Falling global markets combined with the after-shock of terrorist activities have dramatically slowed the pace of money manager mergers and put other growth and expansion plans on hold.
Investment bankers and executive recruiters report that beyond resumption of normal day-to-day operations, few companies are looking to make strategic acquisitions or to meaningfully beef up their staffs.
Strategy consultant Peter Starr, a managing director of Cerulli Associates Inc., Boston, said he's found the outlook of money managers is becoming grimmer.
"The business plans many money managers started with at the beginning of the year are very far off base now in every respect from assets under management, to new business and new relationships. I think that by the end of the summer, many managers were becoming more optimistic that their companies were recovering enough to get within striking distance of their targets. And then came Sept. 11. Money managers are really worried about falling even further from their goals," Mr. Starr said.
While no one is pulling out of deals in progress, at least yet, investment bankers said that since the terrorist attacks on the World Trade Center and the Pentagon, both buyers and sellers are moving far more slowly than they normally would.
"Our experience has been that people are moving slower over the last two weeks and are less willing to spend time on the phone discussing these matters. Some people think it seems inappropriate ... so soon after such an awful tragedy," said Bruce Cameron, managing director and one of the founders of investment bank Berkshire Capital Corp., New York.
"Discussions that will go on at all, now will go on much longer," said Chas Burkhart, president of Rosemont Partners LLC, West Conshohocken, Pa., a merchant bank that makes direct investments in emerging money managers. "And there will be a few discussions that won't get much energy for a month or two."
Rosemont has had a deal pending that likely will not close until mid-October, Mr. Burkhart said. Buyers are too busy reassuring their clients post-disaster and licking their own wounds in core business lines to worry about acquisitions and mergers, he said.
`Hard to do anything'
Part of the difficulty is logistical, getting people together in person or on the phone, said Joe Hershberger, managing director and head of the asset management investment banking practice at Putnam Lovell Securities Inc., New York. "It's been hard to do anything," he said.
In the three days following the Sept. 11 attacks, many deals were held up because travel was impossible and in the following week, out of respect, investment bankers held off sending out the "books" that detail the money management companies they represent, said Mr. Hershberger.
Long term, however, "people will concentrate on getting deals done. There are no business reasons that would prevent a continued flow of deals," he said.
Mr. Burkhart agreed there are too many compelling reasons to do money manager M&As to stop the deal flow for too long. While the pace of mergers likely will be dramatically slower in the third and fourth quarters, he expects it will pick up in the first quarter of 2002.
That said, the pace of money manager merger deals has been slower this year than in 2000, said Paul Holt, president of Cambridge International Partners Inc., New York, a boutique investment bank that deals exclusively with asset managers. As of June 30, there had been 23 transactions involving domestic buyers and 23 with foreign buyers, with a total transaction volume of $9.2 billion, according to Cambridge International. That compares with 50 in the first six months of the previous year. The transaction volume for the first six months of last year was more than twice that for the same period this year - $22.5 billion -indicating most of the deals executed in 2001 were for smaller companies.
Some reluctance seen
With assets under management falling precipitously, sellers will want a creative deal structure with earn-outs that will essentially pay them for future growth, rather than current assets, Mr. Holt said.
Berkshire's Mr. Cameron said if the market continues to decline or remains flat, a number of owners might back away from selling their companies. A certain number may be in such poor shape they will have little choice but to sell, creating a buyer's market. "The types of buyers and sellers may change," said Mr. Cameron. "The buyers are likely to be more opportunistic than ever, looking at this as a time to buy companies that have finally become reasonably priced."
Grappling with expectations of sellers and buyers likely will lead to "a greater failure rate" for completing deals, said Mr. Holt.
He noted investment bankers at Cambridge International were surprised that their phones rang half a dozen times in the week after the terrorist attacks with inquiries from both buyers and sellers. A potential buyer from Europe even managed to get a call into Cambridge's midtown Manhattan offices the Monday after the World Trade Center tragedy.
One U.S. subsidiary of a European financial services company, Swiss-owned Lombard Odier Inc., remains completely committed to its expansion plans in the United States, said Jean Keller, president. He is looking to strengthen Lombard Odier's fixed-income capabilities in the United States and will need marketing and operations staff for a new wrap account initiative. Additional compliance officers also are needed.
This matter-of-fact approach to growing a money management business is not cold hearted. "(T)hings like this will happen in the life of a company and you have to be prepared for them. It's a mistake to think you should judge the future from what you can see today. A knee-jerk reaction would be very dangerous. You have to look across the valley," Mr. Keller said.
And other managers, like Driehaus Capital Management Inc., Chicago, also are staffing up, following founder Richard Driehaus' conviction that companies make a grave error when they lay off workers at the bottom of a market cycle.
Certain parts of the investment industry, specifically custody and trust units, are relatively "market proof," said Anne Marie Mulvihill, an associate at Executive Search Consultants Inc., Chicago, which specializes in recruiting middle- and upper-level trust executives. While all the projects her company is doing are going forward as planned during the fall, the traditional hiring season, she said, she did note a pause after the mid-September disasters.
But in the wider world of money management, executive recruiters report a softened market for executive searches, compared with last year. While the flow of projects focused on hedge fund and fund-of-funds hires has been strong, business has slowed in most other areas, said Richard Lannaman, managing director and head of the investment management practice at Russell Reynolds Associates Inc., New York.