NEW YORK For the second consecutive year, merger-and-acquisition activity in the money management industry climbed to new heights in 2007, both in the number of deals completed and their total value.
There were 195 deals valued at a combined $52.8 billion last year, compared with 136 deals worth a total of $44.5 billion in 2006, both previous high-water marks for the industry, according to New York-based investment bank Cambridge International Partners Inc.
The roughly 19% increase in deal value is astounding, said Paul Holt, president of Cambridge, considering the year went by without an actual megadeal, such as BlackRock Inc.s acquisition of Merrill Lynch Investment Advisors in 2006, which was valued at $9.7 billion and accounted for almost one-quarter of that years total deal value.
The largest transaction last year in terms of value was the $6.3 billion acquisition of Nuveen Investments Inc., by Madison Dearborn Partners LLC of both of Chicago. That deal, which was announced in June, accounted for 12% of the years overall deal value.
Madison Dearborn teamed up with a consortium of financial institutions to buy out Nuveen, formerly a publicly traded company, in the process creating the largest money management buyout ever. Prior to Nuveen, the $1.4 billion management-led buyout of Jupiter Investment Management Group in London, backed by TA Associates Inc., was the previous high for a buyout and that deal occurred just three months before the Nuveen agreement.
You saw a number of very significant deals, of varying form, spread out across the industry at a rate that we have never experienced before, said John Temple, managing director at Cambridge. And many of these deals involved alternative investment firms, also more than we have seen in the past.
In fact, there were 13 transactions valued at more than $1 billion last year, the most in a single year, Mr. Temple pointed out. These deals were largely fueled by alternative investment firms, many of which went public or were acquired during the year.
The June initial public offering of the Blackstone Group LP, New York, ranked as the largest alternatives deal of 2007, with a value of roughly $4.1 billion. Two other alternatives firms GLG Partners Inc. and Och-Ziff Capital Management LLC, both in New York also went public during the year, with transactions valued at $3.4 billion and $1.2 billion, respectively, placing them in the top 10 largest deals of 2007.
Also in the alternatives world, BlackRock acquired New York-based hedge fund-of-funds manager Quellos Group LLC in June for more than $1.4 billion, which ranked as the largest-ever acquisition of an alternatives firm. It was the eighth largest deal of 2007 in terms of value.
65 alternatives deals
In total, there were 65 transactions involving alternatives firms last year, surpassing the previous high of 45 deals in 2006. At the same time, the value of alternatives deals added up to more than $26 billion more than half of the total value of money management M&A in 2007 and more than five times the total value of alternatives transactions in 2006.
While these levels might not be sustainable, the considerable role of alternatives in M&A activity has become a new industry norm, said Ben Phillips, managing director at New York-based investment bank Putnam Lovell, a division of Jefferies & Co.
Mr. Phillips pointed out that while alternative investment firms make up roughly 8% of the industrys total assets under management, they are also responsible for more than 20% of the industrys revenue and Putnam Lovell estimates that figure could grow to more than 50% in the next five years.
Deal flow will increasingly involve alternatives firms, Mr. Phillips said. There are still a number of long-term trends that are encouraging the move to alternatives, and money managers will continue to build their businesses accordingly.
Mr. Phillips added the pipeline for alternatives deals is still robust, as the vast majority of the recent transactions have been motivated by owners looking to create liquidity. Convergence between traditional and alternative managers deals such as BlackRock-Quellos or JPMorgan-Highbridge (a 2004 acquisition) will be a much more significant theme in the near future, said Mr. Phillips.
Mr. Holt said that another notable characteristic of last years M&A volume is the clear difference between the activity in the first half of 2007, when deals totaled about 70% of the years values, and the second half.
While the year was record-breaking, there were really two distinctly separate bull and bear markets defining the year, he added. The first half of the year was very much a bull market, while the second half was clearly marked by the implications of the subprime issues and credit crunch.
The second quarter was particularly strong, when 49 deals worth $25.5 billion were recorded. To put that quarter into perspective, consider that there were only two full years in the industrys history that had higher deal values than this second quarter, said Mr. Holt. That appears to have been the market top.