NEW YORK -- As clients, competitors and observers praise the merger of Alliance Capital Management LP and Sanford C. Bernstein Inc., only one potential problem is surfacing:
Can Alliance retain Bernstein's talent pool?
Certainly, Alliance is making all the right moves. Bruce W. Calvert, chief executive officer of Alliance Capital, says Bernstein employees will own a significant amount of Alliance Capital.
A total of 38 million new limited partnership units have been issued to Bernstein for distribution to about 200 employees, who cannot sell them until two years following the closing, after which they are subject to a 20% limit on sales for every year.
"We think that ownership position will be an enormous incentive," Mr. Calvert said.
David Barrett, partner and global head of the investment management practice at Heidrick and Struggles, New York, said as a recruiter, he will be watching how well the integration process moves along to see if any Bernstein people will leave.
"We may see a little migration once the vesting period ends," he said.
"Will investment talent be happy with this? It's too soon to say," said Peter Starr, managing director of Boston-based Cerulli Associates.
The retention pack- age will be crucial.
Meanwhile, observers say the marriage will be good for the companies, their clients and the investment management industry.
A few think the price tag was a bit too steep -- 4% of assets.
But Alliance's $3.5 billion acquisition of Bernstein will help Alliance "to reach one of their goals to be a diversified global money manager," said Brad Hearsh, managing director at the financial institutions group at PaineWebber Inc.'s investment banking arm.
`Positive move'
"Generally, it's a positive move for both parties," said Cerulli's Mr. Starr.
The combined firm will have $475 billion under management, employ 4,000 people and manage money for 2,600 institutional and 15,000 private clients.
The deal is expected to be done in the fourth quarter and will consist of approximately $1.5 billion in cash and 40.8 million newly issued limited partnership units of Alliance Capital. AXA Financial Inc., which has a majority interest in Alliance, will purchase Alliance Capital limited partnership units to come up with the cash portion of the transaction.
The actual price might by adjusted downward if a certain base level of Bernstein client revenue is not achieved at closing. Mr. Calvert wouldn't disclose the agreed-upon base level but noted it was "pretty standard stuff."
The deal creates "one of the premier research groups in the world," he said.
"We feel with the increased (talent) pool, research and greater product line, we will be able to compete in any line of business," said Mr. Calvert.
Roger Hertog, president of Sanford Bernstein, said, "Both firms are really in one business; both are asset managers. We both came from the same church, so to speak."
Before merger talks began three to four months ago, executives at both firms were working to extend their investment capabilities -- value manager Bernstein on the growth equity side and growth manager Alliance for value equity, Mr. Hertog said.
Tom Pipich, investment consultant at Buck Consultants, Pittsburgh, said the business aspects of the Bernstein-Alliance deal might take precedence over the investment side.
`Out of character'
"I'm not certain yet what to make of it," said Mr. Pipich. "But it seems a little out of character for one firm (Alliance) to say that `we believe so deeply in our own investment philosophy that we have gone out and acquired someone that is the polar opposite of what we believe.' You have a clearly identified growth manager buying a clearly identified value manager."
"The quaint notion of `this is the way we manage money and we aren't going to try to be all things to all people' seems to be going away," said Mr. Pipich.
In addition, he said, Bernstein's fixed-income capabilities could provide a complement to Alliance's fixed-income offerings.
Mr. Pipich said it appears Alliance paid a "steep price" for Bernstein, "but they saw something there."
PaineWebber's Mr. Hearsh also believes the price is a little high. He calculated that Alliance paid a little bit more than 4% of assets under management for Bernstein, while the standard range in the industry is 1% to 5% of assets.
Sometimes in money manager M&As, clients react by putting the manager on a watch list. But Bernstein's pension fund clients interviewed for this article seemed satisfied everything will work out.
"We have no problem with it," said Bob Gish, director of investments at the $8 billion New Mexico Public Employees' Retirement Association, Santa Fe.
"We prefer it would be a United States firm acquiring them (Bernstein)," he said. "But on the other hand, think what they are going to gain in acquiring this growth capability. It prevents them from being pigeon-holed as a value manager."
Bernstein manages $580 million in large-cap value equity for New Mexico.
Doug Sisson, investment officer at the $8.8 billion Ohio School Employees' Retirement System, Columbus, said he expects the fund will continue as usual with Bernstein. The firm manages $210 million in developed non-U.S. equity and $40 million in emerging market equity for the Ohio fund.
"But like a lot of other folks, we will be keeping a closer eye on them in the near future," he added. Bob Rusch, assistant treasurer at Alliant Energy Corp., Madison, Wis., expects little change.
"I suspect their performance will be, if anything, enhanced," Mr. Rusch said. The money management firm handles $55 million in domestic value equity for the $570 million company's pension fund.
