The number of money manager M&A deals in the first half of 2010 tumbled to the lowest level in nearly a decade, but that lull should give way to a pickup in activity in the coming 12 months, predicts New York-based investment bank Jefferies & Co. Inc.
Following a spate of sizable divestitures by struggling financial conglomerates in 2009, the Jefferies report tallied a scant 51 first-half M&A deals valued at a combined $6.3 billion, down 34% and 45%, respectively, from the first half of 2009. That marked the lowest number of deals since 2001 and the lowest combined value of deals since 2002, in the aftermath of the technology bubble's demise.
Amid a renewed uptick in market volatility and a raft of regulatory uncertainties, the report noted the absence of “headline-grabbing deals” in the latest half. The prior 12 months had seen nine deals completed involving firms with more than $100 billion in assets under management, capped by BlackRock Inc.'s Dec. 1 acquisition of Barclays Global Investors and its $1.8 trillion in assets.
The biggest deal in the first half of 2010 was Hinduja Group's May 10 purchase of KBL European Private Bankers SA, with $58.2 billion in client assets.
However, the report's authors predicted a rebound in activity as market conditions continue to stabilize, with independent money managers and Asian buyers leading the way.
Market conditions “are no longer right for megadeals,” but activity, in terms of number of deals, will rebound as strategic buyers step up to round out their capabilities, in terms of products, distribution channels and geographic reach, said Kevin J. Pakenham, London-based managing director and head of Jefferies' international group, in an interview.
The report predicted independently owned asset managers will move center stage, both as buyers and sellers. As buyers, after a few years spent coping with the impact of the financial crisis on their businesses, firms will be thinking again of expanding, seeking “partners to help grow their businesses and expand their platforms.” On the sell side, a “growing backlog” of aging owners, looking to address retirement or estate planning issues, should be open to considering deals.
Against that backdrop, “deal activity will recover from the current lull and overall volumes will increase, as strategically driven transactions replace and exceed the hole in deal activity left by the winding down of divestiture activity,” the report concluded.
With investor allocations to global, international and emerging markets continuing to grow, managers specialized in those areas will be the most sought-after targets, along with those that boast fixed-income expertise. Emerging markets managers with a local presence in those markets will attract especially strong interest, the report said.
But companies in Asia and the emerging markets will increasingly be acquirers as well as the acquired, the report predicts. Those buyers “will join U.S.- and U.K.-based pure-play asset managers as the predominant buyers of asset management businesses.”
Unlike U.S.- and U.K.-based buyers, corporate conglomerates in Asia will play a bigger role in the near term, building out their financial services arms, noted Mr. Pakenham. Over the longer term, the same market pressure that has seen managers spun out in the U.S. and Europe could come into play there as well, he said.
With fewer potential buyers of sizable properties, more “at-scale” firms could mull initial public offerings over the coming year, the report predicted.