BOSTON -- United Asset Management has arrived at a crossroads. The direction it chooses will determine the fate of the 16-year-old, once-revolutionary company.
But is it carrying too much baggage to maneuver?
"It takes a long time for a big ship to turn," said Randy Befumo, an analyst for Legg Mason Fund Advisers Inc., Baltimore, which bought more than 800,000 shares of UAM in 1998.
Critics wonder if UAM actually needs a miracle.
What began in 1983 as a sweep to acquire profitable boutique investment management firms has resulted in an incoherent collection of 44 wholly owned firms. Because UAM was attracted to firms with top investment performance -- rather than growth characteristics -- it now is holding only a few companies with momentum.
Over time, market appreciation and acquisitions have contributed a great deal to UAM's growth. The company's earnings are expected to grow 4% in 1999 and 9% in 2000, according to Thomas Hanley, analyst with Warburg Dillon Read LLC, New York. The average earnings growth rate for Warburg's asset management universe is 10% to 11%.
He rates UAM's stock a hold, saying the changes UAM made in 1997 and 1998 to maximize productivity at affiliate firms might take time to bear fruit.
Many longtime firm principals remain at the helms of their operations under UAM ownership; because they have the proceeds of the sales of their firms, the usual financial incentives to inspire growth aren't always effective, analysts say.
In addition, UAM's arrangements with each subsidiary require a consensus among UAM and firm leaders on critical action taken regarding the affiliate, which would make replacement of lead management or closure of the firm more difficult to accomplish.
Hagler, Mastrovita & Hewitt Inc. of Boston was closed in April after it lost a substantial account; UAM executives were quick to note the firm's closure was a joint decision between HMH principals and UAM.
But no joint decision was needed in September to close UAM Retirement Plan Services, New York, an unsuccessful defined contribution operation launched five years ago. Nor did UAM need anyone's OK to terminate 12 employees last month at another UAM-created operation, UAM Investment Services, Boston.
Steven Schwartz, analyst at ABN AMRO Inc., Chicago, recently lowered his UAM 1998 and 1999 earnings estimates to $1.15 per share and $1.09 per share, respectively, from $1.14 and $1.12.
The outflow of client accounts, which Mr. Schwartz estimates will be $2.6 billion net per quarter in 1999, could match investment returns resulting in no growth in average assets under management for the next year, Mr. Schwartz forecasted.
UAM is not a likely acquisition target, said Neal Epstein, vice president at Putnam, Lovell, de Guardiola & Thornton Inc., New York.
"There are a few firms with positive momentum, but I don't see why anyone would buy up UAM to get their hands on a few small firms. It would be a nightmare. If you reduced UAM to $40 billion of quality assets, with a market cap of $1.5 billion, that's a high cost to get to the quality. It's not a logical step for anyone," he said.
The weakness of UAM's model was exposed in last year's second quarter, when financial markets dipped and investment returns were weak industrywide. UAM's total assets slipped to $210 billion from $213 billion. Affiliates were losing more accounts than they were winning. While it wasn't a new problem, it came on the heels of an uncomfortable $175 million charge against 1997 earnings because of insurmountable problems at two affiliates.
Mr. Hanley has rated UAM's stock a hold, as have Mr. Schwartz and analyst James Hanbury of Schroder & Co. Inc., New York. Mr. Hanbury expects UAM to continue to have negative net client cash flow. "The company has come to the view that spending a fortune on getting new clients may not make as much sense as serving the existing ones better, and is refocusing its efforts toward this," he observed in a recent report on the firm.
There's always the chance that UAM eventually would go private, said Legg Mason's Mr. Befumo, possibly through a slow-motion leveraged buyout over 10 years. Observers say that would give UAM the privacy to sell or close unprofitable affiliates and make other such moves that could affect the company's stock price if the firm were still public.
WHAT'S UP
To inspire affiliates to market themselves more aggressively, UAM announced in January it would assume a greater share of the marketing cost. It also tweaked incentive programs to reward positive net client cash flow rather than overall increases in revenue, an arrangement UAM hopes will function like a phantom stock agreement.
Schroder's Mr. Hanbury doesn't believe UAM will begin to treat its affiliates as tradable properties. "We do sense a new pragmatism and an awareness of the values in the organization. We do not expect anything dramatic soon, but the probability of an event has increased," he said in a recent report.
UAM spokesman Jonathan Hubbard acknowledged that until recently, UAM improved shareholder value in part through acquisitions. UAM's best buy now is its own outstanding stock, he said.
UAM made no acquisitions in 1998, although it was financially capable of doing so and firms were looking for buyers. Instead, UAM bought back 10%, or 9.8 million, of its outstanding shares. It used operating cash flow and unused credit capacity to purchase the shares.
Mr. Schwartz said amortization of the costs of contracts acquired -- the non-cash expense that boosts UAM's cash flow so significantly -- will increase significantly on a per-share basis as the number of outstanding shares decreases, assuming UAM continues its stock repurchase program around 3 million shares per quarter.
UAM's stock price stayed between $20 and $29 in 1998, closing the year at $25. Its stock rose 6.39% during the year, putting it in the middle range for publicly held money management firms but far below the Standard & Poor's 500 stock index.
