller, Anderson & Sherrerd and Morgan Stanley Asset Management concentrate heavily on investment-only business in the large defined contribution plan market.
"Culturally, there's an enormous gap between Dean Witter and Miller, Anderson and Morgan Stanley Asset Management. Frankly, they never seemed to know what to do with Van Kampen American, either. There is a real difference between the institutional and retail businesses," said Ms. DeRemer.
She added Morgan Stanley Group has yet to integrate the money management units it bought by rationalizing the mutual fund lineup to eliminate duplicate funds, changing fund pricing models to make multiple distribution channels workable and taking advantage of synergies in back-office administration and in money management expertise.
But so far, there haven't been any huge staff departures on the investment management side in any of the managers in the Morgan Stanley stable, partly because "it's still essentially four companies operating alone," said Avi Nachmany, a consultant at Strategic Insight Inc., New York, a mutual fund consultant.
And Morgan Stanley grabbed a big chunk of the lucrative mutual fund business. Before its acquisition spree, Morgan Stanley Asset Management Group managed only $11.5 billion in mutual funds as of Dec. 31, 1995. Industry estimates put the mutual fund assets under management at $146 billion at the time of the acquisition of Dean Witter, Discover in May 1997.
Franklin/Templeton tops
"Franklin and Templeton is the only one of these combinations where there were substantive synergies and growth after the merger," said Mr. Nachmany. "Franklin certainly helped Templeton with improved distribution and also helped Heine Securities with better distribution of Michael Price's Mutual Benefit Shares funds," he said.
"The acquisition of Templeton was a wonderful move by Franklin to fill a gap in its product line - international equity funds. People thought at the time that the premium for Templeton was too high, but its growth over the next three years basically paid for itself," said Ms. DeRemer.
"Before consummation of the deal, right out of the gate, they knew what they were doing. They dealt with transition issues right away with Michael Price and also, with Templeton," said Ms. DeRemer.
Franklin Resources, pre-merger, managed a total of $20.6 billion as of Dec. 31, 1991.
After six years and two acquisitions, total assets under management as of Sept. 30, 1997, were $226 billion; of that, $195 billion were in mutual funds.
Amvescap a 'powerhouse'
The jury is still out on the potential for success of Amvescap, the new combined holding company for A I M and Invesco, since the deal was only completed last February.
But Ms. DeRemer said she thinks the new combination is a strong "global powerhouse and can offer the retirement area, in particular, a very full template of A I M and Invesco funds. It's a case here of one plus one equals three."
Invesco managed $156.8 billion in total as of Dec. 31, 1996, with $76.2 billion of that in mutual funds. As of Sept. 30, 1997, A I M helped bring total assets to $191 billion and mutual fund assets to $110 billion.
More mergers expected
"In general, we've been seeing panic among the mutual fund companies to get acquired or to make acquisitions," said Paradigm's Mr. Johnston. "They are looking to find some kind of revenue maker above and beyond their normal retail operations. The cost of dealing with the wire houses is enormous, there's a lot of pressure to increase distribution of funds and there is really huge pressure to get costs down. One way to do that is to buy more assets under management and to buy better distribution. 1997 saw an aggressive amount of acquisitions and there will be more of the same next year. But there are fewer good acquisition targets."
Mr. Nachmany of Strategic Insight was careful to avoid use of the word consolidation in describing recent mutual fund merger and acquisition activity.
"What consolidation? One should not confuse changes in ownership with consolidation (the elimination of the selling entity). So far the 'imminent' consolidation of our industry has impacted just a few managers and while mergers and acquisitions continue, their focus of late has been to pair distribution infrastructures with small but reputable advisory firms. True consolidation activity impacted less than 3% of industry assets in each of the prior few years and hardly changed the overall dynamics of our industry."
Mr. Nachmany suggested creative and entrepreneurial mutual managers will continue to flourish in the industry independently and will be benefited by better distribution in the form of mutual fund supermarkets and alliances.
Unless, as Mr. Johnston suggests, the "good" ones succumb to the pressure of the horde waiting to buy them for their ability to attract new assets.
