With the acquisition of Zurich Scudder Investments Inc. by Deutsche Bank AG, what were seven major money management organizations not long ago will become one.
This combination of firms has been driven by a desire for asset accumulation and economies of scale, supposedly the key to long-term business success in the financial management industry. There might have been benefits to the various firms and their employees, particularly top executives along the way. But the question is: Where is the benefit to the clients?
The latest combination will bring together Zurich Scudder Investments - formed when Zurich acquired Kemper Financial Services Inc. and then bought what once was Scudder Stevens & Clark Inc. - and Deutsche Bank, which acquired Morgan Grenfell Asset Management and Bankers Trust Co., which in turn had acquired Alex. Brown & Co.
Rolf Breuer, chief executive officer of Deutsche Bank, said the Zurich Scudder deal will rank Deutsche as the fourth largest money manager worldwide, its assets under management totaling $900 billion. But will it be at least the fourth best performing investment manager for clients?
No one can know now how well the Deutsche acquisition will turn out. But one thing is clear: It is exceedingly difficult to successfully pull together disparate investment management organizations, with different investment styles and skills, and produce top-tier investment performance. All too often, centrifugal force of change pulls apart the formerly successful investment management teams and performance plummets.
For example, take Merrill Lynch & Co.'s acquisition five years ago of Hotchkis & Wiley Inc. Hotchkis & Wiley had been a top-level domestic and international value manager with a successful fixed-income component. But soon after the acquisition, the Hotchkis & Wiley fixed-income team bolted to form Metropolitan West Asset Management LLC , building a successful firm during a bullish equity market highly unfavorable to boutique fixed-income managers. After defections on the equity side, Merrill agreed to sell the remnants of the firm to former principals.
UBS AG's acquisition in 1998 of Swiss Bank Corp., which had bought Brinson Partners Inc. in 1994, brought the combination's assets under management to about the same amount then as Deutsche will have now. But the UBS combination had trouble almost from the start, in part because of poor performance, which the firm now is beginning to improve.
Even for Deutsche Asset Management Inc., after buying Bankers, its tax-exempt institutional assets fell 41% in the year ended Dec. 31, partly due to misreporting and client defections, including one $42 billion account.
The Deutsche-Zurich Scudder combination will almost certainly feel the same centrifugal forces. How will it contain them? What sacrifices will Deutsche make to propitiate the gods, namely, talented portfolio managers, clients and prospects? Zurich Scudder already has investment performance problems; and both firms have organizational issues that must be fixed for the deal to be successful for clients.
Recent memorandums from one consulting firm offer some interesting observations. Deutsche, it notes, has "only recently completed its integration of Deutsche, Morgan Grenfell and Bankers Trust; now it faces another lengthy period of transition with the acquisition of Scudder."
As for Scudder, the consultant was troubled by the recent departure of Ted Truscott, CIO-Americas, Zurich Scudder: "Truscott was toeing the company line about making sure that Scudder professionals are going to be protected in any transactions. Now he is walking away, leaving a fair bit on the table in the form of Scudder stock. Again, turnover at the senior level continues to plague this organization."
Staying put is not necessarily a formula for success either. Kemper, once a top mutual fund company, lost ground to competitors as the market exploded in the 1980s. But changes should be planned, and not result from staff defections caused by changes in ownership. Changes should be aimed at producing more alpha for clients, more than more revenue for the firms. When acquisitions are aimed at producing better investment management firms rather than bigger firms, the results for the clients will be stronger.
