It wasn't the busiest recent year for investment management deals, but what 1999 lacked in volume, it made up for in price.
While the total number of mergers and acquisitions in 1999 dropped to 54 in the United States and 51 internationally -- compared with 59 U.S. deals and 57 international deals in 1998 -- the total of all transactions was 31% higher.
The 105 deals in 1999 that involved money managers with assets of $200 million or more totaled $13.3 billion, compared with $10.1 billion for 116 deals in 1998, based on data from Cambridge International Partners Inc., New York.
"I expect to see the same pace or greater of mergers and acquisitions in 2000 as we saw in 1999," said Joe Hershberger, senior vice president in the New York office of investment bankers Putnam, Lovell, de Guardiola and Thornton Inc., which specializes in money management deals. "The pace will be about the same . . . in the U.S., but on the global side, it will be Europe with a vengeance. You haven't seen anything yet.
"There is huge opportunity to broaden distribution and product capability as Europe moves into a single currency, to one platform of operations. Financial services companies will do more and more deals to strengthen themselves for participation in the strong, forthcoming growth in asset management in Europe."
In fact, six of the top 10 deals in 1999 that involved U.S. companies resulted in the partnering of a U.S. money manager with a foreign entity.
Insurance companies surpassed all other categories of buyers of money managers for the first time with 29 deals. Banks were next with 27 and independent companies were responsible for 19, according to the Cambridge data.
The largest deal was the acquisition of Bankers Trust Co., New York, with $277 billion under management, by Deutsche Bank AG, Frankfurt, a merger investment bankers said was motivated more by the investment banking interests of Deutsche than by money management concerns.
However, the second-biggest deal -- the $3.5 billion acquisition of 70% of PIMCO Advisors Holding LP, Newport Beach, Calif., by Allianz AG, Munich, -- was a pure asset management play by a German insurer.
European insurers are shifting from providing asset protection services to offering savings or asset growth and need to be able to quickly provide superior investment performance from a credible investment manager, said John H. Temple, a managing director at Cambridge International. Many European insurers have been managing huge pools of assets in-house.
The acquisition of PIMCO by Allianz "gives them that credibility and improved returns. Even if they get just a small improvement in returns on their huge $400 billion pool of internally managed assets, that will make a big difference to Allianz's bottom line. That's the Gross factor. They were trying to get hold of Bill Gross and his extraordinary abilities," Mr. Temple said, referring to PIMCO's chief investment officer.
The third-largest deal, London-based Prudential Corp.'s, $3.1 billion purchase M&G Corp., a U.K. mutual fund manager, set a new high in investment management purchase prices. With a price tag of 25 times pre-tax earnings, the M&G sale "is a reflection of the scarcity of independent investment managers in Europe. There are very few with any scale left," Mr. Temple said.
Sharp drop ahead
However, smaller institutional investment managers are going for much lower multiples -- between 10 times and 13 times pre-tax earnings -- in the U.S. market, for example, he said.
The $1.338 billion that Principal Financial Group, Des Moines, Iowa, paid for Bankers Trust Australia Group, Sydney, made it the third-largest deal of 1999 that does involve a U.S. partner, in terms of transaction cost, according to the list of deals involving a U.S. Partner that P&I compiled from investment bankers' data.
But the dropoff between that deal and the next largest is sizable. UBS AG, Basel/Zurich, paid $675 million for Global Asset Management, London.
This year's increase in prices is expected to stick. Deal pricing is likely to remain fairly high in the United States and at a premium in Europe, said Putnam Lovell's Mr. Hershberger, partly because the pricing of money manager initial public offerings "hasn't been great and when that happens, acquisition becomes more attractive to many companies."
With fewer and fewer large, multi-product money management firms on the global auction block, Mr. Temple said, financial services companies will likely move to a "string of pearls strategy," in which the focus is on acquisition of smaller, specialist investment managers. But the key to keeping the pearls knotted on a single strand may be investing the employees of acquired niche firms with sufficient autonomy and equity in the firm, Mr. Temple said. "The demise of UAM (United Asset Management) underlines the importance of this kind of structure," he said.
Mr. Hershberger agreed that "as long as the focus is on performance, a high value is placed on talent, which is mobile. All well-constructed investment banking deals make this a critical component: putting incentives in place to tie down the human capital. As well as incentives, you need shared strategies, vision and chemistry."
These were somewhat lacking in the early stages of the integration of Bankers Trust Co. by Deutsche Bank. Bankers Trust had been plagued by problems for years before its June 4 merger with the German bank.
On a mission
But Deutsche was dealing with more than the simple integration of one small money manager into a larger organization, said Josh Weinreich, co-head of Deutsche activities in the Americas. Bankers Trust was managing $277 billion in an array of investment strategies and vehicles. The combined entity had more than $550 billion under management in total, $325 billion of which is managed in the United States.
The first move involved sorting out retail mutual fund operations. New York-based Deutsche Asset Management Inc. merged four mutual fund operations, with $50 billion total under management, into one, under the administration of Deutsche Banc Alex. Brown in Philadelphia and Baltimore, said Rich Marin, co-head of Deutsche operations in the Americas.
The institutional investment management activities of Morgan Grenfell & Co. Ltd. and Bankers Trust were merged into Deutsche Asset Management, including client service, marketing, administration and consultant relations.
Rather than worry too much about "losing assets in the most commoditized, low-margin part of our business," Mr. Weinreich said, Deutsche staff are developing new active management styles that use quantitative techniques and asset allocation to help clients find "portable alpha" in a more opportunistic style, with fewer style constraints.
"We're concentrating on building this vision, on hiring aggressively to support this. But it's critical that we don't get weird. We need to focus on core competencies. We're on a mission."
Scudder Kemper Investments Inc., New York, by contrast, had a fairly easy time with cultural vision when it acquired Threadneedle Asset Management Ltd., London, from its own parent company, Zurich Group, Zurich. Zurich got Threadneedle, which managed $70 billion as of June 30, through its September 1998 acquisition of the financial services division of B.A.T Industries, London. Because 30% of Scudder Kemper Investments is owned by top management, Threadneedle had to be formally acquired by the Zurich subsidiary.
Zurich acquired 70% of Scudder, Stevens & Clark Inc., New York, in December 1997 and used the U.S. manager as the platform to combine its money management divisions.
The Threadneedle acquisition gave Scudder Kemper exactly what it needed: European distribution; investment management products with great performance; and $70 billion in mainly retail mutual fund assets, said Mark S. Casady, managing director of Scudder Kemper Investments and its head of mutual funds.
"We wanted to gain significant assets in Europe for retail mutual funds and pension investment management and are concentrating on the U.K., Germany, Switzerland and Italy. Our European sales force is cross-selling all kinds of products -- wherever the investment management might take place," Mr. Casady said.
Threadneedle provides the perfect platform for aggressive penetration into the European mutual fund market, because Threadneedle is one of the U.K.'s largest mutual fund managers, with a strong distribution channel in the U.K. through Allied Dunbar Assurance PLC, London, a network of U.K.-based financial advisers, which Zurich also got with the B.A.T acquisition.
On the institutional side, the acquisition of Threadneedle was the impetus to further expand the pension fund sales force Scudder had already put into place in London, which focuses on the largest end of the market -- the top 1,000 pension plans in Europe. Scudder Kemper largely has left Threadneedle's investment management techniques alone, Mr. Casady said.
In another deal with a cross-border element, Credit Suisse Asset Management acquired Warburg, Pincus & Co. early in 1999, after less than a year as strategic partners in an investment management distribution.
The combin- ed entity manages about $60 billion in the United States.
Its parent company, Credit Suisse Group, Zur- ich, manages more than $230 billion globally.
"Our relationship began in the middle of 1998 and it became obvious that we stood a better chance of scaling out business (getting more assets under management) together, than we would separately," said William W. Priest, chief executive officer of Credit Suisse Asset Management/Americas.
The integration of the two companies is still going on, Mr. Priest said, with plans to pull together the staff of both firms from four New York offices to one location next year.
While CSAM now has the investment management spectrum largely covered, Mr. Priest said, its task now is to create global functions that can be tapped into by the company's five geographic regions: Japan; Australia; Americas; Switzerland; and the rest of Europe.