Parker Brothers created the game Monopoly in 1935. Through generations this board game has captivated would-be capitalists as players march around the board, building their balance sheets and acquiring properties in the quest to vanquish their competitors. The game bears remarkable similarity to the one played by the investment management industry for the better part of 20 years, since United Asset Management launched its aggregation strategy in the early 1980s.
The last five years have witnessed 308 U.S. acquisitions of money management firms and numerous other ownership change events, such as liftouts and startups, in which employees depart for greener pastures, often taking existing clients with them. The demand side of this equation remains healthy, since there are as many interested pursuers of Baltic Avenue as there are of Park Place and Boardwalk. Prior to Sept. 11, activity in 2001 was poised to mirror the accelerated pace we have witnessed since the late 1990s. Globally, investors have approved deals valued at more than $112 billion, with $3.75 trillion in assets under management changing hands in pure investment management acquisitions alone. Even more eye-opening is the valuations accorded many of these properties, despite the broad market malaise of the past 18 months. The insatiable appetites of a dynamic group of acquirers to increase their asset management and fee income streams show little sign of ebbing. Sept. 11 will create in its wake only temporary respite from this pace, as the underlying dynamics will re-appear in 2002.
Unlike a Monopoly game, however, the properties appear not to be finite, as new firms often emerge in the wake of the acquired. According to Nelson's, there are more than 1,350 independent firms, each managing more than $100 million in assets in the United States, 134 of which each manage more than $10 billion. While the larger independents find themselves the focal point of acquirers' affections, this pool is continually refreshed. Some transactions have the effect of providing "get out of jail free" cards to employees who view the transactions as a catalyst for seeking new opportunities in an industry with relatively low barriers to entry. These startups can look to a number of successful examples - such as Wallace R. Weitz & Co., Artisan Partners LP, Boston Partners LP, Oaktree Capital Management LLC and Turner Investment Partners Inc. - for comfort that success on a national scale is achievable for a talented group of entrepreneurs. These firms are legitimate competitors in the game, not mere "houses" to the acquirers' "hotels."
While there are segments of the investment management industry where firms may not "pass go" without a certain degree of scale (defined contribution, indexing, certain distribution opportunities), the pursuit of scale also has its pitfalls. Some firms, such as AMVESCAP PLC, appear to have benefited from strategic acquisitions, making the wise decision to leave their holdings relatively independent (with the exception of the ailing Chancellor LGT) while promoting product and distribution cooperation where appropriate. Other firms, such as Zurich Scudder Investments Inc., have experienced all the growing pains such pursuits can entail, melding two disparate cultures (Scudder and Kemper) in the hopes of building a more valuable property. What many acquirers overlook is that objectives such as scale, market share and fee-based earnings contribution are not high on the list of clients' objectives as they decide on the stewardship of their assets. While pursuit of scale is lauded on the basis of anticipated cost savings, these savings have yet to be realized meaningfully by clients in the form of reduced fees, with the exception of indexing. This unrelaized cost savings is compounded by the fact that acquisitions often dramatically change compensation and value-sharing structures such that acquired firms can find their incentives skewed away from direct client satisfaction and toward the broader global successes and ambitions of the acquirer.
As a management consultant and merger and acquisition adviser to this community for the past 12 years, I saw first-hand how the post-transaction afterglow fades to expose a mountain of poor or non-existent planning, disenfranchised employees and unmet merger objectives. Firms such as Zurich Scudder are suffering in part from this malaise. With some notable exceptions, performance at acquired firms often lags post-acquisition, as does overall asset and revenue growth. Those that continue to excel are more likely to be the properties of "arms-length" aggregators like Affiliated Managers Group Inc. or Legg Mason Inc., where a substantial degree of operating autonomy and equity are retained by the seller. These approaches also alleviate clients' fears that the businesses' new owners share little in the way of common incentives with the firms they now "control."
As we know from the 301 liftouts and startups that Rosemont has tracked in the past five years, "control" is illusory. Only when all stakeholders (clients, employees and owners) are aligned do the ingredients exist for sustained success. This is best accomplished through equity ownership in the operation in which employees most directly participate. As the players in the investment management industry continue to circle the board in pursuit of scale, properties will be acquired, divested and reacquired, with new and reconstituted properties arising from this mass disenfranchisement. The most valuable properties are not necessarily those with the largest hotels. The key to success is not building on Boardwalk as opposed to Baltic Avenue, but in correctly aligning the interests of all stakeholders. Institutional investors must pay closer attention to this concern, or they will continue to suffer from conglomerate chaos.
Chas Burkhart is the founder of Rosemont Investment Partners, LLC, West Conshohocken, Pa.