WEST CONSHOHOCKEN, Pa. -- The asset management industry has more types of competitive business models now than at any stage in its history, according to "Beyond the Hype," the seventh annual strategy report by Investment Counseling Inc.
"The choice of sustainable business models is increasing, not decreasing" according to the report, due in part to the merger and acquisition frenzy in the overall financial services industry.
Consolidations, a strong market and robust industry profits conspire to prevent the emergence of a single model for success in the industry, the report states: "The superior corporate strategy often lies in deciding what not to do."
The review was written by Investment Counseling President Chas Burkhart, senior consultant David Silvera and analyst John O'Shea. It examines the variety of ways investment management firms can structure their business today.
The "grow or die" mantra advocated by many in the industry has contributed to the rise in valuations, as "firms fear having their competitive choices made for them in this heightened assembly period," the report said.
It might seem like an ideal seller's market, but not every firm is regarded as premium property, according to the report. Much of the buying activity has been driven by employee-owned firms that wanted to sell part or all of the firm for strategic reasons.
In fact, the traditional distinction between a financial and strategic buyer is fading.
"The buyers of investment management firms can no longer be neatly pigeonholed as financial or strategic," the report states. It outlines the acquirers of today:
* Financial investors, such as the venture capitalists and buyout groups, offer creative structures but don't get involved with the seller's business. Pure financial buyers are interested in generating attractive returns then taking an exit.
* Investment management holding companies provide some liquidity to the sellers. These transactions usually are structured around revenue or profit-sharing models. An important part of this model is the autonomy granted the affiliates. Until recently, holding companies have not stressed centralized marketing or co-development of products.
But a new category of holding company might come from changes recently implemented by the industry's traditional holding company, United Asset Management Corp., Boston.
Until recently, UAM affiliates that wanted the parent company's help promoting a product found it costly; help is provided through a cost-sharing agreement with the affiliate or through UAM's central marketing operations. UAM reduced that cost at year-end 1997. It also began rewarding affiliates for retaining and acquiring new client assets rather than rising revenue.
The asset management holding companies lost ground last year as a percent of total acquisition activity. The most active acquirers in investment management mergers and acquisitions last year were the banks, trust companies and their affiliates, with about two dozen deals. Employee-owned, unaffiliated public companies made about 15 acquisitions, according to the study, followed by insurance companies and their affiliates with 14 deals. Money management holding companies and their affiliates only did about a dozen deals in 1997; brokers and investment banks made about nine.
* Financial service acquirers generally keep their affiliates operationally distinct, but also are seeking ways to make the most of the affiliates' talents. An example of this is the acquisition by Nvest LP (formerly New England Investment Cos.) of Daniel Breen & Co., which was integrated into existing affiliate Vaughan, Nelson, Scarborough & McConnell. The firms shared clients and high-net-worth expertise.
* Strategic acquirers, such as banks and insurance companies, bring numerous benefits to the seller in order to maximize the value of an acquisition. The acquirer can offer the seller back-office and technological support, marketing and distribution leverage, seeded assets, parent board representation and other things. A strategic buyer will pay a premium price in a transaction and share some of the leverage and upside with the seller.
In general, insurers and brokerages offer more autonomy, while banks tend to prefer "absorbing the seller to varying degrees," according to the study.
Gary Brinson and Brinson Partners is an example of how a strategic move can lead to expanded opportunity. Brinson Partners was bought by Swiss Bank Corp. in 1994, when Brinson had $30 billion in institutional assets. Mr. Brinson now is leading the asset management merger in process between SBC and Union Bank of Switzerland that will result in an asset management arm with about $340 billion in total assets.
Still, the study notes: "Strategic acquisitions often raise more issues than they solve at closing." The Brinson deal, as well as several other notable acquisitions of 1997, are still in the proving ground, the report says.
Consolidation of operations, or total integration, is not an option often selected by investment management firms. Investment Counseling consultants say it is rare for an investment management firm to be totally integrated into an acquiring entity. It's difficult for a buyer to fully absorb the selling firm's people, products and clients. An exception to this might be the acquisition of a single fund or fund complex.
The lift-out of teams is another way buyers can acquire a skill, strategy, track record or client list. However, the teams often have fragile and individual business dynamics that make them unwilling to be totally immersed into a new entity, the report states.