Future M&A deals won’t match blockbusters

"If you're one of these three companies, you want to be able to convert your assets into a currency by doing a deal with a publicly traded independent firm," said Mr. Snowling. With BlackRock and Legg Mason out of the picture for now, he added, San Mateo, Calif.-based Franklin Resources Inc. and Baltimore-based T. Rowe Price Group Inc. become the most attractive potential partners for any motivated sellers.

Janus Capital Group, Denver, whose management team was reportedly pursuing a buyout of the firm until last month, is also viewed as an attractive and "reasonably priced" target for a merger, said one source.

But some of the largest potential players might already be occupied with smaller targets. Morgan Stanley executives, who reportedly pursued a merger with BlackRock earlier this year, have said they will try to build the firm's asset management business by making smaller acquisitions or hiring teams to launch new investment strategies, specifically in alternative investments.

Meanwhile, according to one source, Franklin Resources has expressed an interest in bidding on the Gartmore Group's U.K. funds business, which has been put on the block by its parent, Nationwide Financial Services Inc, Columbus, Ohio. Lisa Gallegos, spokeswoman, said the company does not comment on speculation.

Eric Weber, chief operating officer and principal of Freeman & Co., New York, a boutique investment bank, said banks and insurance companies will play a larger role in money management M&A following the success that PNC Financial Services Group had with its 70% stake in BlackRock. The Pittsburgh-based banking company will report an after-tax gain of roughly $1.6 billion as a result of the BlackRock and Merrill deal.

"A bank doesn't have to buy a money manager and put their name all over the funds to make a deal work," Mr. Weber said. "PNC did very well with its stake in BlackRock, and other banks could learn a lesson from that."

Mr. Weber expects more banks and insurance companies to acquire partial stakes in money managers over the next year and then keep an arm's-length relationship with the asset management units.

Even if there's no sequel to the BlackRock-Merrill Lynch deal this year, many in the industry believe the deal will ignite a flurry of strategic acquisitions focusing on some of the long-term issues facing the money management industry.

"The BlackRock and Merrill Lynch deal is good for the industry because people are looking at the deal and asking, ‘What should we do now?' and ‘How do we position ourselves to capitalize on the seismic changes in the retirement markets?" said Benjamin Phillips, managing director at New York investment bank Putnam Lovell NBF. "The defined benefit market is shrinking, and the retired population is going to increase significantly — these are factors that will require money managers to be innovative in both portfolio management and distribution."

Specifically, many of the deals that will take place in the near future will involve firms seeking to broaden their alternative investment offerings and those seeking to expand their presence in international markets, Mr. Phillips said.

Deals motivated by alternative investments, in particular, have significantly increased in recent years, and the trend should continue, he said. Last year, a combined $140 billion in alternative assets under management were acquired by money managers, a 67% increase from 2004, according to a recent Putnam Lovell NBF report on money management M&A.

The size of international transactions, or cross-border deals in which managers acquired firms based in a different country, increased significantly last year as well, according to Putnam Lovell. Money management firms acquired $315 billion in cross-border assets last year, more than double the amount acquired in 2004.