The total dollar value of money manager deals in 2002 was the lowest it has been in six years. While the number of asset manager acquisitions last year was about the same as usual, with 117 deals involving managers with more than $200 million under management, the dollar value of those deals - $7.9 billion - was down 45% from the $14.4 billion in deals struck in 2001. A more extreme comparison is with the $31.7 billion paid for money managers in 2000: total deal volume was 75% lower in 2002.
One reason for the decline in the total dollar volume of M&A deals was the absence last year of the megadeals that had characterized the money management industry for the past few years, said Douglas P. Klassen, managing director of investment banking boutique Cambridge International Partners Inc., New York, which provided deal data. Cambridge only includes in its data acquisitions of companies that derive a minimum of 50% of revenue from asset management, eliminating Boston-based State Street Corp.'s $1.5 billion acquisition of Deutsche Bank AG's global custody business from the deal ranking.
"There were no blockbuster deals of over $1 billion last year," said Mr. Klassen. There were four deals with a purchase price in excess of $1 billion in 2001, 10 such deals in 2000 and three $1 billion plus acquisitions in 1999, Mr. Klassen noted. The average price paid for money management firms in 2002 was $88 million, vs. $133 million in 2001 and $286 million in 2000.
Mr. Klassen said almost all of the drop in total deal value in 2002 can be attributed to the decline in the number of U.S. money managers sold. Prices paid this year for foreign-domiciled firms remained at 2001 levels, he added, depressing the total value of M&A deals. There were 60% to 70% fewer acquisitions of or by U.S. companies in 2002, compared with 2001 and 2000 when the majority of deals had a U.S. element, Mr. Klassen noted. Of the top 12 deals tracked by Cambridge in 2002, only two involved U.S. buyers and only four involved U.S. targets, compared with seven U.S. buyers and nine U.S. targets in both 2001 and 2000.
Prices commanded by money managers have dropped dramatically, in concert with poor global markets.
"Prices have returned to their pre-1999 levels, at multiples between eight and 10 times earnings, down from the midteens as we saw in 1999 and 2000, " said David Heaton, co-head of the global asset management practice and director at Merrill Lynch & Co., New York.
Those valuations disappointed owners of many money management firms, and many took their companies off the market last year, even after extensive discussions with potential buyers, said investment bankers.
Mr. Heaton said sellers simply have not adjusted their price expectations down far enough and buyers simply aren't willing to pay a lot up front for a money manager with depressed cash flow, poor performance and low assets under management.
"The level of discussions between buyers and sellers has remained relatively constant. Many buyers are looking at potential acquisitions, but the really healthy companies - the ones you'd want to buy - are looking at deals and saying `Why would I want to sell today, when assets under management are so low?' " said Donald J. Truesdale, managing director and head of the asset management practice in the investment banking division of Goldman, Sachs & Co., New York.
Acquisitions were tougher to close in 2002, said Mr. Klassen, especially of privately held asset managers whose owners do not have shareholders pushing them to sell regardless of price. Buyers also were far less tolerant of the efforts of asset management targets to negotiate prices based on future earnings, which is essentially an expression of good will, rather than belief in a predictable outcome, Mr. Klassen said.
Buyers had a hard time agreeing to pay multiples of 11, 12 or 13 times forward earnings in 2002, said Christopher J. Acito, managing partner at consultants Casey, Quirk & Acito LLC, Darien. Conn. "They are having trouble with the `hockey stick' model here, when the owners of money managers are saying they might be down now, but as soon as the market turns, their earnings will skyrocket. But that concept is not selling. Money manager earnings right now are not just low, they are negative."
Of the notable deals that almost happened in 2002, but didn't, were the management buyout of Barclays Global Investors N.A., San Francisco, and the sales of Britannic Asset Management, Glasgow; Mesirow Asset Management, Chicago; and Oaktree Capital Management LLC, Los Angeles, Mr. Klassen said. Commerzbank AG, Frankfurt, couldn't even get rid of Jupiter Tyndall, London, at auction last year, said Mr. Heaton. Many managers, including Royal & SunAlliance Investments, London, said Mr. Klassen, sold for bargain-basement prices.
There were a few instances in 2002 of partial deals, where the seller had to split up the company between two buyers or sell only part of it. "A year ago, I would never have believed that this could happen. But it's the only exit strategy left for some companies," Mr. Acito said. "These franchises are not worth what people think they are and at the end of the day, people are likely going to be willing to pay for the part of the business they want, not everything. With buyers stripping for parts, asset management companies are only as valuable as their parts."
Mr. Acito cited as an example Chicago-based Lincoln Capital Management Inc.'s sale of its better performing, more profitable $30 billion fixed-income operations to Lehman Brothers, New York, leaving its performance-plagued equity team behind. Lincoln had tried to sell the equity and fixed-income parts of the firm as one package and didn't get any takers, investment bankers said. Mr. Klassen said the less than $100 million Lincoln was able to command for its fixed-income division was reflective of the fact that about two-thirds of its assets are managed in low-revenue enhanced or indexed strategies.
Similarly, Mr. Acito said, Commerzbank was only able to divest Montgomery Asset Management LLC, San Francisco, in pieces. Montgomery's fixed-income, small-cap, midcap and emerging markets retail mutual funds and institutional strategies were sold to Wells Fargo Bank N.A., San Francisco, and the global equity and alternative investments were picked up by Gartmore Global Investments, Conshohocken, Pa.
Away from globalization
Commerzbank's disaggregation strategy was part of a shift away from a globalization trend that began in 2001, Mr. Klassen said. Only Robeco Group, Rotterdam, Netherlands, was particularly active in expanding its global reach through the acquisition last year of 60% of Boston Partners Asset Management LP, Boston, for an estimated $240 million. Acquisition of this value equity and fixed-income manager nicely completed Robeco's U.S. investment platform, with the Dutch bank already having acquired Weiss Peck & Greer LLC, New York, (growth equity); Sage Capital Management LLC, White Plains, N.Y., (hedge funds); and Harbor Capital Advisors Inc., Toledo, Ohio (mutual funds). In this vein, Bank of Ireland Asset Management, Dublin, also modestly expanded its U.S. presence with the acquisition of 61% of value equity manager Iridian Asset Management LLC, Westport, Conn., for $188 million.
"When companies start to take a geographic, product or client-related focus, rather than focusing on the building of a multistrategy infrastructure, the size of the deals gets smaller," Mr. Klassen said. "The big global financial services companies are not going global any more or are actively deglobalizing, as evidenced by the sale last year of Scudder Investments by Zurich, Commerzbank's sale of its U.S. subsidiary, Montgomery Asset Management, or in the announcement that Allianz is considering a sell-off of its money management subsidiaries. The mind-set is changing and companies are distancing themselves from the business of money management from a financial standpoint," he said.
Merrill Lynch's Mr. Heaton disagreed. "Strategic interest in wealth management remains strong. Few if any senior executives at insurers and banks that I have talked to are interested in getting rid of their asset management units. Asset management is a core strategy for many financial services companies, one of their top three goals, I would say," Mr. Heaton said. "They've entered the next phase, where the conversation is more about how to restructure their subsidiaries, how to make more creative deals, such as minority investments in firms, joint ventures, business line consolidations. They are not necessarily talking about just combining or merging operations."
In addition to shifting from multistrategy or global management platforms, asset manager buyers and sellers were motivated to make a deal in 2002 in order to:
* make product line enhancements, especially of hedge funds and other alternative investment managers. In fact, 15 of the 122 deals struck in 2002 involved acquisition of hedge fund capability, including Man Group PLC's $833 million acquisition of RMF Investment Group. An interesting product-line play was Frankfurt-based Deutsche Bank's $440 million acquisition of real estate specialist RREEF, Chicago;
* refocus activities along product or geographic lines in order to preserve strengths and shed weak business areas. One example was New York-based Deutsche Bank Asset Management in the Americas' sale of its passive business for $260 million to Northern Trust Global Investments, Chicago;
* create in-market consolidations of smaller scale businesses. The absorption of Deutsche's passive assets pushed Northern Trust up to third place in the rankings of the United States' largest money managers. London-based Friends Ivory & Sime's $350 million acquisition of Royal & SunAlliance doubled FIS' assets under management and pushed it into the top 10 of U.K. money managers. Rye, N.Y.-based Gabelli Asset Management Inc.'s acquisition of Woodland Partners, Minneapolis, expanded its coverage of the U.S. small-cap sector and brought in $250 million of mainly institutional assets.
Paid too much?
With regard to the rankings of 2002 deals, observers questioned whether London-based Man Group paid too much to get its hands on the $8.5 billion of hedge funds managed by RMF Group, Pfaeffikon, Switzerland, in what Mr. Heaton said was the first hedge fund acquisition of scale and the biggest deal of 2002. Cambridge International Partners estimated the $833 million price was a multiple of 23 times earnings before EBITA.
"Man Group got incredible performance of the investments and of the business in RMF, but the jury is still out on the price paid," said Mr. Heaton. "From the perspective of a U.S. financial institution, it's hard for them to see how they can grow and manage a hedge fund business. And it's quite difficult to value a hedge fund company, if you decide you want to buy one, because there is such a significant performance fee factor. Performance may be great now and therefore, performance fees are also great. But in the space of one quarter, that can all change, the fees can disappear and it's very hard for the buyer to envision how to value that kind of volatility when agreeing to a price to pay. It's a tough bridge to get across."
In a series of in-market consolidations in Canada, CI Mutual Funds Inc., Toronto, acquired, for US$560 million, the Spectrum/ Clarica Funds from Sun Life Financial, Toronto, which in turn took a 30% stake in CI Funds, in the second biggest deal of 2002.
In Australia, Westpac Banking Corp. Ltd., Melbourne, bought BT Financial Group (Australia), Sydney, for US$531 million in the third biggest deal of last year. Westpac also acquired Rothschild Australia Asset Management, Sydney, for $175 million, as Rothschild's parent company refocused on its home market in the United Kingdom for the 12th largest deal of the year.
In a complicated reorganization, Nationwide Financial Services Inc., Columbus, Ohio, paid $375 million to combine its separately held U.S. asset manager, Gartmore Global Investments, with its U.K. manager operation for the fifth largest deal.
Den Norske ASA Bank, Oslo, Norway, bought Skandia Asset Management, Stockholm, Sweden, for $310 million in the seventh largest deal, which united the money management operations of two Scandinavian financial powerhouses. Skandia exited money management to concentrate on investment product design and distribution.
In another Canadian market consolidation play, National Bank of Canada, Montreal, bought Altamira Investment Services Inc., Toronto, a no-load mutual fund manager, for US$309 million in the eighth largest deal.
The market's performance will be the primary determinant of asset manager M&A this year, said Mr. Klassen. "It's anyone's guess what the market will do. There's not a nice simple answer (about 2003)," he said.
Goldman Sachs' Mr. Truesdale said "the buyer universe is relatively weak as insurers and banks are under capital pressure and public financial services companies in the U.S., the U.K. and Europe are under stock price pressures. I expect to see some rebound (in M&A) and some bigger deals in terms of size in 2003 if the market improves or at least stabilizes."
Messrs. Truesdale, Heaton and Klassen agree that deals of the future might be structured very differently from those of the past few years.