BOSTON -- United Asset Management's old-line value investors may be first in line for mergers or outright sales if the $2.2 billion bid for the group by South African insurer Old Mutual PLC is successful.
Senior executives of both companies do not rule out merging affiliates or selling them either to management or outside buyers.
Old Mutual is buying UAM for $1.46 billion and assuming $769 million in debt. The deal triples Old Mutual's global assets under management to $275 billion.
A number of senior Old Mutual executives will be appointed to run UAM, but no names were revealed. Tim Cumming, head of Old Mutual Asset Managers in South Africa, and Kevin Carter, head of OMAM in the United Kingdom, both have been centrally involved in discussions with UAM affiliates.
The price, 1.2% of assets under management, is significantly less than other recent deals, reflecting that Old Mutual is buying a "fixer-upper" instead of a firm in move-in condition.
One of the key handymen is expected to be Eric Anstee, Old Mutual's finance director, described as a "turnaround artist" by a senior executive at a rival South African firm.
Old Mutual intends to create a "core group of affiliates," said James Poole, director of investor relations. Executives don't yet know, however, how many UAM affiliates will remain in that core group.
"There are changes to be made, but the changes will be made collaboratively" with the affiliates, said Mr. Poole.
Sean Nossel, a Johannesburg -based insurance analyst for South Africa's ABN AMRO Securities Pty. Ltd., predicts a number of the affiliates will be rebranded as a single entity, possibly using the Old Mutual name.
A London-based analyst with a U.K. bank, who asked not to be named, suggested Old Mutual would attempt to centralize each affiliate's back-office activities and might even decide to run account administration from its operations in South Africa.
Just less than half of UAM's affiliates describe themselves as value investors. Many were acquired during the group's early years but recently have lost assets because of increased demand for growth strategies. UAM's value investors include GSB Investment Management Inc., Fort Worth, Texas, and First Pacific Advisors Inc., Los Angeles.
Best performers highlighted
During a presentation to analysts to announce the deal, James Orr, United Asset Management chief executive officer, and Mr. Anstee highlighted UAM's best performers: Pilgrim Baxter & Associates Ltd., Wayne, Pa.; Provident Investment Counsel, Los Angeles; Murray Johnstone Ltd., Glasgow, Scotland; Pell Rudman Trust Co., Boston; Dwight Asset Management Co., Burlington, Vt.; and Barrow, Hanley, Mewhinney & Strauss Inc., Dallas.
These firms, presumably, would be the ones Old Mutual would want to keep.
But Peter Starr, managing director at Cerulli Associates Inc., Boston, said it's the "star" affiliates that might have the performance, name brand and assets to go it alone.
Key to Old Mutual's desire to make a go of the mutual fund business is Pilgrim Baxter, which has $25.9 billion in total assets and $13 billion in mutual fund assets under management. Mr. Anstee described Pilgrim Baxter as "the jewel in the crown."
"Pilgrim Baxter was always something that could perhaps be another Janus" in terms of performance, said John Adams, chief executive officer at Adams, Harkness and Hill, an investment bank in Boston. "That would be your card if you wanted to play it."
David Eager, president of Eager Manager Advisory Services, Louisville, Ky., wonders why Old Mutual would acquire a company so heavily weighted in affiliates that specialize in the slower-growing defined benefit market.
Old Mutual generally is considered to be good at building retail distribution operations and is the largest financial services group in South Africa, its home market.
"Old Mutual is to South Africans what Prudential is to Americans," said an independent South African consultant based in Johannesburg.
As a life insurer, it has a huge distribution network in South Africa and is the biggest provider of mutual funds in the country. As an asset manager, it has a reputation for management of low-risk core asset strategies. It manages money for some of South Africa's largest pension funds but has over the past few years been losing ground to specialist, boutique money managers.
Some observers believe the high number of UAM affiliates Old Mutual will inherit is unwieldy.
Alexander Paris Jr., analyst at Barrington Research Associates Inc., a research firm in Chicago, also believes some affiliates will be divested. He said the acquisition by Old Mutual will help accelerate initiatives that UAM already had begun, such as re-equitizing, co-investing and divesting.
"UAM had already begun the process of transforming itself from a holding company of asset managers into an asset management company," Mr. Paris said. He believes the focus will shift away from defined benefit and toward retail.
David Silvera, management director at Rosemont Partners, West Conshohocken, Pa., sees Old Mutual spending more money on retail platforms that affiliates can plug into. He, too, envisions a number of affiliates being merged or sold.
Another key to Old Mutual's success, said Mr. Silvera, will be in realigning the incentives across the affiliates. He pointed to Affiliated Managers Group, Boston, as a "better mousetrap." It buys 60% to 80% of the affiliates and offers ongoing incentives for successive generations of managers.
It could take two to three years to renegotiate the 42 affiliates' contracts, said Mr. Anstee. In some cases Old Mutual might have a fight on its hands, if it attempts to merge or reduce the independence of affiliates it chooses to retain.
Many UAM affiliates hold dear their independence within the group and would be unwilling to accept a merger of brands and operations.
"We have contractual independence and that is important to us. More than a third of our staff are shareholders and we don't want to give that up; there is no way we would do that," said Olaf Rogge, partner and director of Rogge Global Partners PLC, London.
Mr. Rogge also said financial incentives for staff should be extended to second- and third-tier management. "UAM has a sadly tarnished name in the United States," he said, with the current revenue-sharing arrangements acting as a disincentive to growth.
Mr. Anstee responded, "We will not compromise their independence but will evaluate whether the revenue-sharing agreements are working and ask if there is a better methodology."
Mr. Poole concurred, saying, "It's very important that we preserve the independent franchise structure."
Executives at other European affiliates cautiously welcomed the deal.
Erik van Dyk, chief executive officer of Palladyne Asset Management BV, Amsterdam, hopes the deal will give the affiliates access to in-house mandates within the Old Mutual group.
Product development opportunities may improve, as affiliates are able to build up performance track records with the backing of Old Mutual, he added.
"The deal will probably change the nature of the organization but bring in some distribution synergies," said Herve de Lattre, managing partner at affiliate Expertise Asset Management, Paris.
The deal is an important step for Old Mutual in its bid to build a global asset management business.
Two years ago Old Mutual demutualized, and last July it listed its stock in London in an attempt to circumvent domestic exchange control regulations and give it access to greater capital resources.
If the deal is approved by UAM shareholders, 25% of Old Mutual's earnings will be generated outside of South Africa.
The group already has a small asset management operation in the United States -- Old Mutual Investment Advisors Inc., Boston -- which likely will be merged with the UAM business, said Mr. Anstee.