SAN FRANCISCO - Industry observers are pretty sure that this time, BGI really will be sold.
Or it might be bought out by management, or even abandoned by its megaquant gurus, who probably could replicate the enhanced indexed and passive strategies in a new company without too much difficulty, and bring their loyal client base with them.
Barclays PLC, London, is thought to be ready at last to divest Barclays Global Investors, its San Francisco asset management unit. BGI has $770 billion under management, $451 billion of that from U.S. institutional, tax-exempt investors.
Officials on both sides of the Atlantic responded with "no comment" when queried about a possible spinoff.
Spokesman Tom Taggart said Patricia Dunn, BGI's chief executive officer, was not available and declined to pass messages on to her.
The industry buzz is that both sides are fed up with their relationship.
Ms. Dunn and her staff are said to be tired of pressure from Barclays to develop high-revenue active management strategies to run alongside the $142 billion managed in enhanced indexed strategies for U.S. and a smaller base of international clients.
San Francisco area consultants said their contacts inside BGI said the company's top brass now respond to internal inquiries about a possible divestiture with "no comment" rather than the once common "don't be ridiculous."
Exhaustive review
BGI is known to have completed an exhaustive review of its business in the past 12 months. Last year it outsourced the administration of U.S. investment operations to Investors Financial Services Corp., Boston, removing a large, capital-intensive operation from its books. Bank of New York was selected in March 2001 to provide fund administration to BGI's U.K. retail mutual fund unit. Alison Davies, BGI's chief financial officer for the past year, is known to be a strategist, and sources suspect she might be pushing the campaign to free BGI from its large parent company.
It's not surprising to one observer, who asked to remain anonymous, that it might look "like BGI's parent company is chickening out, but on the side of focusing (on money-making activities.) If you're not going to be successful, you don't want to be mediocre. If you look at Barclays Bank, they have the prospect of becoming a global leader in investment management. But quantitative management probably is not the way to take over the world. It's like a high-performance engine. You can look at it and see that it has high rpms, but that doesn't mean you can understand it, explain it, sell it."
And despite growth to $770 billion at year-end 2001 from $450 billion in 1995, when BGI was purchased by Barclays, observers said marketing efforts at BGI have been lackluster and the intermediary distribution channel underexploited. Retail mutual fund assets, even after a successful launch of exchange-traded funds, remain stuck between $75 billion and $100 billion. Compared with Barclays' other business divisions - such as Barclays Capital and Business Banking - the asset management operation made one of the smallest contributions to the group's pre-tax operating profit of $6 billion in 2001.
"The management team at BGI will have to really give it a lot of juice for the money management unit to really go," said one vendor consultant. "Profit margins are probably quite good, although fees aren't. There's just not much horsepower there. Passive management works, but it's not very appealing. It just sort of chugs along in boom times. BGI might be much better appreciated as an independent, purchased at a reasonable price."
No secret
"It's no secret in the industry that Barclays has been shopping BGI around," said an industry observer who requested anonymity. "State Street took a look and wouldn't pay what Barclays wanted. Deutsche took a look and thought the price was too high. But it's not likely that Barclays will sell it at a fire-sale price, although they do think that because it's a commodity, it is worth much more than its numbers would suggest."
Barclays' asking price is rumored to be $1 billion, a figure at which most observers scoff. That's probably more money than a management buyout could conjure up on its own. Calls placed to private equity manager Hellman & Friedman, San Francisco, rumored to be interested in financing the deal, were not returned.
"It will be very difficult for BGI management to put together a financing package for a deal of this size. It's a huge mass of assets, but they're all low fee generating strategies, starting at 15 basis points and dropping from there," said Burton J. Greenwald, managing director, B.J. Greenwald Associates, Philadelphia. "Barclays probably has decided to get out of the business, since it doesn't contribute enough to their P&L. So I don't think they'll be too hung up on getting a specific price. The most logical buyers for BGI are its competitors - Deutsche Bank, State Street, Mellon Bank - who could swoop in and pick up the business at a bargain basement price."
One source with inside knowledge of BGI said it would not be surprising if Ms. Dunn and her colleagues jumped ship and set up their own shop if a price couldn't be negotiated with management or an outside buyer. "The intellectual chassis of BGI is the quant team that came in when Barclays bought Wells Fargo Nikko. They've already survived several name changes quite successfully, and since this passive management is really just a two-man race between BGI and SSgA, everyone will know exactly how to find them. They have to manage brand transition carefully, but the market won't lose sight of this management team," said the source. "Where there's smoke, this time, there's fire. Changes will be made at BGI when this is all over, regardless of whether there's a sale or an MBO or something else."
Observers vary in their assessments of BGI's chance for success if staff leaves or if the company remains intact, but goes solo.
"It's not a negative for us by any means," said Ted Disabato, president of consultant Disabato Associates Inc., Chicago. "A lot of money management firms do a lot better when they're independent."
Unique role
"There's crying need in this business for brands with a clear value proposition vs. a commodity. BGI is not a commodity player, despite being an indexer. They do really good passive and quant management. They have a unique role in the business: There's a clear choice between Barclays and other passive managers," said Ward Harris, president of McHenry Consulting, Berkeley, Calif. "It's critically important to sponsors to have managers with names they can trust, given all the background noise - H-P, Enron, stock options. Over 25 years, BGI and its predecessor, Wells Fargo, have produced results for clients. They're an efficient and ethical investor," Mr. Harris said.
But one of the biggest "ifs" for observers centers on the debt BGI executives would have to shoulder if they bought out their company, because so much of its revenue comes not from investment management fees but from securities lending.
"This is only the 50,000th time management at BGI has been around this loop," said a former BGI executive. The former staffer, who asked not to be identified, said the major impediment to a management buyout of BGI has been the need for a lot of capital to remain idle to cover the firm's securities lending activities. Securities lending is one of the most profitable areas at BGI, but it can generate only slim profit margins on fees for its mainly institutional, indexed and quantitative assets under management. "The art of the management buyout is to have as little debt as possible. In the case of BGI, it's hard to make it work when pension trustees require that you have a deep capital base in order to compete in terms of fiduciary criteria with State Street."
"If they can strike something that won't bury them in debt, they have a good chance to go forward and attract and retain good, solid talent," said J. David Barrett, partner at Heidrick & Struggles, an executive search firm in New York. "The problem with carrying a lot of debt is that they won't be able to plow money back into the business to really grow it."
Not for an independent
Bruce McEver, president at Berkshire Capital Corp., New York, said the burden of managing so much money in indexed strategies "would be very hard to do outside a large bank. Indexing on any kind of scale is not something for an independent."
Mike Beasley, managing director at Strategic Investment Solutions Inc., San Francisco, agreed. "This is a challenge they'd have to wrestle well ahead of time. ... They would definitely need some serious capital to run these kind of strategies, even if they outsourced administration."
