Six months of market volatility aren't stopping money managers intent on acquisition.
Nor is it deterring would-be sellers from striking deals, although negotiations seem to be taking a bit longer to hammer out. They also have more earn-out clauses than they did a year ago, to give principals time to rebuild asset levels to boost their final payouts, industry observers said.
While the pace of announced merger and acquisition deals within the money management industry in the first quarter was only about half of what it was last year, the pipeline is full, said Paul Holt, managing director at Cambridge International Partners Inc., New York.
"It's still too early to see any meaningful change in transactions. 2000 was a record year by leaps and bounds. It always looks tough to beat a record year of transaction volume so early in the year," said Sam Liss, managing director at Credit Suisse First Boston, New York.
"There has definitely been a slowing of the pace of money management deals compared to last year, but it just shows that money managers are not immune to the general slowdown in M&A activity in all sectors. But last year's M&A activity in money management, in terms of the dollars transacted, beat the previous record year by three times. From what I see, I think this year will probably be the second-best year ever for money management deals," Mr. Holt said.
Mr. Holt pointed to Winnipeg-based Investor Group Inc.'s recent US$2.6 billion acquisition of Canadian mutual fund manager Mackenzie Financial Corp., Toronto, as evidence that there has yet to be a substantial softening of prices based on lower assets under management and consequently lower fees caused by market losses.
Joe Hershberger, managing director and co-head of the asset management group at Putnam Lovell Securities Inc., New York, pointed to two other deals that "were not done at cheap prices" so far this year - London-based AMVESCAP PLC's $200 million purchase of National Asset Management Corp., Louisville, Ky., and Rotterdam, Netherlands-based Robeco Group's $490 million acquisition of Harbor Capital Advisors Inc., Toledo, Ohio (see story on page 22).
Some observers wonder whether the delay in the announcement of a buyer for Standish Ayer & Wood Inc., Boston, is because interested bidders aren't willing to pay as much as management wanted. Sources close to Standish confirmed Mellon Financial Corp. is the likely buyer (see story on page 2).
`Might be a little pause'
"There's a lot on the market right now. There might be a little pause here as the market settles down, but it won't last long. People have a long-term view and are attracted by the asset management business. The fundamental opportunities are there, and a blip in the market won't influence the buyer with strategic intent," Mr. Hershberger said.
Overall, observers agree with Mr. Liss, who said: "This market does not lack for strategic ambition. Asset management remains a healthy business that everyone wants to get into."
Peter Starr, a managing director of vendor consultants Cerulli Associates Inc., Boston, said: "When a company has committed to an acquisition strategy, they've already spent the money mentally. Unless there's a huge market drop here or in international markets or an internal fire to put out, you will see purchasers going forward, especially Europeans. All it takes is a sign of willingness (from the seller) and these people will move in."
Among the companies on the dream list of many acquirers are Putnam Investments and MFS Investment Management, both with strong investment manufacturing capabilities and reasonable distribution channels, Mr. Starr said.
Neither firm's insurance company parent has indicated a wish to sell the money management unit, but both money managers have that magic combination of product, performance and sales record, which are increasingly hard to come by.
"There's often talk about Sun Life (Financial Services of Canada Inc.) spinning out MFS, but it will be a feeding frenzy if they do. The sharks will be circling," Mr. Starr said.
Multiples still high
Mr. Hershberger and others note that despite the stock market's gyrations, high multiples still are being paid for money managers. "A slower stock market won't influence the multiples paid for money managers. They won't be as frothy as they were in 2000, when they were almost ridiculously high, but they will remain high," he said.
The Putnam Lovell index of public money managers dropped to 8.8 times trailing operating earnings before interest, taxes, depreciation and amortization as of March 23, compared to between 11 and 12 times EBITDA last summer, said Bruce Brewington, an analyst at Putnam Lovell in San Francisco. The multiples on earnings paid for privately held companies have remained relatively stable, between 10 and 12 times EBITDA.
Valuations of publicly held money managers are more vulnerable to their swinging share prices, said Cambridge's Mr. Holt, but "none of the public companies could be acquired for the multiples they're listed at. They would command a premium over the multiple."
Despite good multiples, the ultimate price paid for many money management companies will be lower. That's because the price will be based on lower fees earned as assets under management have dropped or slowed in growth in response to market returns, said Mr. Liss of CSFB. "You have deal valuations that have similar multiples to last year, but based on earnings that are more subdued than last year."
"Are some companies wondering if they should have sold out last year? Yes, there are some," said Cerulli's Mr. Starr.
Six of the public money management companies tracked by Putnam Lovell's index showed slight or marked drops in assets under management as of Dec. 31, compared with year-end 1999: Franklin Resources Inc., Stilwell Financial Inc., T. Rowe Price Associates Inc., Waddell & Reed Financial Inc., Affiliated Managers Group Inc. and Wilmington Trust.
Mr. Brewington said the median profitability of the public money managers he tracks remained positive for the fourth quarter, but the real pain on profits is likely to be felt in the second quarter of this year. He noted the first quarter of 2001 will be the third in a row in which asset levels were pressured by market falls and that will be more clearly manifested in the next quarter.
"There has always been more attention paid to money manager fees based on assets under management in turbulent markets over the past 10 to 15 years. Companies with diversified product lines usually do well in all markets. Those that are more purely in the equity markets or who are more reliant on incentive fees are probably hurting a lot more right now than those with fixed-income and value stock management," said Jon C. Hunt, chief operating officer of Convergent Capital Management Inc., Chicago, a money management holding company.
Mr. Hunt said he has been contacted more often than ever in recent months by willing sellers. He noted there is usually a dichotomy in the expectations of deal prices between buyers and sellers. While the seller is likely focused on the last 12 months of cash flow, the buyer is focused on the current run rate of cash flow or at most, the quarter's.
"The high flyers are in pain right now as their cash flow dries up. The more stable and solid organizations with more diversified investment strategies are not doing so badly. If they sell right now, they might not get top dollar, but they will get a reasonable price. The high flyers, mainly growth managers, have been submerged by the market. High volatility feels good on the upside, but it hurts a lot on the way down," he said.
Mr. Starr of Cerulli said the market is cognizant of the impact of market returns on asset levels and already has factored lower assets under management into the multiples paid for money managers.
"Nothing has changed about that in the last six months. When assets drop, it always puts pressure on fees, but the market has already taken that into account in pricing deals."
Because of lower asset levels, Mr. Holt of Cambridge said he expects to see greater reliance on earn-out clauses of between three and five years in forthcoming deals. Such clauses allow the sellers to rebuild assets under management before taking final payouts.