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Consultant consolidation

Mercer’s EAI buy just the beginning

Gaining: Jeffrey Schutes said EAI extends Mercer’s reach with endowments and foundations.

Key step in plan to become the dominant investment consultant

Mercer Investment Consulting Inc.'s May 26 announcement that it will acquire the bulk of rival Evaluation Associates Inc.'s business from Milliman Inc. puts the firm at the forefront of what Mercer executives say could be a wave of industry consolidation over the coming years.

While Mercer was the main mover behind the deal — the company's second this year after buying St. Louis-based Hammond Associates in January — for this latest acquisition it worked in tandem with San Francisco-based Callan Associates. Callan will acquire the 10 public defined benefit clients among the 115 institutional investors Evaluation Associates serves.

Executives at Mercer and Callan couldn't immediately specify how much of Evaluation Associates' roughly $200 billion in assets under advisement come from those 10 public funds.

Mercer announced in October it would exit the U.S. public fund arena, resigning accounts with a combined $240 billion in assets under advisement, following lawsuits filed against the firm's actuarial consulting affiliate by public fund clients.

In an interview, Jeffrey Schutes, Mercer's U.S. investment consulting leader, said acquiring the Evaluation Associates business will help extend the major beachhead Mercer obtained in the endowment, foundation and wealth management segments of the market with its Hammond acquisition, advancing his firm's goal of becoming the dominant competitor in the fragmented U.S. investment consulting market.

Asked whether Mercer wants a certain share of the U.S. investment consulting market, Mr. Schutes said the most widely used yardstick — assets under advisement — might prove less relevant with Mercer's withdrawal from a U.S. public DB segment.

In second place

According to Pensions & Investments' latest survey of investment consultants, Hewitt EnnisKnupp was the biggest investment consultant by U.S. institutional tax-exempt assets under advisement as of June 30, 2010, with $2.629 trillion, followed by Mercer, with $1.2 trillion.

By other measures — whether it be in terms of the number of clients or industry revenues — Mercer is shooting for a market share of 20% to 25%, Mr. Schutes said.

Mercer is looking to put “space between us and the second (biggest) player” in the U.S. market, he said.

In February 2009, the company sought to reach that goal with one giant step when it announced it would acquire Callan, but the deal was abruptly called off a little over a month later. Mercer and Callan executives have refused to say why they walked away.

The move by both firms to acquire different segments of Evaluation Associates' business suggests that the failure of the Mercer- Callan deal left no hard feelings.

In a separate interview, Gregory C. Allen, Callan's president and director of research, said the mutual respect the two firms retain for each other following their merger discussions left the door open for the cooperation that led to the EAI deal.

Mr. Allen said after Mercer decided to exit the public DB business, executives there had suggested the possibility that working together could provide a less disruptive means of pursuing future consolidations, and the Evaluation Associates situation came up fairly quickly — a little over a month ago.

Mr. Schutes refused to rule out the possibility that the “alliance” between the two could play out again, as looming generational changes at consulting boutiques and the need for ever-more resources to compete put more firms in play.

If Mercer executives are determined to garner market share, Callan's Mr. Allen struck a more nuanced tone. With public funds accounting for 30% to 40% of Callan's total business, the firm was open to looking at the opportunity, but it only moved forward on the Evaluation Associates deal after concluding that Callan's Northeast U.S.-based consultants had the capacity to take on those new clients, he said, adding. “growing too fast creates just as many problems as it solves.”

Some smaller competitors predicted Mercer's growth strategy won't leave them at a disadvantage.

Robin S. Pellish, CEO of Norwalk, Conn.-based Rocaton Investment Advisers, said succession issues could well lead to further industry consolidation, but her firm's model — an employee-owned, nimble, “high-touch” investment consultant to, at present, 60 sophisticated institutional investors — won't be threatened. “Size alone doesn't help. In some cases, size can inhibit your ability to be effective,” she noted.

It's a very open question whether “getting bigger is going to be better” for either Mercer or its clients, said Jeffrey J. MacLean, president and CEO of Seattle-based Wurts & Associates. He said boutiques such as his could prove to be beneficiaries of Mercer's quest for scale.

Richard E. Graf, a Houston-based partner with Corinthian Cove Consulting who previously served as president of Marco Consulting Group, said Evaluation Associates' “solid niche” in the Northeast could prove to be a smart pickup for the broader Mercer organization, with cross-selling opportunities in areas such as actuarial, management and compensation consulting. For investment consulting alone, it remains to be seen whether size — and its attendant tendency toward bureaucracy — will prove a plus or a minus, he added.