Power Financial Corp. appears to be falling short in its bid to acquire DWS Americas, with that U.S. mutual fund family's parent, Deutsche Bank, focusing on bids that cover all but its European and Asian mutual fund businesses.
Investment bankers, who declined to be named, said as of Feb. 17, Guggenheim Partners and Macquarie Group were the leading bidders for that broader asset management business. Those units are Deutsche's real estate-dominated RREEF Alternatives affiliate, its DB Advisors institutional arm and its insurance asset management business, in addition to the U.S. piece of DWS Investments.
While Power might be down, it's too soon to say it's out, said one banker. The banker said it's unclear whether the all-in bids will satisfy Deutsche Bank, leaving open the possibility of Power getting a second bite of an ala carte apple.
Whatever the outcome of Deutsche Bank's auction, Power Financial's pursuit of DWS shows that executives at the Montreal-based firm are ready and willing to add more chips to a four-year bet on the U.S. asset management market — staked by its $3.9 billion, mid-2007 purchase of Putnam Investments, Boston — that has yet to contribute to the conglomerate's bottom line.
Adding DWS' $51 billion in mutual fund assets to Putnam's $125 billion in assets under management as of Jan. 31 would have lifted Putnam above the $150 billion mark its president and CEO, Robert L. Reynolds, cited in recent analyst calls as a threshold of profitability for the firm.
Fourth-quarter results reported on Feb. 9 by Power subsidiary Great West Lifeco showed Putnam — with assets of $116.7 billion as of Dec. 31 — delivering core earnings of less than $1 million for the period, on fee and net investment income of $182 million.
That amounts to an operating margin of 0.5%, better than Putnam's -10% margin when equity markets plunged in the third quarter, but still markedly low in an industry where competitors often boast margins of 30% to 40%.
One Toronto-based analyst who declined to be named said Putnam's infrastructure and cost structure, while slimmer now than when AUM peaked at more than $400 billion in early 2000, remains appropriate for a company with far greater assets, which accounts for much of the company's unusually low operating margins.
The markets Putnam is targeting, such as retail and 401(k), demand heavy spending on infrastructure just to come to the table, added a veteran money manager consultant, who likewise declined to be named. While that could be weighing on Putnam's operating margins at current AUM levels, it also could mean that any rebound in assets under management would provide a healthy boost for those margins, he said.
Thomas MacKinnon, a Toronto-based analyst with BMO Capital Markets, said officials at Putnam and Great West Lifeco have suggested that Putnam's margins could rebound to 10% or so as AUM rises toward $150 billion and improve further to between 15% and 20% as assets climb toward $220 billion.
On the fourth-quarter conference call, a healthy chunk of the analysts' questions focused on Putnam's prospects for becoming profitable and whether the money management firm was likely to get there organically or through acquisitions.
Mr. Reynolds expressed full confidence that Putnam could reach the goal through organic growth.