The urge to merge was not dampened last year by a faltering U.S. economy, rocky global stock markets or terrorist activities.
In fact, 2001 was the second-best year ever for money management company mergers, with 107 transactions totaling an estimated $14.3 billion. That compares with 110 deals totaling $31.5 billion in 2000 and 105 deals totaling $13.3 billion in 1999, according to data from Cambridge International Partners Inc., a New York investment banking boutique. Cambridge International only counts mergers and acquisitions of firms with more than $200 million under management in their deal totals.
While the total dollar amount of transactions in 2000 was more than double the prices paid for money managers in 2001, it's a misleading high-water mark, said Joe Hershberger, managing director, Putnam Lovell Securities Inc., New York.
"People look at what happened in 2000 and think it sets a benchmark. But it obfuscates how strong 2001 was, especially when you consider that it happened in the second of two years in which equity markets were declining. There were impressive deal volume and prices."
But the challenging 2001 stock market did change how sellers and buyers negotiated prices, said John H. Temple, managing director at Cambridge International. There was no sign of decline in the multiples paid, but buyers were forced to look at projected earnings, rather than at past multiples or current revenue, he said.
While most observers are not predicting that 2002 will be as strong economically as 1998 or 1999, Mr. Temple said buyers in search of good money management companies last year were confident that earnings will improve. Buyers were willing to negotiate a price that reflected what a money management company likely would be worth in 12 months. For example, the $880 million that Societe Generale Group, Paris, paid for 51% of TCW Group Inc., Los Angeles, was explicitly based on an average of projected earnings for the last half of 2001 and the first half of 2002, said Mr. Temple.
Private deals favored
More deals also were conducted privately last year rather than in so-called public auctions, Mr. Temple said, because sellers were unwilling to surrender control of price negotiations. That lack of public deals likely contributed to a slowing in merger and acquisition activity reported by investment bankers from larger firms, which are the most likely to conduct money manager auctions. Investment bankers from shops of all sizes acknowledged the aftermath of the terrorist activities of Sept. 11, combined with sluggish markets, forced many asset managers to look inward to find cost savings rather than focus on external acquisitions.
Mr. Hershberger of Putnam Lovell said the last quarter of 2001 was a "period of introspection in which money managers were looking at capital and where to deploy it, how to decrease the number of people, what their company really is and where they want it to go." Mergers and acquisitions likely will flow as part of the outcome of that internal deliberation and soul-searching, he said.
Greg Fleming, managing director and head of the global financial institutions group at Merrill Lynch & Co. Inc., New York, predicted there will be some pickup in merger activity. It will be driven by the need for true consolidation and product additions after money managers cut more fat from their current organizations. "Fewer portfolio managers, fewer analysts, less marketing and fewer products; why offer 110 mutual funds when you only need 90?" Mr. Fleming said. "After a (mostly) uninterrupted run since 1984, the industry has reached its natural maturation and stalled growth. You have to expect rationalization."
Mr. Fleming said he thinks "people are just trying to get to the finish line, to get through the holidays," and that M&A activity is unlikely to pick up dramatically until the second half of the year.
On the other hand, Paul Holt, managing director of Cambridge International, said, "there is still a lot of activity on the forest floor," even after his firm and others kept busy in 2001 handling sales of midsized companies. And Mr. Hershberger of Putnam Lovell said his company's pipeline "is quite full going into the new year."
Milton R. Berlinski, managing director at Goldman, Sachs & Co., New York, the industry's largest asset management investment banker, said money management companies are focusing on "the usual things" they do during tough times - increasing sales, growing revenues, increasing existing client assets and cutting people, costs and products.
But he is confident M&A activity will increase in 2002 and likely will feature one to three "trophy" deals - foreign buyers, probably Europeans, who come to the United States bearing checkbooks big enough to buy a lot of investment management capacity. But "the real question is whether the Europeans will bring enough to ... the sellers, who are getting more selective about who buys them. There are still more buyers than sellers of very high-quality product," Mr. Berlinski said.
As for 2001, Mr. Fleming and other bankers pointed to the second-largest deal - the sale of Zurich Scudder Investments, New York, to Deutsche Bank AG, Frankfurt, for $2.5 billion - as the most noteworthy.
Zurich Scudder deal
Cambridge International, in its annual commentary on asset management deals, explained the deal as "Zurich Financial sells at a loss the remnants of its ill-conceived merger of Kemper and Scudder Stevens." Christopher J. Acito, managing director of BARRA Strategic Consulting Group Inc., Darien, Conn., called it "a sale that will lead to an unprecedented stripping for parts."
But one investment banker who declined to be identified because of nearness to the deal was more positive. "With Scudder, Deutsche got a great opportunity at a great price. They just got a terrific beachhead in the U.S. with a retail brand name. It's a very well known, old, creaky brand name, but there are very few of those in asset management. Deutsche will add the needed focus and take care of the cost-cutting and trimming that must be done there," he said.
Mr. Berlinski agreed the deal could be a great one for Deutsche, if integration is well-executed and sensitive to client needs. "They have to cut costs. It's very simple. Scudder should have done it before," he said.
In the Scudder deal, Cambridge International analysts estimated Deutsche paid 31 times first half of 2001 earnings before interest, tax and amortization annualized or 12.5 times 2000 EBITA, 2.5 times revenues and 0.9% of assets under management.
The other top M&A deals:
* Investors Group acquired Mackenzie Financial for $2.5 billion. It combined two strong Toronto-based mutual fund brand names for the most expensive pure asset manager play last year. Cambridge International analysts estimated Investors Group paid 19 times EBITA, 4.7 times revenues and 10% of assets under management;
* Legg Mason Inc., Baltimore, bought Private Capital Management LP, Naples, Fla., for $2.5 billion, gaining wealth management capabilities. Legg Mason paid nine times EBITA down and nine times EBITA growth over five years. Cambridge International estimates this is worth 11 times revenue and 13% of assets under management for Private Capital;
* FleetBoston Financial Corp., Boston, bought crosstown neighbor Liberty Financial Corp. for $1 billion, breaking up an asset management empire composed of several previous acquisitions. Fleet Financial paid 13 times EBITA, 2.4 times revenue and 2% of assets under management for Liberty Financial; and
* Societe Generale purchased 51% of TCW Group for $880 million, giving the French bank access to an American institutional and high-net-worth shop. SoGen paid 16 times budgeted EBITA in 2001 to 2002, 4.8 times revenue and 2.2% of AUM for its initial purchase of 51% of TCW.
Bank mergers noted
Two bank mergers were noteworthy for the amount of asset management business. Dresdner Bank AG was acquired by Allianz AG last year for $19.6 billion. Both Frankfurt, Germany, managers had substantial asset management businesses with a combined total of $370 billion. First Union Corp., Charlotte, N.C., acquired Wachovia Corp., Winston-Salem, N.C., for $14.6 billion. The combined firm has $90 billion under management.
Among the 98 smaller deals in 2001, there were several strong trends. First and foremost was the search for hedge fund and high-net-worth money managers, followed by a quest for institutional management capabilities.
"There was a sudden awakening to alternative investment in 2001," said Putnam Lovell's Mr. Hershberger. It was sparked by the acquisition of Tremont Advisers Inc., a Rye, N.Y., hedge fund-of-funds manager, by Oppenheimer Acquisition Corp., New York, for $140 million. John Nuveen Co., Chicago, bought Symphony Asset Management LLC, Berkeley, Calif., from BARRA Inc., San Francisco, for more than $210 million. Mellon Financial Corp., Pittsburgh, bought 15% of The Optima Funds Group, Fairfield, Conn., a hedge fund manager with which it struck a distribution deal in June 2000. Terms of this deal were not disclosed.
Many more hedge fund acquisitions are in the works, Mr. Hershberger said, especially for fund-of-fund companies with $1 billion to $2 billion under management. "This hedge fund trend is very big in every kind of way. It's evolving from a cottage industry to a mature niche. More suppliers will come to the market and will transform the dynamic of the industry; those will probably be institutional managers that will create models that will serve institutional investors," he said.
High-net-worth in demand
High-net-worth managers also were much in demand last year. Neuberger Berman Inc., New York, bought Oscar Capital Management LLC, New York; Wilmington Trust Co., Wilmington, Del., acquired Balentine & Co., Atlanta; and Affiliated Managers Group Inc., Prides Crossing, Ma., took a 60% stake in Welch & Forbes LLC, Boston. Terms were not disclosed for these deals.
A number of other buyers were filling product gaps as well as securing institutional investment talent:
* AMVESCAP PLC, London, acquired National Asset Management Corp., Louisville, Ky., for $200 million to $250 million; the deal brought growth equity and fixed-income institutional management to the firm. AMVESCAP also bought Pell Rudman & Co., Boston, for up to $200 million to expand equity management;
* Eaton Vance Corp., Boston,, a money management conglomerate, bought institutional managers, Atlanta Capital Corp. Atlanta, for $75 million, and Fox Asset Management, Little Silver, N.J., for up to $52 million;
* New York Life Asset Management, New York, bought McMorgan & Co., San Francisco, for an estimated $400 million to gain that firm's mainly institutional Taft-Hartley client base;
* Phoenix Investment Partners Ltd., Hartford, Conn., another consolidator of money managers, bought 60% of institutional managers Kayne Anderson Investment Management LLC, Los Angeles, with an option to acquire an additional 15% of the company by 2007; it also bought Walnut Asset Management LLC, Philadelphia. Terms were not disclosed for either Phoenix acquisition;
* Credit Suisse Asset Management, London, bought SLC Asset Management, London, the U.K. asset management business of Sunlife of Canada, for an estimated $175 million to $189 million;
* Mellon Financial Corp., Pittsburgh, beefed up its institutional fixed-income business with the purchase of Standish Ayer & Wood Inc., Boston, for more than $15 million; and
* UBS AG, Zurich, Switzerland, bought a Canadian client list and distribution north of the border through its acquisition of RT Capital Management, Toronto, for $228 million.