Executives from Mercer Inc. and Callan Associates Inc. say their pending merger will spawn the undisputed heavyweight of U.S. investment consulting, but competitors predict the giant could be playing more defense than offense for the next few years.
In announcing their surprise engagement on Feb. 17, following almost a year and a half of discussion and negotiation, Mercer and Callan executives made the case for domination.
Combining two of the industry's most experienced nationwide teams of consultants and researchers will create an organization that's greater than the sum of its parts, Jeffrey Schutes, the Chicago-based head of Mercer's U.S. practice, said in a joint interview with other top executives from the firms.
Having scores of top consultants and more than 100 of the most experienced researchers in the industry will allow the new Mercer to maintain more extensive manager databases and conduct more cutting-edge research than competitors, the executives argued.
This was an “opportunity to get incredible people” that Mercer just couldn't pass up, said Mr. Schutes. There are no plans to squeeze out efficiencies through layoffs, said executives from both firms.
With Mercer and Callan having roughly 10% apiece of the U.S. market, the combined entity would become the largest player in a fragmented investment consulting industry.
People familiar with the deal said privately held Callan's 65 shareholders will be paid out over three years, while all 175 consulting professionals will be asked to sign a three-year contract under Mercer, a division of New York-based insurance giant Marsh & McLennan Cos. Inc. Executives from both companies declined to comment.
The move provides a way for senior officials at Callan — including Chairman and Chief Executive Officer Ronald D. Peyton — to cash out.
Mercer and Callan executives said the merger would give them the scale needed to compete more effectively. Gregory C. Allen, Callan's president, said his firm had “struggled over the years to grow beyond 10%” of the fiercely competitive U.S. market.
Industry veterans said Mercer would command a sizable chunk of the U.S. market, at more than 20% by some measures, commensurate with its scale in other major markets around the world. Mercer has more than 25% of markets such as the U.K. and Australia.
Richard E. Graf, president of Marco Consulting Group Inc. in Chicago, said the merger could prove “a brilliant move,” creating a “mega-consultant” with the resources to do creative research on a “myriad of sophisticated products,” while providing senior executives at Callan an exit.
Still, competitors said being a behemoth could have its downside. Timothy R. Barron, president and chief executive officer of investment consultant RogersCasey Inc., said size can bring complexities, making it more difficult, for example, to decide which clients will get to allocate money to highly rated, capacity-constrained strategies.
Mercer officials said they have nothing to announce at this point regarding which Mercer and Callan executives will be picked for leadership posts in the combined entity. Market watchers said those will be among the trickiest near-term decisions to be made.
Investment consultant mergers are few and far between because it's difficult to combine culture-heavy, people-intensive businesses, sources said. One consultant relations executive at a money management firm, who requested anonymity, said he believes the merger will work. Still, “if I were a competitor, this would be a good time” to try to pick off clients and staff, he added.
