Prices paid for money management firms have surged in the past decade, thanks to the roaring bull market and growing scarcity of independent investment management companies.
According to data compiled by Berkshire Capital Corp., New York, the average price acquirers paid for money management firms in 1997 was 4.5 times revenue, and 2.8% of assets under management. That's a hefty 150% jump from the 1.8 times revenue, and 1.76% of assets paid in 1987.
Pricetags on these deals have climbed in the last couple of years, as well, said Glenna Webster, principal at Berkshire Capital, a private investment banking boutique. In 1996, acquirers paid, on average, 3.7 times revenue and 1.3% of assets under management.
Investment Counseling Inc., West Conshohocken, Pa., which also follows mergers and acquisitions in the money management business, found similar results. According to its review of 1997 activity, the average multiple paid in 1997 was 4.08 times revenue and 2.64% of assets.
In 1997, 33 institutional money managers were acquired, nearly double the 17 acquired in 1987, according to Berkshire, but down from the 40 acquired in 1996.
The total value of the 1997 deals came to $8 billion, said Ms. Webster, compared with $335 million in 1987 and $2.9 billion in 1996. "One mammoth deal -- Merrill Lynch's $5.1 billion acquisition of Mercury Asset -- skewed the 1997 data," observed Ms. Webster. "If you remove that deal, the value for the 1997 deals was $2.9 billion, the same dollar value as (1996), but for fewer deals," she said.
Prices were higher in 1997 than in 1996, she added, because there is a lot of demand.
"With the bull market, money managers did well, revenues increased, and the added profitability has driven up the prices. There is a lot of demand on the buy side, and it boils down to a question of supply and demand, because many independent managers aren't interested in selling. As a result, competition for those firms that are willing to be acquired has intensified."
Buyers have become more careful before committing, because of the high multiples, added David Silvera, senior consultant at Investment Counseling. At the same time, there are fewer great targets among midsize companies, which was why there were fewer deals in 1997. The trend of fewer deals seems to be continuing into 1998, he said.
Ms. Webster concurred, noting that in the first quarter there were seven deals, compared with 22 in the first quarter of 1997.
"But for the year as a whole, we don't expect to see fewer deals. There is a tremendous amount of activity, with many deals in the pipeline."
New types of acquirers have been moving into the business, Ms. Webster added. Financial services firms that are publicly traded -- such as United Asset Management Corp. and Affiliated Managers Group -- were major buyers of independent money managers. Europeans also have become interested in acquiring money managers. Banks and insurance companies continue to be attracted to these businesses.
A big trend Berkshire has noted is what they call "second-generation sales" -- where acquiring institutions later look for a new home for the target company because it no longer is an appropriate holding. One example was Nationsbank, which sold ASB Capital Management to Chevy Chase Savings Bank last year after it no longer fit in with Nationsbank's long-term strategy. A similar, but speedier, scenario occurred at LGT Global, which bought Chancellor Asset Management and tried to merge it with its GT Mutual Fund family. But the merger was a poor fit. Top managers quit Chancellor, and many clients terminated the money manager. As a result, LGT sold Chancellor to AMVESCAP PLC at the end of January. The deal is expected to close by June 1.
Ms. Webster predicts the trend of second-generation sales will continue, as will the consolidation in the industry. At the same time, new companies will start up, because it's a business that attracts entrepreneurs.
Another industry trend is for management firms to go public, Mr. Silvera said. There also seems to be an increased interest in buying hedge fund companies.