BOSTON -- The acquisition of BankBoston Corp. by Fleet Financial Group won't provide Fleet with much in the way of tax-exempt investment management, observers say.
"This is a brick-and-mortar retail banking merger," said Peter Starr, consultant at Cerulli Associates Inc., a Boston-based financial services consultant. The transaction will do little to directly improve Fleet Investment Advisors, he said.
The combined Fleet Boston Corp. investment operation would more than $110 billion in total assets under management.
Looking to higher growth
Fleet Investment Group manages $84 billion in total assets, of which $41.6 billion is institutional: $15.8 billion from tax-exempt clients; $11.4, retirement plan services; $4.5 billion, large institutional; and $9.9 billion, not-for-profit assets.
BankBoston's investment management arm has $27 billion in total managed assets, of which $6 billion is institutional. Only about $3 billion of that is tax-exempt pension fund assets, sources say.
Fleet's asset management business will expand in an effort to steer the bank away from relying on core banking revenue, said Terrence Murray, chairman and chief executive of the new bank. He holds those same positions now at Fleet.
"On a combined basis, no line of business will contribute more than 20% to total earnings, and higher growth business areas like commercial finance, asset management and investment banking will contribute a greater percentage to earnings than they do today," Mr. Murray said.
Focus on building
Fleet's Investment Group earnings were 15% of total bank earnings in 1998, compared with 14% in 1997 and 1996. The group includes asset management, brokerage, retail mutual funds and other investment services.
If the organization is serious about winning investment management business, it will have to focus more clearly on building strong investment teams, creating investment products and distributing them, said Cerulli's Mr. Starr.
It's a common struggle faced by banks, which are lured by the fee revenue of the investment management business but stymied by the costs. Do they hire portfolio managers? Do they launch products and distribute them? Do they merely distribute subadvised products
Some observers suggest Fleet should acquire a large investment management organization, such as the lucrative operation owned by Kansas City Southern Industries Inc. of Kansas City, Mo., which may be spun off this year. (It includes Janus Capital Corp. and Berger Associates Inc., with a combined $137 billion under management.)
"Too often the banks make acquisitions first and figure it out later, then try to knit together independent firms. It can be catastrophic," said one observer.
A few acquisitions
Fleet has made a few as yet unconnected steps into asset management in recent years. It bought Columbia Management Co., a large-cap growth manager in Portland, Ore., in 1997. Columbia has $21 billion under management, of which nearly $16 billion is tax-exempt.
Last summer, Fleet made a minority purchase of mutual fund subadviser Oechsle International Advisors LP, a Boston-based international equities manager. The purchase allowed Oechsle's well-heeled managers to buy out other outstanding owners, but Oechsle has received no additional assignments from Fleet since then. Oechsle manages a $700 billion international equity mutual fund.
Critics say BankBoston has done little to pursue the investment management business, despite public statements by Edward Riley, BankBoston chief investment officer, that the bank hoped to rebuild the business it sold off in 1989. BankBoston's focus has been regional banking, a narrow sliver in today's expanded financial services environment. Critics say that direction may have contributed to the 10% decrease in earnings per share for the fourth quarter.
BankBoston has been an acquisition target, consultants say.
"The writing was on the wall 24 hours after (the merger of) NationsBank and Bank of America," Mr. Starr said.
In its tax-exempt investment management business, BankBoston has relied on the occasional account coming in through bank channels. In fact, BankBoston began last year to lose some of the small pension fund management accounts it acquired through the 1997 purchase of Boston's Bay Banks. Four investment professionals have left BankBoston since last summer, several of whom were not replaced.
The strategic merger of the two longtime New England rivals is expected to close in the fourth quarter. The stock swap values Boston-based BankBoston at about $16 billion.
While it's clear that Fleet's Mr. Murray will lead Fleet Boston Corp., leadership positions in the investment management unit have not been announced.
Sources expect Fleet Chief Investment Officer Thomas O'Neill to come out on top because there is no parallel position at BankBoston. While BankBoston's Mr. Riley is a CIO, he is not an investment manager by trade as is Mr. O'Neill.
Mr. O'Neill's two lieutenants are Robert Ash and Gary Anderson. Mr. Ash heads up Fleet's $10.9 billion Galaxy Funds mutual fund business; Mr. Anderson is managing director and head of the bank's $11.4 billion retirement plan services unit, comprising primarily 401(k) business.
Robert Garty was moved from BankBoston's private client division last year to become the head of the institutional asset management business, although his position in the combined entity is uncertain.