More than $1 trillion in assets under management were at stake in investment management mergers and acquisitions last year, all designed to win the race to build the world's most pervasive money management machine.
And more action is expected this year.
Although there were slightly fewer transactions in 1997 than in 1996 - 81 vs. 87 - the amount of assets acquired in the deals was up from $500 billion in 1996, according to Berkshire Capital Corp., New York.
The 1997 statistics are preliminary.
The final 1997 deal pushed the asset figures over the trillion dollar mark. Union Bank of Switzerland and Swiss Bank Corp. announced a merger in December; when UBS combines its $411 billion under management with SBC's $509 billion, the new entity will have more than $920 billion in investment assets.
Such deals are being driven by the need for strategic mass to compete either worldwide or nationally.
"The aspiration of some firms is to play globally," said Jeffrey Lovell, managing director of Los Angeles investment bank Putnam, Lovell and Thornton.
"Others are driven by an interest in playing on a competitive basis in the U.S. markets, but that doesn't mean they couldn't play globally as well," Mr. Lovell added.
LGT still on the block
As the year opens, one international manager continues to openly look for a new owner. LGT Asset Management of London is available for an estimated price of $800 million to $1 billion. LGT has $61.6 billion in total assets under management and a presence in U.S. and European markets.
At least eight potential buyers are believed to have expressed interest.
LGT is conducting negotiations now to select a candidate. Sources say the firm may be sold at auction.
Consolidation in the mutual fund industry will continue among firms with eyes on the U.S. market. Mr. Lovell said an example of that kind of activity, which is driven by a desire to dominate the U.S. market, was last summer's purchase by J.P. Morgan & Co. Inc., New York of 45% of American Century Cos., Kansas City, Mo.
Also, the creation of several new holding companies in the last two years gives owners of smaller investment management firms new options.
Value Asset Management Inc. of Westport, Conn., and Matrix Capital Management Inc. of New York are expected to actively seek majority holdings in small managers in 1998. VAM made its first two acquisitions in 1997; Matrix has yet to make an acquisition.
Affiliated Managers Group Inc., Boston, just completed an initial public offering, the $200 million in proceeds from which will be used to pay debt incurred in its initial 10 acquisitions. Meanwhile the firm continues to seek new acquisitions. AMG bought into three investment management firms this year, acquiring a total of $11.1 billion. In all, AMG has invested in 10 firms with a total of $43 billion under management.
Higher and higher stakes
Officials at United Asset Management, Boston, have said the firm wants to make larger purchases than in the past, and is capable of making a $1 billion deal.
"I expect (merger and acquisition) activity will continue on a fast and furious pace," said Frank Kettle, UAM's director of corporate development. "I don't see why it would slow down. There are a lot of potential sellers and suitors.
"And the stakes keep going higher."
UAM's focus in 1997 was on Canada and Europe. In Canada, UAM acquired 49% of two investment management firms active in the Canadian pension fund and defined contribution areas - Lincluden Management Ltd., Ontario, and Integra Capital Management Corp. of Toronto.
In Europe, UAM backed two lift-outs from European money management houses - Palldyne Asset Management B.V. in Amsterdam, with the former investment management staff of Fortis Group, and Expertise Asset Management in Paris, with the former investment staff of Fimagest, Paris.
An affiliate of UAM - Pell, Rudman & Co. Inc. of Boston - made an acquisition of its own: Sovereign Financial Services LLC of Denver, with $1 billion in private equity assets under management.
Meanwhile, the strategy of Legg Mason Inc., Baltimore, is to continue to expand its investment management holdings through further acquisition, because fee revenue from asset management is stable and not affected by changes in the securities business, according to a recent company report.
Legg Mason made a single acquisition in 1997, buying Brandywine Asset Management Co. of Wilmington, Del. Brandywine's $7 billion under management brought the total number of assets managed by Legg Mason affiliates to $54 billion.
Banks seek managers
U.S. banks are expected to continue to acquire investment management firms, said Greg Hazlett, director of research for Investment Counseling Inc., West Conshohocken, Pa., which does research and analysis of the investment management industry.
The banks are interested in two things: acquiring the fee revenue from investment management, and offering an additional service to core banking customers to ward off competition from multi-service financial institutions, he said.
Worldwide, there were 81 mergers, acquisitions, joint ventures and startup/expansions among investment management companies in 1997, according to Berkshire's preliminary data.
In addition to the UBS transaction, another significant deal is the cross-border acquisition of Mercury Asset Management Group PLC, London, by Merrill Lynch & Co., New York.
The transaction will create a multiasset manager with nearly $450 billion under management.
Also of note was the acquisition of Scudder, Stevens & Clark Inc., New York, by Zurich Group in Switzerland. Scudder was merged Dec. 31 with another Zurich Group firm, Chicago-based Kemper Investments Inc., to create Scudder Kemper Investments Inc., New York. The firm has more than $200 billion under management; about half is institutional.
Price tags also rise
In addition to asset figures rising, the average acquisition price across all industries grew 24% in 1997, said Houlihan Lokey's Mergerstat, a division of Houlihan Lokey Howard & Zubin investment banking services, Los Angeles.
For example, Merrill Lynch is paying more than 3% of assets under management for Mercury.
Meanwhile, mega-deals like UBS-SBC and Merrill-Mercury have prompted observers to ask: How large must a firm be to globally compete?
The oft-quoted 1994 study by Goldman Sachs & Co. predicted the fragmented investment management industry would evolve into one led by 20 to 25 large companies with at least $150 billion each in assets under active management. But the two big recent deals raise the bar, at least in the global arena, Mr. Lovell said.
Still, not everyone is competing globally. While the larger firms will have a significant advantage in terms of distribution and marketing, "strong investment performance still drives the U.S. market," he said.
"Even if the firm is relatively small, if it has access to distribution and can tap into other people's distribution forces, it can do well."
'Dance of the elephants'
"There is the dance of the elephants right now," said Leighton Strader, vice president of marketing for Value Asset Management.
"But within the smaller managers there are equal talents, and that's what should concern a fiduciary," he said.
Added Richard Ennis, principal at consultants Ennis, Knupp & Associates, Chicago: "With a rare exception, I don't see clients benefiting from M&A activity."
While investment management firms are concentrating on their own expansion during this "great era of asset gathering," the question that comes to the client's mind is, "Will this hurt me?"
Shortly after Merrill Lynch announced the acquisition of Mercury, a Mercury client said, "If I'd wanted Merrill Lynch, I would have hired them."
