TCW Group Inc.'s alternative investment strategies will get a shot in the arm when the deal with Societe Generale is complete.
SG Asset Management Ltd., the financial services and asset management subsidiary of Paris-based Societe Generale Group, has agreed to buy 51% of TCW now for $880 million and another 19% over the next five years. The all-stock deal will leave the remaining 30% in the hands of TCW employees.
The price for the 19% interest will be tied to the future performance of TCW, based on a multiple of earnings. The total price could exceed $2 billion if Los Angeles-based TCW continues its current growth rate.
Aside from the acquisition price, SGAM plans to provide TCW with up to $125 million in additional capital to fund current and new investment products and an additional pool of capital to help retain key employees.
SGAM is keen to provide extra capital to TCW to help SGAM develop alternative investment products, said Patrick Pagni, senior adviser to SGAM Chairman and Chief Executive Officer Philippe Collas.
"The alternative side of the business is likely to experience substantial growth in the years to come. There is expertise to be brought from the U.S. to Europe where these products will be in demand," Mr. Pagni said.
The European market for mortgage-backed securities and high-yield fixed income is still in its infancy. SGAM was particularly interested in getting access to TCW's expertise in distressed debt and mezzanine finance. The only alternative products the French group offers are private equity, venture capital funds and hedge funds.
At year's end, TCW had more than $10 billion in alternative investments, including mortgage-backed securities, for U.S. institutional tax-exempt clients.
Robert A. Day, founder, chairman and chief executive officer of TCW, said the firm has focused on building its alternative investment capabilities over the past few years to better compete with large Wall Street firms. It now has a formidable alternatives arsenal including international private equity, distressed debt funds, mezzanine financing funds, emerging markets and real estate, he said.
TCW's broad range of investment products also should help meet demand from Japanese institutional investors, a market SGAM has been keen to develop since acquiring Yamaichi Capital Management in 1998.
The deal also fulfills long-standing strategic objectives for both firms.
The addition of major European and Asian markets through its deal with SGAM could help TCW to grow its global investment management capabilities.
"Our business is growing very fast," said Mr. Day. "Last year was a record year for us in terms of assets under management, net client cash inflow, revenues and profits."
The deal will expand TCW's growth opportunities in Europe and Asia, he said, while making TCW the exclusive asset management platform for SGAM in the United States.
"The U.S. market is more mature and this is a means to jump-start our opportunities in Europe with institutional and individual investors," said Mr. Day. As for SGAM, "they have virtually no U.S. products," aside from SG Cowen Asset Management, New York. But SGAM offers a variety of investments not provided by TCW, including "a raft of derivative investment products" that can be offered to TCW clients after the deal is completed.
First phase by July
The first phase of the deal, in which SGAM will acquire the 51% ownership of TCW, is expected to be completed by July. SGAM will acquire the additional 19% interest in four equal installments between 2003 and 2006.
Societe Generale acquired the investment banking firm Cowen & Co., New York, now SG Cowen, in 1998. A division of SG Cowen, SG Cowen Asset Management, has $2.2 billion under management, with $1.3 billion at year-end from U.S. institutional tax-exempt clients.
A spokesman for TCW said SG Cowen Asset would be absorbed by TCW, with Cowen's investment banking operation remaining separate. SG Cowen Asset employs about 48 professionals. The TCW spokesman said no layoffs are expected.
Investment consultants see the transaction as financially beneficial for both organizations.
"It's definitely good for TCW to get this expansion opportunity in Europe, and it is a better way for Societe Generale to get more experience in the U.S.," said Richard Holbein, chief executive officer of Holbein Associates Inc., Dallas.
"It's a good business to be in and it's probably a good time to buy," he said, "since valuations are probably not as high now as a year and a half ago. Plus, there is a major impetus now for the large (investment management firms) to get larger."
Michael A. Rosen, principal at Angeles Investment Advisors LLC, a Los Angeles-based investment consulting firm, takes a different view.
"It's a sign that the market may be nearing the top for investment managers," he said. "Insiders usually sell at the top, not at the bottom. My guess would be that the excess numbers in the investment management business in the next 10 to 20 years won't be as large as in the past 10 to 20 years and may be lower than when these companies were private."
Mr. Rosen said the TCW deal is neutral at best for TCW clients, since more emphasis will be placed on "asset gathering." He said the deal would be good for both TCW and Societe Generale, but existing clients should make sure the firms continue to emphasize performance rather than profits.
Mr. Day said TCW was not seeking to be acquired. Company officials were not in discussions with any other groups before being contacted by Societe Generale. "They had been looking for several years for ways to enter the U.S. market," he said.
"This is not a transaction we sought out, but the deal has so many advantages - and the chemistry and strategic fit with our new partners is so good - that it only made sense to pursue it. The transaction gives us an international distribution platform and the means to grow and help drive the overall growth of SG Asset Management."
Mr. Pagni said: "We have made the right acquisition. TCW will be our exclusive vehicle in the U.S.," he added.
In a letter to TCW clients, Mr. Day said he would remain chairman and CEO of TCW and "will become one of the largest individual shareholders of Societe Generale." He is expected to be named to the Societe Generale board of directors. In addition, Philippe Citerne Societe Generale's CEO, and Mr. Collas will join the TCW board.