Volatile markets won't dissuade strategic buyers from acquiring asset management companies, especially if they seek to grow the business or expand into a new market, dealmakers say.
More firms were purchased during the first nine months of 1998 than in the first nine months of 1997, but those acquired this year are smaller than those acquired last year.
Investment bankers expect the same level of activity to continue, with private firms selling for 10 to 12 times earnings before interest and taxes.
Deutsche Bank AG is known to be prowling for a U.S. asset manager; Bankers Trust Co. is rumored to be for sale.
Having delayed an initial public offering, Neuberger & Berman LLC of New York is said to be an acquisition target, in full view of New York-based Goldman, Sachs & Co., which is believed to be looking for an asset manager.
Goldman might hope to raise its $155 billion asset management business out of the shadow of New York competitor Merrill Lynch & Co., whose managed assets have ballooned to $467 billion. Merrill gained $177 billion with its acquisition last year of Mercury Asset Management Group PLC, London, and has also been winning new business.
Valuations for private firms probably will stay the same and won't be affected by the volatile public markets, said Joe Hershberger, senior vice president at Putnam, Lovell, de Guardiola & Thornton Inc., a New York investment bank.
He expects private companies to continue to fetch prices of 10 to 12 times earnings before interest, taxes, depreciation and amortization; public companies are valued at 17 times trailing earnings.
During the market volatility of 1994, the multiples of public companies contracted, but the multiples of private firms remained stable. He expects that to be true going forward as well.
Putnam Lovell estimates public money managers will experience 12% earnings growth in 1999, down from the 17% growth level Putnam Lovell originally estimated for 1998. That could change again in the face of third-quarter earnings data, which is now being analyzed, Mr. Hershberger said.
The earnings growth of public money managers can be a benchmark for private money managers, but Mr. Hershberger wouldn't predict earnings growth for private managers.
"Strategic buyers will continue to be interested because of the long-term growth prospects of these firms. If you look at 1994, you'll see deal volume was the same as 1996. In spite of market volatility, we expect the deal volume to continue at the same pace as 1998," he said.
There were 73 investment management deals in the first nine months of this year, compared with 59 deals in the first nine months of 1997, according to data from Berkshire Capital Corp., a New York investment bank.
Buyers paid an aggregate $6.2 billion for deals in the first nine months of this year, compared with $5.8 billion in the first nine months of 1997, according to Berkshire.
Merrill's acquisition of Mercury for $5.3 billion during the fourth quarter of 1997 led to an exceptional $13.1 billion year-end tally of money spent buying firms in 1997.
While many parts are still moving, one thing is certain: The parade of dust-raising blockbuster deals of the past two years might not be duplicated any time soon.
"A lot of the larger deals in the last few years were for independent mutual funds," said Berkshire partner Glenna Webster. Many of the larger, private U.S. money managers with distribution and name brands already have been snapped up. According to Pensions & Investments' data, fewer than 30 U.S. managers have assets of more than $100 billion, which is what made Zurich Group's acquisition of Scudder, Stevens & Clark and its $120 billion in assets such a gem of a deal.
"Acquisitions like Founders (Asset Management Inc.) are few and far between because such firms are no longer available," Ms. Webster said.
Mellon Bank Corp. bought private Denver-based Founders last December when Founders had $6.7 billion in total assets under management.
Meanwhile, buyers that were active in 1997 still are busy integrating their acquisitions, said Thomas Courtney Jr., president of the Courtney Group Inc., a New York investment bank.
Merrill Lynch & Co. Inc., Morgan Stanley Dean Witter & Co., Scudder Kemper Investments Inc. and J.P. Morgan & Co. Inc. made sizable purchases in 1997. Merrill and J.P. Morgan also made smaller acquisitions in 1998.
Mr. Courtney doesn't expect those firms to be pushing deals today, but he anticipates activity by Goldman, Chase and Deutsche Bank.
Firms for sale include Robertson Stephens Investment Management of San Francisco, the investment management arm owned by Bank of America. It had $4.3 billion in total assets under management as of Oct. 31. The firm's principals were trying to buy the firm, but the bank might be entertaining buyers as well.
"We are continuing in discussions about the sale with interested parties," said BofA spokesman Jack Houseman.
Although Pilgrim Baxter Co. wasn't able to crack a deal with Nationwide Financial Services, industry watchers say the firm might still be interested in a distribution deal if the right one came along.
Among the deals so far this year, the pension industry was shaken in August when longtime pension fund consultant Frank Russell Co. was acquired by Milwaukee-based Northwestern Mutual Life Insurance Co.
Northwestern was interested in Russell's manager-of-managers program, which contains $21 billion in institutional assets and is not tied to the brand of any one manager. Russell will create a new series of mutual funds for Northwestern, which will distribute them through its insurance agents. Northwestern is believed to have paid at least $1 billion.
LGT Asset Management was acquired last spring by London-based AMVESCAP PLC, reportedly for less than the $1.3 billion AMVESCAP expected to pay. The Liechtenstein Global Trust was selling off its asset management business and AMVESCAP saw the chance to expand its INVESCO asset management operations. LGT's U.S. institutional manager, Chancellor LGT Asset Management Inc., had about $20 billion in institutional assets under management when the deal was done. Chancellor is now INVESCO.
Robeco Groep NV of Rotterdam, the Netherlands, bought Weiss Peck & Greer LLC of New York for nearly $600 million, paying a portion down and the rest over five years if the firm meets certain profit targets. Weiss had $16 billion in total assets under management.
Fleet Financial Group Inc., Boston, invested in 35% of Oechsle International Advisors LP, Boston, which had $12 billion in total assets, of which $8 billion were institutional. Oechsle had been 65% owned by Dresdner Bank AG, which sold 35% to Fleet and the remainder to Oechsle management.
Insurance companies were active players this year, completing about 14 asset management transactions in the first nine months; six total deals were done in all of 1997, according to Berkshire. The value of mergers and acquisitions by the nation's insurance companies increased 109% during the first six months of the year over the same period in 1997, according to Conning & Co., an insurance asset manager in Hartford, Conn.
Banks also were active, with about 15 transactions as of Sept. 30; banks purchased 21 asset managers in all of 1997.
WHEN VALUES GO DOWN
Until recently, strong financial markets pumped up the assets under management of investment management firms worldwide. More assets mean more revenue and, if expenses are controlled, greater earnings.
Independent firms have been valued in recent years at 10 to 12 times pretax earnings. Even if that doesn't change, the market volatility has resulted in lost assets under management and decreased revenue. The firms will fetch a lower price regardless.
"This is good for us, fundamentally," said R. Alastair Short, president and chief operating officer of Matrix Global Investments Inc., New York. "The boom market has papered over cracks in the business structure of many firms." And as those firms fall apart under the pressure of shaky markets, buyers such as Matrix will be waiting.
Matrix was formed a year ago to acquire majority stakes in investment management firms. It has made one acquisition, New York-based Carret & Co., with $1 billion in primarily high-net-worth assets under management.
Investment management holding companies have been moderately active this year.
Affiliated Managers Group has invested in three asset management firms so far this year. In January it bought 68% of Essex Investment Management Co. LLC, Boston; Essex had $4.3 billion in total assets under management, of which 72% is institutional. AMG announced on Oct. 23 it would take a majority interest in Davis Hamilton Jackson & Associates Inc. of Houston; DHJA had $3 billion in total assets under management as of Sept. 30, of which 93% is institutional.
AMG took a 65% ownership position in Rorer Asset Management, Philadelphia, on Nov. 9. Rorer manages $3.7 billion in total assets, of which about a third are institutional tax exempt. AMG invested in three firms in 1997, two in 1996 and four in 1995.
United Asset Management Corp., Boston, made two bolt-on acquisitions by helping affiliates buy an operation that would spur growth.
UAM's Dwight Asset Management Co., Burlington, Vt., in October acquired the stable-value advisory and consulting unit of Laughlin Group of Cos., Beaverton, Ore. The group advises for $5 billion in commingled stable value funds, with discretionary authority over $250 million.
And UAM's Pell, Rudman & Co., Boston, in January acquired Sovereign Financial Services Inc., an equity consulting and asset management firm with $1 billion in assets under advisement and management.