Fewer, smaller mergers and acquisitions transpired in 1998 than in 1997, indicating the flattening of an M&A market that took off like a rocket in 1995.
The aggregate value of the 57 total deals in 1998 was $5 billion, compared with 63 total deals worth $6.7 billion in 1997, according to preliminary year-end data from Putnam, Lovell, de Guardiola & Thornton Inc., a New York investment bank serving financial services companies.
There were no blockbuster mergers in 1998 as in previous years. Putnam, Lovell does not include in its count of asset management deals the merger between Traveler's Group Inc. and Citicorp, because it was a banking merger, not a pure asset management deal. The enormous acquisition closed in October and resulted in a combined asset management business of $292.3 billion named SSBC Asset Management Group. U.S. institutional tax-exempt assets account for about $120 billion.
"The landscape has been big deals, small deals and everything in between, and unless there's a dramatic decline in markets, there will probably be more of the same," said Dean Eberling, managing director, Putnam, Lovell.
Big players may acquire smaller firms that can provide the larger firm with a specific product. Smaller firms may sell to seek future security. But if boutique managers experience a drop in earnings because of market volatility, then the firm's value may decrease. That can lead to fewer properties for sale.
But analysts said they don't expect current market volatility to curb the buying and selling of investment management firms. If anything, some say, market volatility will drive independent managers to seek strategic partners with which to leverage abilities.
About $310 billion in managed assets exchanged hands in 1998 through M&As compared with $430 billion in 1997, according to Putnam, Lovell.
M&A activity in the investment management industry initially soared in 1995, when the combined value of transactions increased 15%, then continued to increase 15% a year in 1996 and 1997, according to data from Berkshire Capital Corp., a New York investment bank that tracks the asset management business. Blockbuster mutual fund mergers drove a great deal of that growth, analysts said.
The year's most unexpected transaction was the sale of Frank Russell Co. to Northwestern Mutual Life Insurance Co., Milwaukee.
Northwestern was motivated by a strategic plan to enter the defined contribution business, but Russell's chairman and majority owner George Russell primarily was driven by his desire to plan for retirement. Total sale price for the Tacoma, Wash.-based firm was estimated at $1 billion, with most of the sale price reportedly paid up front in cash.
Northwestern executives said they sought Russell's institutional asset management capabilities, specifically the manager-of-managers system that keeps Northwestern from being locked into any single manager or manager brand. Russell Co. will create and manage mutual funds the insurer will sell to pension fund sponsors for defined contribution plans.
Another noteworthy deal was the acquisition of the asset management division of the Liechtenstein Global Trust, with more than $55 billion in total assets under management, by AMVES- CAP PLC, London.
Investment bankers at Berkshire refer to this deal as a second-generation sale and the beginning of a new dealmaking trend. Second-generation deals are those in which the buyer of an investment management business no longer finds it beneficial to keep the acquired firm, for strategic, profit or other reasons, and seeks a buyer for the business.
LGT announced in late 1997 it intended to sell its asset management business to concentrate on its core private banking business. AMVESCAP snapped up the opportunity in early 1998.
At that time, LGT's $60 billion asset management business consisted of three parts: the former Chancellor Capital Management Inc. of New York, the former GT Capital of San Francisco and LGT Asset Management of London.
Interestingly, the sale of LGT asset management is LGT's second time to resell an asset management purchase. LGT bought Trainer, Wortham & Co. Inc., New York, in the late 1980s, then sold it to management three years later after it had acquired GT Capital, saying it no longer needed an active equity and bond manager.
Both the Chancellor and GT names have been eliminated and replaced with AMVESCAP's INVESCO brand name.
While it wasn't strictly an asset management merger, the combination of Travelers and Citicorp has resulted in the creation of one of the nation's largest institutional managers. Salomon Brothers Asset Management Group (Travelers) had $29.3 billion in total assets under management; $21.6 billion was institutional. Smith Barney Asset Management (Travelers) had $140 billion in total assets; $22.6 billion was institutional. Citibank Global Asset Management had $123 billion in total assets; $76 billion was institutional.
The combined SSBC Asset Management Group has headquarters in New York. Peter Carman, former head of Citicorp Asset Management, and Thomas W. Jones, former head of the two Travelers asset management business, will be co-chairmen of the new entity.
Neuberger Berman LLC, New York, experienced a bit of bad timing in 1998. For several years, the company had entertained money-raising ideas, from an outside investor to a public offering. In August, Neuberger officials announced they would make a public offering of common stock. But in less than 30 days, financial markets worldwide began rippling with volatility.
Neuberger withdrew its IPO registration from the Securities and Exchange Commission in October, saying it would wait until the markets recovered their strength. Neuberger manages about $50 billion in total assets.
Federated Investors Inc. was luckier. Its May 14th public offering brought in $312 million in net proceeds, on a sale of 17.5 million shares at $19 a share. the firm manages about $100 billion in total assets under management.
Putnam, Lovell's Mr. Eberling said IPOs will have to be priced right in the 1999 market.
"The environment for public offerings of financial institutions will be choppy," Mr. Eberling said.