NEW YORK — Fresh off the most impressive single year in money management M&A activity, investment bankers and analysts are saying that all signals are pointing to a repeat performance in 2007.
Exceeding last year’s activity — a record 196 deals valued at $44 billion, according to New York-based investment bank Putnam Lovell NBF Securities — will not be an easy task, but executives at money management firms and financial institutions are still exploring opportunities to redesign and restructure their businesses.
Investment bankers point toward the globalization of the money management industry and the ongoing separation of distribution and manufacturing as the primary drivers of future M&A activity. These two trends, combined, could continue to give impetus to megadeals much like the BlackRock/Merrill Lynch Investment Managers marriage last year, as well as the Citigroup/Legg Mason union in 2005. These deals, plus the Bank of New York’s December acquisition of Mellon Financial Corp., were the three largest transactions to ever take place in the asset management industry.
Ben Phillips, managing director and head of strategic analysis at Putnam Lovell, said there is “the potential for another half-dozen deals” of this size to take place in the not-too-distant future.
“People are starting to realize that you don’t have to own the manufacturing to make money in the asset management business anymore,” he said. “The deal structures are getting more creative; so if you don’t have the stomach to support investment management, you can likely find a way to profit off of just distribution.”
Many money management firms, he said, have only just begun to draw up the blueprints to strategically redesign their business models to be more competitive on a global basis. This means more U.S.-based firms will be looking to diversify both their client bases and their mix of investment strategies outside the U.S., Mr. Phillips said.
Also, a number of U.S. money management firms and financial institutions are armed with significant amounts of uninvested capital; publicly traded asset management companies, specifically, have a combined $9 billion in cash on hand could be used for future deal-making, he said.
Most of this cash belongs to a few of the largest managers, including Franklin Resources Inc., T. Rowe Price Group Inc., Janus Capital Group Inc., AMVESCAP PLC, Legg Mason and BlackRock, according to data complied by Putnam Lovell from company filings.
“Just because the money is there, it doesn’t necessarily mean that it’s burning a hole in their pockets and they’ll rush to do a major, transformational deal,” said Robert Lee, an analyst covering publicly traded asset managers at New York-based investment bank Keefe, Bruyette & Woods Inc. “But you could easily see a number of these larger firms looking to use this cash to fill in product holes.”
Specifically, money managers will likely be on the prowl for specialists in EAFE equity strategies, as well as emerging markets and global equity firms and non-U.S. fixed income managers, said Mr. Phillips.
Deals such as Evergreen Investments’ January acquisition of European Credit Management, a London-based fixed-income manager with $26 billion in assets, as well as Mellon’s purchase of Walter Scott & Partners Ltd., an Edinburgh-based international and global equity manager with $27 billion in assets, are prime examples of the types of acquisitions other money managers are looking to execute, said Mr. Phillips.
Raymond “Chip” Mason, Legg Mason’s president and chief executive officer, for one has already acknowledged that his firm would consider doing a deal for a European equity manager. In a recent conference call, Mr. Mason acknowledged that lacking this strategy is a “weakness” of his firm. He added that European equity “would be the particular area that would be of most interest.”
Aside from traditional deals, initial public offerings could also play a role in M&A activity this year. While there has been speculation that more alternative investment firms will follow in the footsteps of Fortress Investment Group LLC, New York, which went public last month, some suggest that privately owned traditional money managers are also seriously considering the possibility of a public listing.
“Many of the publicly traded managers have performed very well lately, and their valuations could be attractive to some private firms,” said Eric Weber, chief operating officer and principal of Freeman & Co., New York, a boutique investment bank.
A number of publicly traded money managers — including BlackRock, Franklin and AllianceBernstein LP — have seen their stock prices trade at, or very close to, all-time highs this year. In addition to finding these valuations attractive, Mr. Weber said that by going public, privately owned managers would be armed with a currency for future acquisitions as well as an effective recruiting tool. Also, private firms whose founders are nearing retirement could consider going public as an alternative to selling the business.
