Money managers just can't seem to make happy marriages -- in their business lives, at least.
The past five years are littered with mergers that didn't meet the expectations of either the buyer or the seller. They include:
* Merrill Lynch & Co. Inc. plus Hotchkis and Wiley plus Mercury Asset Management Group PLC;
* Comerica Inc. plus Munder Capital Management;
* American Century Cos. plus J.P. Morgan & Co. Inc.;
* Frank Russell Co. plus Northwestern Mutual Life Insurance Co.;
* Robeco Groep plus Weiss, Peck & Greer LLC;
* Zurich Kemper Investments Inc. plus Scudder, Stevens & Clark Inc.; and
* Legg Mason Inc. plus Brandywine Asset Management Inc.
As many as 95% of money management marriages fail to deliver on the promises made at the altar, primarily because of poor post-merger integration, one expert estimated.
"A lot of money is being spent on vapor constructs," said Peter Starr, managing director at Cerulli Associates Inc., Boston. "A lot of money is being raised through venture capital, or in-house, to invest in these companies based on unclear acquisition strategies. Acquisitions are made and mergers consummated without a clear sense of the end product," he said.
"The big question with all of these mergers is not `What was the seller thinking?' but rather, `What was the buyer thinking?' " said Andrew Silton, president of AMS Financial Consulting Services, Chapel Hill, N.C.
"It's very rare to see a post-merger plan on paper, in ink, which spells it all out, especially for the distribution side, where a lot of the disappointment happens," he said. "There are broad, stated objectives, but frankly, there isn't much concrete strategy for after the merger; and often that never happens.
"Then the slow talent leak starts. In a strong equity market, it's harder to notice the problems, but they're there."
Missteps at Merrill
For example, Merrill Lynch's acquisitions have involved a series of what seemed to outsiders to be organizational missteps that apparently started with assurances new subsidiaries would retain their identities, but ultimately resulted in their being subsumed into Merrill Lynch.
New York-based Merrill Lynch acquired Hotchkis and Wiley, Los Angeles, in May 1996, in a bid for increased institutional market share, then promptly lost much of Hotchkis and Wiley's fixed-income team. Company founder John Hotchkis left four years later and started a smaller investment firm, Ramajal LLC, Los Angeles.
Merrill Lynch bought Mercury Asset Management, London, in November 1997 and passed control of its institutional and high-net-worth businesses to Mercury, while keeping retail in the United States.
Assets grew on Mercury's watch, but by November, Merrill Lynch obliterated the separation between its money management units and created a single business to manage all three divisions, which retained their product names and identities.
By June 30, all asset management was folded into one unit, Merrill Lynch Investment Managers. The Hotchkis and Wiley name was dropped from all investment strategies, and the Mercury name had been dropped from all investment strategies except for mutual funds used in third-party distribution networks.
Responded Merrill spokeswoman Christine Walton: "Our intention has always been to set up a single global investment platform and to provide local delivery of services, especially since the acquisition of Mercury. We began the process . . . four years ago with Hotchkis and Wiley. . . . We feel that both of these acquisitions have added tremendous value to the company."
Institutional assets under management for Merrill Lynch Investment Managers totals about $100 billion, an approximately 30% increase from three years ago.
In addition to the acquisitions of Mercury and Hotchkis and Wiley, Merrill Lynch added enhanced indexing and passive management by lifting out the quantitative management team of Deutsche Asset Management, New York. That move has resulted recently in "some nice new mandates, including New York City (pension fund)," Ms. Walton said.
"If you judge mergers by asset growth, client retention and employee retention, our mergers have been a success," Ms. Walton said.
Net new business drops
David L. Eager, former head of Eager Manager Advisory Service, Louisville, Ky., said the asset management industry generally does a bad job of integrating acquisitions into the main company or handling the new subsidiary's independence.
"Not a lot of thought is given to strategy on deals," he said. In fact, once the ink is dry on the contracts, integrating the new entity into the existing structure appears to be so distracting to the acquirer that net new business drops off, according to data from vendor strategists BARRA Strategic Consulting Group, Darien, Conn.
BARRA divided the 25 largest U.S. money managers into three categories based on their total assets as of year-end 1998: indexed managers; active managers that grew through "organic" growth; and active managers that grew through acquisition. After factoring out market appreciation and assets gained through acquisition, BARRA's "back of the envelope calculation" indicated that 31% of growth by index fund managers was from new business; 18% of the growth of active managers without an acquisition was from new business; and just 1% of growth of managers with an acquisition came from new client assets.
"It's as though the managers are so distracted by the merger that they didn't have time to concentrate on gaining new business," said Wayne Lin, a consultant at BARRA Strategic Consulting Group.
Why firms make deals
Money managers, said Mr. Eager, generally make acquisitions for financial reasons -- simply to make a good investment -- or for strategic reasons that include:
* gaining presence in a new market, as Merrill Lynch did in acquiring institutional managers;
* adding a new investment capability, as in Morgan Stanley's acquisition of Miller Anderson to gain fixed-income expertise, or in growth manager New York-based Alliance Capital Management LP's purchase of value manager Sanford C. Bernstein Inc., New York;
* increasing distribution to new market segments;
* snapping up a talented team or investment process or approach; and
* instantly adding a strategy with strong performance.
But few managers -- buyers or sellers -- actually achieve their objectives because "the deal environment is not the same as the operating environment. There is a whole different set of issues that confront managers after the deal is struck," said David Silvera, managing director at investment banker Rosemont Partners LLC, West Conshohocken, Pa.
"The biggest issue for money management is to create an environment that retains, motivates and incentivizes people to stay there. Bonuses, compensation, equity ownership -- all these have to be there to tie people in," Mr. Silvera said.
Mr. Silton agreed. "A deal instantly changes how staff look at a company. Motivation drops. Unlike almost any other industry, in the investment management business, the only thing you get in a merger is talented people."
Comerica couldn't seem to decide what to do about the "talented people" within its money management business.
The Detroit-based firm bought 44% of Munder Capital Management, Birmingham, Mich., in 1994 and merged its own money management units, Detroit-based Woodbridge Capital Management and World Asset Management, into Munder in 1995. Munder took a 49% stake in London-based Framlington Group PLC in 1996 to provide international management capabilities.
Founder Lee Munder stepped back from a day-to-day role in the firm in 1998 and sold his shares to Comerica, which now held 88% of Munder. By January 1999, Comerica had hired an investment banker to shop Munder Capital to willing buyers, but Comerica would not sell to an internal management team led by Paul Tobias, then chief executive officer.
By the end of 1999, Mr. Tobias was gone and Comerica apparently decided to keep its money management entity, sealing the decision by awarding 20% of its stake back to existing management.
Bob Doetsch in the corporate communications department said he couldn't comment on the issue.
Hating the uncertainty
Pension funds and their consultants hate the uncertainty of money management takeovers, mergers, marriages and subsequent divorces.
"I'm getting used to it now; it happens all the time," said Jeff Nipp, head of investment research at Watson Wyatt Investment Consulting, Atlanta.
"The best a pension fund client can hope for is that a merger is neutral. It's almost impossible to hope that a merger will improve a client's life."
One problem is "the business development goals of the acquiring manager are not in the interest of the client, which only cares about performance," Mr. Nipp said. How long a client and its consultant give a money manager after a merger is a deal-by-deal affair, he said, but most deals "meet with acceptance, grudgingly," from sponsors, which tend not to fire managers immediately.
Mike Flynn, a principal and senior consultant at Stratford Advisory Group Inc., Chicago, said when he evaluates manager acquisitions, he finds those most prone to disaster are those that are not made solely to advance the company's investment business line, but rather to provide liquidity to aging business owners.
While most consultants and other observers consider the Alliance Capital Management purchase of Bernstein "a good deal on paper," many, including Mr. Flynn, said the jury is still out. "There's always someone, some part of the business that doesn't fare well. You can't tell with this deal which one it will be because Bernstein and Alliance are a weird fit," Mr. Flynn said.
Despite the problems, acquisitions by money managers will not diminish, said Christopher J. Acito, managing director, BARRA. "People are looking for distribution and product. It's hard to grow it organically, and acquisitions are becoming critical to gain those capabilities," he said.