LONDON -- Barclays Global Investors might be ripe for the auction block.
With the appointment of Matthew Barrett as chief executive officer of parent Barclays PLC, numerous industry observers think the bank ultimately will sell off BGI, the world's largest institutional money manager with $686 billion in assets under management as of June 30.
Observers believe BGI could fetch anywhere between $1.5 billion and $4 billion, with most estimates toward the lower end of the spectrum.
Likely buyers could include major U.S. money center banks, particularly those with custody operations such as Bank of New York Co., Chase Manhattan Corp., Citigroup Inc. and Mellon Bank Corp. Germany's Deutsche Bank AG also is cited as a possibility, although some believe Deutsche needs more time to digest its recent acquisition of Bankers Trust Co.
Mr. Barrett, who will join Barclays Oct. 1 after leaving his post as chairman of Bank of Montreal, reportedly has said he will take 100 days to review the bank's operations. But some observers think a sale is inevitable because BGI is not a good fit for the bank's increasingly retail focus.
"They're just about as far from the core of the Barclays business as you can get," said one former Barclays executive who asked to be unnamed.
Not everyone agrees. Nancy Dickey, head of the investment consulting practice at Hewitt Associates, St. Albans, England, and a former BGI executive, said: "Internally, the great frustration and disappointment has been the lack of focus on the retail side. . . . I would expect someone to have a serious go at leveraging it before selling BGI."
Barclays executives said they are committed to leveraging BGI's products to its private-client and retail arms. "We are trying to position ourselves as the provider of long-term savings and investment relationships. Within that, the position of BGI is strategic," said John Varley, chief executive of Barclays' retail financial services division.
And Sir Peter Middleton, chairman and acting chief executive, said in a statement there are no plans to sell any of the bank's four major businesses, which include BGI. "I get all sorts of proposals every day to merge, demerge, sell bits, buy bits, practically everything you can think of. We have nothing on the stocks at the moment, let me make clear."
Still, no one can predict what decisions Mr. Barrett, who has a retail banking background, will make.
Why a sale is likely
Here's why many observers think a sale is likely:
* Barclays Bank, like its U.K. brethren, has taken an increasingly retail orientation. It sold off its custody operation to Morgan Stanley Dean Witter & Co. two years ago, and has eliminated its equity underwriting business.
* The bank's U.K. retail mutual fund operation has declined to leverage BGI's indexed and quantitatively driven expertise, allowing Virgin Group and Legal & General Group to devour the low-margin business. Instead, the mass-market retail side has stuck with higher-margin, actively managed products.
* The bank's operations in Southern Europe have targeted high-net-worth individuals, who are less likely to use BGI's passively managed strategies, although they might welcome more hedge-fund type approaches, such as market-neutral.
* BGI, while profitable, has consumed increasing amounts of resources. Pre-tax profits totaled L52 million ($86 million) in 1998, up just L1 million from the previous year, and accounted for 2.9% of the group's earnings in the first half of 1999.
The upshot is that some experts both inside and outside the company believe BGI might be sold, although no one expects Mr. Barrett to render a decision until the end of the year at best.
However, comments from Barclays officials suggest they finally might be carving out a bigger role for BGI. In comments announcing the group's interim results, Sir Peter noted BGI's business is becoming more diversified. Half of BGI's income now comes from its advanced active strategies and stock lending, plus half of its funds under management stem from outside the United States, "and we are expecting great things from this business as Europe begins to fund its pensions as clearly it has to and has started doing."
What's more, Robert Hunter, the former president of Standard & Poor's who recently became head of Barclays' highly profitable wealth management group, said BGI "serves as our principal production engine for new investment products that undoubtedly will be needed both for the affluent as well as for the wealth markets."
Mr. Varley acknowledged the bank's retail side had not leveraged BGI's capabilities before, but his division has existed for only a year. Without going into detail on his division's plans, he noted the government has encouraged use of indexed investments. However, he added his unit also will offer customers more traditional investment products.
Redeploying assets?
Some observers believe the bank would be better off redeploying its assets by selling off BGI and perhaps purchasing a traditional mutual fund house that would provide a better fit for its retail-client base. Mr. Barrett also is expected to first sort out the bank's domestic strategy and then, perhaps, a pan-European context. A merger or acquisition equally could affect BGI's future.
If BGI were sold, observers said its potential price would be at least $1.5 billion, based on a multiple of 20 times pre-tax earnings. Any assumption in improved profitability would thus boost the valuation, and would reap dividends on the $440 million that Barclays paid for Wells Fargo Nikko Investment Advisors -- the core of the business -- in 1996.
BGI's pre-tax profits have been depressed by substantial investments in its advanced active and index products and expanded distribution channels, adding L8 million in costs in the first half of 1999.
Excluding the extra investments alone would have pushed pre-tax profits to L36 million in the first half. On an annualized basis, that would place BGI's valuation at $2.3 billion before any cost-savings are achieved.
Meanwhile, total assets under management grew 17% to L434 billion ($686 billion) at midyear. That's up L64 billion in the first half of 1999, of which one-sixth stemmed from net new business. Fee revenue during that period has grown by 11%.
Likely buyers
The most likely buyers would be other major banks with huge custody operations that could leverage securities lending and foreign exchange opportunities.
Michael Green, head of institutional sales/marketing in London for Europe, Middle East & Africa for SSBCiti, Citigroup's money management unit, said his firm is committed to a fundamental, actively managed approach. "It's not an obvious fit for us," he said.
Still, some thought a major active manager, such as AMVESCAP PLC, might seek to buy BGI to add to its product lines because indexed products now comprise such a large chunk of the investment management industry. "If you really have the ambition to be a major global fund manager, you've go to do both," said one money management executive.
Experts said a sale to arch-rival State Street Bank & Trust Co. is highly unlikely because the two already have substantial client overlap, and animosity between the two groups is high.
A purchase by State Street would be "a bloodbath," one insider said. All the same, that purchase would offer the greatest potential for cost-savings, another BGI watcher noted.
