BOSTON -- UAM is allowing executives of some of its money management affiliates to buy ownership interests in their own firms to help promote internal reinvestment and retain staff.
In fact, United Asset Management Corp. already has completed deals to provide significant economic stakes to executives of three firms, including Heitman Financial LLC and Analytic Investors Inc. The firms are buying back some of their own stock; UAM is granting stock options and is allowing executives to share in the profits of their firms.
Deals with Clay Finlay Inc., New York, and Rogge Global Partners PLC, London, are near completion, and discussions with other subsidiaries are under way.
UAM also has taken less than 100% stakes in four recent startups and acquisitions.
This "re-equitization" process is expected to boost morale among a younger generation of managers at UAM affiliates. It is one of a several strategies, including investments in affiliates and collective marketing, designed to foster relationships with subsidiaries.
But it's not clear whether re-equitization will do the trick.
"It's hard to tell if it's a stopgap measure or a long-term solution for re-energizing the more attractive firms. The question is whether the market has the patience to see out a longer-term strategy," said John O'Shea, vice president at Investment Counseling Inc., West Conshohocken, Pa.
H. Bruce McEver, president of Berkshire Capital Corp., New York, said the new program was "essential" but will take time to take hold.
"It changes their whole basic way of doing it. It's a pretty fundamental change," he said.
The old way
Under the previous strategy, UAM bought affiliates outright, typically for cash and subordinated notes with warrants or for UAM stock. Principals also received UAM stock options. In their own firms, principals often held phantom stock.
Historically, revenue-sharing has been the primary source of compensation for UAM affiliate employees. Units kick back roughly 40% of revenues to the holding company, retaining the remainder to cover compensation and firm expenses.
Also, the growth in UAM total revenue was expected to lift the prices of UAM stock.
The problem with that strategy is UAM stock has underperformed, so executives at rapidly growing affiliates are not being rewarded for their efforts, and younger generations have reduced incentives to stay put under UAM's revenue-sharing arrangements.
Revenue-sharing and phantom shares have not worked for UAM's top affiliates.
"Basically, we are fed up," said Olaf Rogge, director, Rogge Global Partners PLC. The global bond manager has doubled in size to $6.3 billion since UAM acquired the firm in August 1996.
Mr. Rogge said his firm will get back 25% of its shares from UAM, with an option to purchase another 25% over the next 10 years. Of the first quarter, half the stock will be purchased with cash and the remainder will come in the form of options.
"Revenue-sharing is important, but equity is more important," said Francis Finlay, co-chairman and chief executive of Clay Finlay, and a member of UAM's board. Assets under management at Clay Finlay grew 22% last year, reaching $6.85 billion at year-end 1999.
"People generally like to see the investment professionals (having) a stake in what they are doing," said Jeff Knipp, head of investment research at Watson Wyatt Worldwide, Atlanta.
With 45 money management units, many of which are performing poorly in a technology-driven market, UAM officials are under pressure to make major changes.
UAM's stock has been lagging the market sharply. It closed at 16 3/16 on Feb. 3, down 5/8 after fourth-quarter earnings were released, and well below its 52-week high of 24 3/8.
The re-equitization moves, however, don't remove the cloud over UAM's head. "UAM will still have to divest some of the dogs," or fold them, Mr. O'Shea said.
Some analysts still question whether UAM will be sold, although there is no obvious buyer for the entire business. Rather, a workout specialist "would get a lot more value selling them (the units) one by one," Mr. O'Shea added.
What's more, UAM still is searching for a new chief executive and president. Chairman and CEO Norton H. Reamer said he will retire once successors are found for himself and President Charles E. Haldeman Jr., who resigned late last year to become chief executive officer of Delaware Investments and Lincoln National Investment Cos., Philadelphia.
Pressure to shore up UAM's sagging businesses still is on. The holding company revealed that it had lost a record $9.4 billion in net assets under management in the fourth quarter, although total assets grew $9 billion because of $18.4 billion in investment gains.
In a report, Putnam, Lovell, deGuardiola & Thornton, New York, called the loss in assets under management a "shocker," and projected asset losses of $14 billion for this year.
As of Dec. 31, assets under management reached $202.6 billion, up from $193.6 billion at the end of third quarter and $201.4 billion at year-end 1998.
Revenue for 1999 slipped 8.3% to $882.3 million, while net income plunged 22% to $61.3 million.
On a fully diluted basis, earnings per share dropped to $1.03 last year from $1.15 in 1998. Cash earnings per share (net income plus amortization and appreciation), however, rose 3% to $3.19.
Trying to enhance shareholder returns, UAM also has repurchased 17.1 million shares, or 17.5% of its stock, during the past two years. In December, the UAM board authorized an additional 8 million share buyback. During the past two years, the firm also has closed two affiliates, restructured two and sold three.
UAM officials declined to discuss the size of the equity chunks being given to affiliated firms or the terms of any of the transactions. They said a combination of stock sales, stock options and other measures are being used.
No `cookie-cutter' deals
Frank Kettle, executive vice president at UAM, said there was no cookie-cutter model, and the deals will vary from firm to firm. In fact, some UAM firms are content to stick with existing arrangements, he said. Revenue-sharing remains in place for all UAM affiliates.
"What we're talking about here is (giving) a significant minority interest to the principals -- the first, second and third generations, especially the third generation. You have to get equity into their hands," Mr. Kettle said.
At Heitman Financial, 27 employees share future profits between Heitman and UAM, explained Mary Ludgin, president and chief executive officer of Heitman Capital Management, which manages real estate assets for the firm's institutional clients. Heitman employees receive their share of the profits in cash.
The program began a year ago, in conjunction with management turnover at the Chicago-based real estate firm, which had experienced problems in previous years.
After several years of slack new business, Heitman pulled in $1 billion in new business last year, including the first piece of a hefty ongoing commitment from the California State Teachers' Retirement System, Sacramento.
Similarly, UAM and Analytic Investors developed an employee equitization program a year ago.
Marie Arlt, chief operating officer at Los Angeles-based Analytic, said the program extends to nearly all of the firm's 20 employees, with an emphasis on senior employees.
Ms. Arlt declined to discuss what percentage of ownership Analytic employees have gained or how the deal was structured. The firm's assets have grown 60% to $1.5 billion during the past year.
In addition, officials at two recent startups -- Expertise Asset Management, Paris, and Jacobs Asset Management, Fort Lauderdale, Fla. -- own minority stakes in their firms.
And officials at two recent Canadian acquisitions -- Integra Capital Management Corp., Toronto, and Lincluden Management Ltd., Oakville, Ontario -- retained minority interests.