WASHINGTON -- The dismantling of the Glass-Steagall Act separating banking and securities activities will trigger yet another M&A wave in financial services, consultants predict.
Already middle-tier firms are being gobbled up by larger competitors as banks and insurance companies look to become financial supermarkets, and the formal elimination of the law will speed up the trend, industry analysts said.
Citigroup, formed through last year's merger of banking giant Citicorp and the insurance behemoth Travelers Corp., will be the model for future combinations.
Banks, generally better capitalized than securities or insurance firms, are expected to emerge as the key suitors in this game. Among those they are expected to woo are insurance companies, money management firms and regional securities firms that can help them distribute securities and mutual fund products.
A.G. Edwards Inc., the St. Louis-based brokerage firm, for example, might be an acquisition target, one source said.
In the process, banks whose investment management skills typically have been limited to money market funds will be able to acquire top-drawer investment talent, sources say. These new superstores will have the ability to cross-sell their services, so that a banking client, for example, might also be persuaded to buy 401(k) investment management services through the same firm.
While size could help the financial giants garner fatter fees by spreading out costs over a larger asset base and lower mutual fund distribution costs, it can be a disadvantage to investment management firms seeking to produce superior performance. Consequently, superstores formed through such combinations that are pulling in more assets than they can manage effectively might outsource some of the money management.
In particular, these behemoths might look to subcontract some active money management while keeping passive money management in-house, noted Mark P. Hurley, president and chief executive of Undiscovered Managers LLC, a Dallas-based mutual fund company.
"The core competency of the banks will be delivering financial advice to the consumer, everything about investments to insurance to financial planning to estate planning and taxes, but investment management will be subcontracted out," Mr. Hurley said.
And it's not just U.S. banking firms that will be scouting for securities firms to acquire. Foreign banking firms will troll the U.S. market for mutual fund and investment management firms, analysts said.
But while banking firms are expected to be the biggest hunters, the repeal of Glass-Steagall also might prompt large mutual fund companies to broaden their array of financial services to their clients.
"So far it has been banks getting into investment management. What we will see now is the other way -- mutual funds getting into traditional banking services, to own the consumer at a much more basic level," predicted Peter Starr, a consultant with Cerulli Associates, Boston. Fidelity Investments, Boston, the giant mutual fund company, for example, could start offering Internet-based checking and other financial services, Mr. Starr speculated.
The new Gramm-Leach-Bliley Act -- which allows banks, insurance companies and securities firms to join hands -- might create plenty of acquisition opportunities for investment management conglomerates such as United Asset Management Corp., Convergent Capital Management Inc. and Affiliated Managers Group Inc.
There could be a wave of newly independent money managers as some investment management teams flee the superstores because of a poor fit; in other cases the one-stop shops might be looking to weed out duplication of investment styles and products resulting from the mergers.
"Clashing cultures create opportunities for new firms," said Rick Adler, executive vice president at Chicago-based Convergent. The firm, which buys between 51% and 80% in independent investment firms, expects to announce its fourth acquisition this year shortly, and hopes to close on a fifth before the end of the year.
"Investment management firms are relatively delicate beasts, and bringing them together is not very easy," said Christopher Acito, director of BARRA Strategic Consulting Group, a Darien, Conn.-based industry consulting firm.
In the short term, the lifting of the Depression-era law might cause an immediate pop in prices of investment management firms, but valuations would eventually return to more normal levels, said Stephen Cummings, an analyst with Financial Research Corp., an industry consultant in Boston. Prices for independent investment management firms have hovered between seven and 12 times cash flow in recent times, according to Convergent's Mr. Adler.
