International deals rise in 2013; activity in U.S. falls

Mergers and acquisitions activity among money managers reversed in 2013, as non-U.S. transaction values rose from 2012, while U.S. money manager activity declined.

Transaction value of announced deals involving U.S.-based money managers was $5.6 billion in 2013, down 27% from $7.7 billion in 2012 but up 4% from $5.4 billion in 2011, according to New York-based investment bank Cambridge International Partners.

Deals involving the purchase of non-U.S.-based money managers totaled $16.6 billion in 2013, an increase of 48% from the prior year's $11.2 billion in transactions and up 39% from $11.9 billion in 2011.

When looking at the top 10 ranked by price, money management M&A deals over the course of 2013, only one transaction — the initial public offering by New York-based Apollo Global Management — was for a U.S. company.

John Temple, president of Cambridge, said in a telephone interview that despite U.S. activity having declined in 2013 both in terms of deal volume and value, there is still “a steady improvement since the financial crisis.”

Divestitures of money management units by banks, insurance companies and securities firms accounted for 46% of the number of non-U.S. transactions and 85% of the value of foreign transactions. The divestitures from the largest five non-U.S. banks — Rabobank, Lloyd's Banking Group, Banco Santander, Dexia and BBVA— accounted for 63% of all foreign transaction value, or $10.4 billion out of $16.6 billion in non-U.S. money manager M&A activity.

European bank divestitures, coming from a need to raise capital for banks' core banking activities, continue to dominate transaction activity outside the U.S. The primary reason transaction activity rose in Europe in 2013, according to Mr. Temple, is the European banking industry continues to be undercapitalized and under a great deal of capital stress. With regulations such as Basel III requiring European banks to raise more capital, many are focusing on core businesses and divesting their non-core businesses, including money management.

“This has been a theme ever since the financial crisis. But it's probably peaked; I don't think there are very many businesses left to be sold,” Mr. Temple added about the foreign money management arena.

By comparison, U.S. bank and insurance company divestitures weren't so important a factor in 2013. In the U.S., divestitures accounted for 21% of the number and 25% of the total value of U.S. transactions.

This is because banks in the U.S. are now mostly capitalized and after several years of cost cutting, the money management industry is now looking for growth again, according to Mr. Temple.

In addition, acquisition activity in the U.S. is very focused, as demonstrated by AllianceBernstein LP acquiring W.P. Stewart & Co. Ltd. for its equities offerings, Amundi acquiring Smith Breeden Associates Inc. for its fixed-income capabilities and Aberdeen Asset Management PLC buying Artio Global Investors Inc., also for its fixed-income strategies.

In the U.S., the three biggest divestitures were to private equity firms. Genworth Financial Inc., Richmond, Va., sold its Genworth Wealth Management to a venture between Aquiline Capital Partners LLC and Genstar Capital LLC for $412 million. SunTrust Banks Inc., Atlanta, divested its RidgeWorth Investments to Lightyear Capital LLC for up to $265 million. Finally, KeyCorp, Cleveland, sold its Victory Capital Management Inc. to Crestview Partners for $246 million.

Private equity firms and managers of private equity funds, many of which are looking to diversify into other alternative assets such as real estate and credit, are making the most out of this current cyclical divestiture spree.

Because acquisition activity in the U.S. is typically single-strategy focused, there was a dearth of interest in multiproduct platforms from strategic buyers in 2013. So in the absence of strategic buyer interest in broad capabilities, private equity firms could step in and be competitive. In the past three years, private equity has become a major buying factor — Cambridge counted 18 transactions globally valued around $2.7 total in 2013 in which private equity was the buyer.

“The strategic activity in the U.S. is mostly around specific products or distribution capabilities and not around multiproduct platforms,” Mr. Temple said. “Strategic acquirers aren't looking for multiple capabilities; they're typically much more focused.”

So, in the absence of strategic-buyer interest, private equity firms can step in and be competitive.

Although divestiture activity exclusively within the U.S. — that is, the selling of one U.S.-based money manager to another U.S.-based firm — was relatively low in 2013, the purchase of non-U.S. companies by U.S. companies went up substantially. A few notable examples include New York-based MetLife Inc. buying Santiago, Chile-based AFP Provida SA; New York-based BlackRock Inc. buying London-based MGPA; The Blackstone Group LP, also New York, acquiring Strategic Partners from Zurich-based Credit Suisse AG; and New York Life Investments buying Dexia Asset Management from Brussels-based Dexia Group.

“U.S. companies are looking to continue globalizing,” Mr. Temple said. “As part of their growth strategy, they're adding products and distribution channels. One of the distribution channels they're looking to add is international.”

In contrast, the investment of non-U.S. companies into the U.S. was down significantly in 2013.

The year saw only four significant M&A transactions in which foreign firms bought U.S. companies: Toronto-based Canadian Imperial Bank of Commerce buying Atlantic Trust Private Wealth Management from Atlanta-based Invesco Ltd.; Aberdeen, Scotland-based Aberdeen Asset Management acquiring New York-based Artio; Paris-based Amundi purchasing Durham, N.C.-based Smith Breeden; and Montreal-based Fiera Capital Corp. taking over Bel Air Investment Advisors LLC as well as its affiliate Bel Air Securities LLC, both Los Angeles.

Canadian banks were big buyers in the money management sector in 2013. During the past year, for example, Scotia Bank acquired 50% of AFP Horizonte, Lima, Peru, as well as the previously mentioned transaction of CIBC buying Atlantic Trust.

“(Money management) is a very successful business in Canada,” Mr. Temple said. “The big five Canadian banks dominate the investment management space. They're aggressive acquirers.”

Because the Canadian market is fairly small, and because the top five Canadian banks are well capitalized and looking for growth, they're looking to expand outside the country.

Looking forward, Mr. Temple doesn't see the decline in value of transactions in the U.S. market in 2013 as significant. Instead, he sees that the transactional environment within the U.S. is continuing to improve.

“We think the number and value in 2014 will reflect a gradual improvement,” Mr. Temple said.

In the foreign markets, Cambridge projects the divestiture theme has peaked in Europe and the number of large European divestitures will go down in 2014 — which is not to say there won't be any major transactions in Europe to take place over the course of the year.

“We're also seeing Japanese buying interest coming back as Japan's economy strengthens,” Mr. Temple added.