A pickup in cross-border transactions should help keep money manager merger-and-acquisition activity humming in 2008, despite fallout from the recent surge in market volatility, a Pensions & Investments round table of industry experts predicted.
At the start of November there already were more than 200 money manager transactions, exceeding the record 190 deals for all of 2006, said Kevin J. Pakenham, a London-based managing director with investment bank Putnam Lovell, a division of Jefferies. “We think that’s going to continue,” he said.
But not necessarily in a straight line.
M&A will be a much more international affair in 2008, with European players in particular looking to extend their global reach, said David Hunt, the New York-based director of McKinsey & Co.’s asset management practice. Other themes of recent years, including traditional managers pushing into alternatives and active deal-making by multiboutique firms, are likely to persist, he said.
The roundtable was held Nov. 12 in New York. The other panelists were Mark R. Fetting, senior executive vice president, global managed investments at Legg Mason Inc., Baltimore; David Heaton, managing director of the financial institutions group at Merrill Lynch & Co., New York; P. Andrews McLane, senior managing director with TA Associates Inc., Boston; and Ronald P. O’Hanley, president and chief executive officer of BNY Mellon Asset Management, Boston.
Those industry veterans met as major U.S. banks were reporting hefty losses on their subprime mortgage exposure and economists were further cutting back their growth forecasts for 2008.
That backdrop could well cause the record pace of M&A deals set over the past three years to slow but not stall, participants said. Amid signs of an economic slowdown, “I wouldn’t be surprised to see less overall deal activity and fewer transactions,” in 2008, said Mr. McLane.
But the effects of that market turmoil could cut both ways.
Goodbye to frothy deals
Frothy deals, like the highly leveraged buyout announced earlier this year that took listed Chicago-based Nuveen Investments Inc. private, won’t be repeated anytime soon. And following the summer’s tumult, buyers might also review their recent willingness to ascribe premium valuations to hedge fund performance fees, which Mr. McLane called a key factor behind the proliferation of alternatives-related deals in the past few years.
On the other hand, financial market turmoil should put more money manager subsidiaries in play, as cash-strapped banks review their commitment to the sector. Participants also predicted the relative resilience of asset management stocks, in a market that has decimated banking shares, will leave a healthy number of money managers mulling listings in 2008.
With leverage harder to come by and a foggy capital markets outlook, strategic buyers should be able to steal a step or two on financial buyers, such as the private equity players behind some of the biggest deals in 2007, including Nuveen and London-based Jupiter Investment Management Group.
BNY Mellon’s Mr. O’Hanley said going forward, the biggest M&A deals will be “all about strategic positioning” — with the separation of manufacturing and distribution the biggest single driver of that activity.
While downplaying the odds of new “transformational deals,” such as the 2005 swap of Legg Mason’s brokerage arm for Citigroup Inc.’s money management unit and Merrill Lynch’s 2006 injection of its money management arm into BlackRock Inc. in return for a 49% stake in that New York-based firm, round table participants said the number of conversations taking place on prospective transactions remains high. Mr. Heaton said, “There’s so much going on under the hood in the asset management industry” now, and more conversations than in past years are focusing on “contribution-combination” ideas — such as the Merrill-BlackRock deal.
“When I’m in Europe, the European captives and the independent asset managers all want to talk about how I can become bigger in the U.S. In the U.S., the big interest is how I can become bigger in Europe,” Mr. Heaton said.
Mr. Fetting — calling the two years since the Legg-Citi deal closed “the best 20 years of my life” — said his company’s decision to give up its brokerage arm was “very much a recognition of the importance of being truly global,” both as an investment organization and a client servicing organization.
While European players with global pretensions have to be looking to move into the U.S., Mr. Pakenham said their unwillingness to bid aggressively in recent auctions of U.S. money managers suggests they’re not looking to buy U.S. platforms outright, as they did in 1999 and 2000.
Increasingly, market forces in Europe will pressure banks there to mull new ways of obtaining the U.S. piece of a global lineup, including combination deals, he said, predicting “there will be at least one major deal” involving a tie-up of a European and a U.S. bank in 2008.
McKinsey’s Mr. Hunt said the focus of many U.S. managers on Europe might prove shortsighted, in light of growing opportunities opening in markets such as Japan and the Middle East — both keys to capturing “the international opportunity.”
Mr. O’Hanley, meanwhile, said 2008 might be the year that new players come to money management’s M&A table as buyers of “Anglo-Saxon” expertise. “I do believe you’ll see — whether it’s minority investments or outright M&A — China and the Middle East will be a much bigger deal (among buyers) than they’ve been in the past,” he said.
Along with cross-border transactions, continued growth in deals involving alternative investment managers was another consensus prediction by round table participants. Mr. Hunt said traditional money managers will remain active buyers of alternatives managers in 2008.
Mr. Heaton, meanwhile, predicted listed alternatives managers in particular will be feeling pressure to acquire traditional expertise in liquid markets, capable of ensuring the top-line revenue growth stock market investors crave. He warned, however, that cultural differences between traditional managers and alternatives shops could prove a tough hurdle.
While conceding those daunting cultural challenges, Mr. O’Hanley said money managers must overcome them. “Clients increasingly are seeking these kinds of non-correlated returns, and we’ve got to figure out a way to provide it.” He noted that BNY Mellon has built most of its $50 billion alternatives business in-house.
No signs of consolidation
Despite years of record M&A activity, round table participants said there are no signs the global money management industry is consolidating. A big chunk of recent activity has involved initial public offerings and management buyouts, and in Europe the emergence of independent managers has been especially dramatic in recent years, Mr. Pakenham noted.
As a corollary to that trend, Mr. Fetting noted the growing influence of — and options open to — top-flight management teams. The degree to which those individuals are in the cat-bird’s seat today would have been “unthinkable five years ago,” Mr. Pakenham agreed.
Marsico Capital Management, the Denver-based firm with more than $90 billion in assets that’s putting down a mere $150 million in equity to buy itself back from Bank of America, is the “poster child” of that management empowerment, said Mr. McLane.
Experts said one exception to the non-consolidation trend has been the U.S. mutual fund sector, where an abundance of mutual fund operations has left ample scope for bigger competitors to gobble up subscale operations. Banks with small mutual fund families will be net sellers while other money managers as well as insurers will be net buyers, said Mr. Heaton.
