BOSTON - United Asset Management Corp. needs a complete overhaul to return to profitability, industry observers said, now that its top two executives have announced plans to leave.
The company's structure, in which holding company UAM owns 100% of its 49 money management affiliates, leaves little incentive for the firms to do well, consultants said.
Despite the roaring bull market, UAM's stock price has lagged and is down around 27% this year, as of Wednesday's closing price, from its Dec. 31 high of $26 a share. In the week and a half since the departures were announced, the stock has remained flat.
In addition, clients have yanked out $11.5 billion in assets so far in 1999. But that amount is just half of the annual outflows in 1997 and 1998.
Neal Epstein, vice president at Putnam, Lovell, de Guardiola & Thornton Inc., New York, said he would advocate selling some of the firm's better affiliates.
But UAM already tried to sell Pilgrim Baxter & Associates, Wayne, Pa., and announced deals with buyers fell through twice because Baxter and UAM couldn't agree on how to split the profits. Sources said Pilgrim initiated the sales so it could operate independently.
Since UAM said late last month that President Charles E. Haldeman Jr. will resign to become chief executive officer of Delaware Investments and Lincoln National Investment Cos., Philadelphia, which are units of Lincoln Financial Group, and Chairman and Chief Executive Officer Norton H. Reamer will retire after a successor is named to fill both spots, the rumor mill has been buzzing that UAM has put itself on the block. In interviews, Messrs. Haldeman and Reamer said they never comment on deal activity. Mr. Reamer said that because UAM hired Goldman Sachs to help with the sale of Pilgrim Baxter last year, "it could have led to confusion that UAM is for sale."
Mr. Haldeman said he accepted the offer from Delaware because it was too good to refuse and it was in Philadelphia, where his family has lived for 23 years. His family never really moved to Boston when he joined UAM 18 months ago.
Mr. Reamer said he believed UAM would have a better chance of attracting the right person to run the company if it were the CEO position that was being offered. He founded the company but nevertheless will step down after he turns 65 in September, and then he will serve as a director.
One large shareholder, who preferred to be anonymous, said shareholders have been pressuring the board to improve performance, which could explain the departures.
David Silvera, director of mergers and acquisitions at Investment Counseling Inc., West Conshohocken, Pa., said, "They really need a massive overhaul. I don't know if anyone can fix it. The problem with the current structure in which UAM shares revenues with its affiliates is that there's not as much incentive for the affiliates to do well as there would be if they were partially owned."
UAM's competitors, such as publicly traded Affiliated Managers Group Inc., Boston, and privately held Convergent Capital Management Inc., Chicago, appear to be more successful, Mr. Silvera said. "They own 70% to 80% of their money management firms, and the affiliates keep the rest of the equity. That serves as a carrot for the affiliates. Firms are about the people who work there. When they're 100% owned, there is nothing to bind them."
AMG affiliates retain 30% ownership, which gives them something they could sell back to AMG at a multiple at some point, rewarding them, Mr. Silvera noted. "If UAM affiliates had a portion of equity in their companies it would give them more of a tie to profits than just revenue sharing."
H. Bruce McEver, president of Berkshire Capital Corp., New York, concurred. "The UAM model is flawed. By buying out the owners, they have taken out all of the equity and haven't left any equity incentives for people in an equity-oriented business. As a result, people leave."
UAM tried other incentives, but it didn't work, so it has to change the model and leave something for the affiliates, he said. The current UAM model worked in the beginning, but there are other models now that work better. There is also more consolidation now, Mr. McEver said.
Nevertheless, it would be difficult to renegotiate agreements with affiliates, Mr. Silvera said.
But not everyone is so negative about UAM. One large shareholder who declined to be named said his firm is bullish on the stock. "They have shrunk the number of shares that are out there by 25% in the last two years and are slowly going private. And they have enough cash flow to buy back more shares next year. In addition, they're trading at just 51/2 times next year's earnings."
And Fraser Seitel, a spokesman for hedge fund manager Tiger Management LLC, New York, UAM's second-largest shareholder, noted many investors fail to recognize how valuable the shares have become. "Two years ago they were worth $2,800 of assets under management. Now they are worth $3,500 of assets under management, a 25% increase," he said. As of Sept. 30, Tiger owned 9.3 million shares of UAM, according to First Call Share Watch.
Under Mr. Haldeman's leadership, UAM has been changing its strategy from growing through acquisition to helping affiliates grow by making their own acquisitions.
Mr. Reamer said the company would continue its four-prong strategy: making only acquisitions that can be "bolted" onto existing firms; reorganizing and strengthening the top management team; increasing annual investments in selected affiliates to an average of $25 million; and buying back more shares. Two weeks ago, UAM's board authorized the repurchase of 8 million shares.
The investments in the affiliates should help to improve cash flow, Mr. Haldeman said, describing how in 1997 and 1998 affiliate Heitman Capital Management Inc., Chicago, lost a fair amount in client assets. "We worked with Heitman to put in a new management team and to invest in them, which we believe will produce positive client cash flow. It takes a long time to stop a downtrend and stabilize a company, but we do expect it to turn around."
Investing in key affiliates and working with them is a big shift, Mr. Haldeman said. Although none of the changes yet are reflected in an improved stock price, he said, "we're convinced the plan is the right one. Some accomplishments don't get recognized in the stock."
The stock price is one of the lowest out there for money management firms, said Bruce Sherman, chief executive officer at Private Capital Management, Naples, Fla. The firm owned 1.99 million shares of UAM as of June 30, according to Thomson Financial's First Call Share Watch, Boston. "That presents an opportunity for value managers. We have made nothing on them this year, even though as a firm we're up 62%," Mr. Sherman said.
But he has been buying the stock for the past year and a half because he considers it cheap, trading at six times cash flow. He also likes that UAM is doing buybacks.
