Money management firms made out like bandits last year.
While the number of merger and acquisition deals remained about the same in 2000 as in the previous year, the value of those transactions skyrocketed.
The aggregate value of the 108 asset management mergers announced in 2000 was about $31 billion, more than twice as much as the $13 billion in deals done in 1999, according to data from Cambridge International Partners Inc., New York, and Merrill Lynch & Co., New York. The data do not include the $35 billion Chase Manhattan Corp. will pay for J.P. Morgan & Co. Inc., which isn't considered a "pure" asset management play by investment bankers, or the $6.8 billion Chase paid for Robert Fleming Holdings Ltd., London.
"It was a blockbuster year in terms of deal values," said John Temple, managing director of Cambridge International.
In previous years, there were never more than three asset management deals valued at more than $750 million, said Gregory J. Fleming, managing director and head of U.S. financial institutions investment banking at Merrill Lynch. This year, 18 transactions were valued at more than $750 million.
Amazing multiples
Some of the multiples paid for asset managers, based on pre-tax tax flow, were amazing, said Cambridge's Mr. Temple. The highest was the 29.9 times earnings before interest and taxes and amortization that UniCredito Italiano SpA, Milan, paid for Pioneer Group Inc., Boston, when it acquired the U.S. company for about $1.3 billion. "UniCredito paid an unheard of 30 times multiple. They didn't need to, either. They probably could have gotten it for much less, about 20 times," he said.
Other high multiples, noted Mr. Temple, were the 21.7 times EBITA multiple that The Charles Schwab Corp., San Francisco, paid for U.S. Trust Corp., New York, with its $2.7 billion price tag; the 21.5 times EBITA paid in the $825 million deal of Franklin Resources Inc., San Mateo, Calif., and Fiduciary Trust Co. International Inc., New York; the 14.9 times EBITA that ABN AMRO Bank NV, Amsterdam, paid in its $825 million bid for Chicago-based Alleghany Asset Management Inc.; and the 13 times EBITA represented by the $950 million that Bank of America Corp., San Francisco, paid for the final 50% it did not already own of Marsico Capital Management Inc., Denver.
Three primary drivers were behind the high deal valuations in 2000, said investment bankers.
Financial services companies looking to globalize bought asset managers with strong distribution platforms. Fewer remaining targets with good platforms pushed multiples much higher than in previous years, said Mr. Temple. In fact, eight of the largest deals were plays to gain a platform.
Allianz AG's acquisition of Nicholas-Applegate Capital Management Holdings Inc., San Diego, was the prime example of this trend, as it gives Munich, Germany based Allianz both a growth manager, which it lacked, and access to an institutional client base in the United States. Many of the 108 buyers in 2000 were making cross-border deals to gain access to new foreign markets. Paris-based Caisse de Depot Group's acquisition of Nvest L.P., Boston, similarly gives CDP U.S. distribution and will push the investment strategies of Nvest's stable of money managers into Europe.
"The Europeans hadn't built manufacturing capability and so needed both U.S. and U.K. components for their distribution systems," said Mr. Fleming.
Schwab's acquisition of U.S. Trust gives Schwab entry for its products into the high-net-worth market, a niche many financial services companies are salivating over. "No new net growth in defined benefit plan assets for a decade and no net flows to mutual funds since 1997 has managers looking for other places to go," Mr. Temple said. And as the high-net-worth business is expected to grow 14% per year, it's a great business."
Mutual fund company Franklin Resources is gaining both high-net-worth and institutional management with its pickup of Fiduciary Trust Co. International.
Depressed valuations of public money managers created an opportunistic scenario for buyers this year. "Huge deals happened in a not particularly robust stock market," said Merrill Lynch's Mr. Fleming.
Terms of attraction
Financial services companies also were attracted by asset managers because of their fairly stable businesses and revenue, said Joe Hershberger, managing director and co-head of the asset management group at Putnam Lovell Securities Inc., Chicago. "Buyers have a long-term view of the market. They see that equities ultimately will outperform and asset managers will grow, and short-term market volatility is not going to stop them from buying asset managers and it won't impair the overall value of managers. 2001 will be a big stock-picker's year. A volatile market is often good for the industry as it becomes clear that using a professional, active manager is essential to stock selection in down markets."
The biggest and perhaps the most promising asset management deal of 2000 was the acquisition of J.P. Morgan by Chase Manhattan, both of New York, for about $35 billion. Part of the attractiveness of that deal comes from the completion play that J.P. Morgan makes with Robert Fleming Holdings, which Chase acquired earlier in 2000.
"The combination of Morgan and Fleming is breathtaking," Mr. Hershberger said. "It's fabulous. Fleming has a big franchise in Asia and Europe in mutual funds. Morgan has a big franchise in Asia and Europe on the institutional side. You combine those two pieces and you're a big player in the two markets everyone is dying to be in."
Ramon de Oliveira, now chairman of J.P. Morgan's asset services, will head the combined money management units, which will be the sixth-largest asset manager in the world with $720 billion under management. He shares the industry's excitement about the Morgan-Chase combination in terms of asset management, especially with regard to Chase's June acquisition of Robert Fleming Holdings.
Fleming synergies
"Fleming has an extraordinary investment engine, particularly in Asia, where we are not. What we have with Fleming is ... a remarkable lack of overlap. We're predominantly an institutional firm with a core-to-value investment style with a big U.S. franchise. They are predominantly a retail firm, mutual fund firm, with a core-to-growth investment style and a strong geographic presence in Asia. You pool those two things together and ... there are no overlaps. So the two synergies ... are the aggregation of our fund business with Chase and the cross-selling potential of Morgan's investment product into the Fleming network and the Fleming investment product into the Morgan network," said Mr. de Oliveira.
Mr. Temple of Cambridge International found the acquisition of Sanford C. Bernstein Inc., New York by Alliance Capital Management Holdings Inc., New York, to be "brilliant. They got a wealth management platform at 10.7 pre-tax cash flow at half the price Schwab paid for U.S. Trust. Bernstein was desperate to get some growth product." On the other hand, Mr. Hershberger of Putnam Lovell said Alliance is probably equally "thrilled right now to be getting the diversification play" offered by Bernstein's value approach.
AMVESCAP PLC, London, was one of the most active buyers this year, spending nearly $4 billion for managers in Canada, the United Kingdom and Australia.
AMVESCAP paid the biggest price ever for a pure asset manager based in Canada, when it paid $1.8 billion for mutual fund manager Trimark Financial Corp., TorontoThe move made AMVESCAP - which also owns INVESCO Funds, which has a presence in Canada -- the second largest manager in that country. AMVESCAP also purchased Perpetual plc, London, the last independent money manager in the United Kingdom, for $1.5 billion. AMVESCAP moved into the Australian institutional market with the purchase of County Investment Management for $60 million. County managed about US$7.9 billion for an institutional clientele.
AMVESCAP is pursuing a country-by-country strategy in its globalization, which is not uncommon for American companies seeking distribution abroad, said investment bankers, because there are so few multicountry platforms. Although AMVESCAP, for example, is based in London, much of its business and its chairman are in the United States.
"AMVESCAP's vision is to be a top-tier player in terms of market share in the major markets around the world. We already have a global presence. Now, our focus is on increasing our share in those markets to be among the leaders in each of those markets. Select acquisitions can help us achieve our objectives. Trimark, for example, moved us up the ladder to become the No. 2 mutual fund house in Canada. The acquisition of Perpetual moves AMVESCAP to a top-three position among unit trust managers in the U.K. With County in Australia, we now have the platform to grow into one of the leaders in that market as well," said Charles Brady, AMVESCAP chairman.
There's more to come, said Mr. Brady: "We have built the global infrastructure. Now we are concentrating on growing the business and from time to time, if the right opportunity comes along, augmenting that growth with acquisitions."
On track for new year
Managers are on track for a stellar 2001, as there is "a huge pipeline of deals at various stages of negotiation going into the new year, not even counting the selloff of UAM subs," said Putnam Lovell's Mr. Hershberger.
Values for these transactions "will still be north of where they were before 1999," he said, although the aggregate may not be quite as high. "Multiples paid will remain where they are, but what they are based on will be different, perhaps lower."
Investment bankers all predict a rush to buy managers of alternative investments, particularly hedge funds, as both institutional and high-net-worth investors search high and low for alpha returns in what is likely to be a poorly performing stock market.
But Mr. Hershberger noted that not all hedge fund managers are going to be treated equally when it comes to prices paid for their businesses. "The hedge fund managers who have built their companies around a focused investment strategy that has a process and a style bias are going to command the highest prices." Hedge fund managers with less disciplined styles will be less popular with institutional clients and hence, will likely be worth less to a potential buyer.
