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Defined contribution

Many acquisitions lose luster over time

Tight margins, quest for value cited as big reasons for eventual turnover

Ross Bremen
Ross Bremen sees fee compression as an albatross around the necks of record keepers.

Companies that once swallowed up DC record keepers and other benefits businesses to diversify, expand and increase shareholder value are now regurgitating them to consolidate — again to increase shareholder value.

The latest example is Aon PLC, which announced Feb. 10 it was selling its record-keeping and other benefits-related businesses to a private equity fund run by Blackstone Group LP, New York. Aon acquired these businesses through its 2010 purchase of Hewitt Associates.

The Aon transaction is the latest example of companies dropping record keeping as they refocus their strategies. Among those conducting sales or spinoffs in recent years were Xerox Corp., Mercer, J.P. Morgan Asset Management (JPM), BMO Financial Group, New York Life Insurance Co. and Hartford Financial Services Group.

The activity isn't surprising, defined contribution plan experts said, because record keepers have been besieged by plan executives clamoring for lower fees. Record keeping is a business in which scale is important and where companies must be willing to continue investing in services and technology.

“Sponsors want more tools and services,” said Ross Bremen, a partner at NEPC LLC, the Boston-based investment consulting firm. “Record keepers need to find ways to make the economics work.”

In a survey published in September, NEPC reported that 82% of DC plan executives said they had renegotiated record-keeping fees since 2013. “This may have been a high-margin business in the 1990s, but fees have become compressed in the last decade,” Mr. Bremen said.

“Margins are really tight,” added Lew Minsky, president and CEO of the Defined Contribution Institutional Investment Association. “There has been a myopic focus on fees in the retirement space. There needs to be a robust discussion on fees.”

Judging from recent deals, the allure of record keeping is relatively short-lived. Many major players, including Aon and Xerox, that bought and/or expanded record-keeping operations held them for less than 10 years.

DC consultants say the continuing changes in the record-keeping arena shouldn't be a cause for panic. “Sponsors typically avoid knee-jerk reactions,” Mr. Bremen said. “Every situation is different. There are some situations where nothing changes.”

Shouldn't be shy

And sponsors shouldn't be shy about asking record keepers about their business plans. “I'm sure that one of the first steps for record-keeping clients will be to engage in a dialogue — either directly or with the help of their advisers and consultants — with their existing service partner to assure that the commitment level to the business relationship remains the same,” Mr. Minsky said.

“We've seen through the last several years an ability for the record-keeping business to remain largely intact after it moves from one ownership structure to another,” he added. “I suspect it will be the case with this one,” referring to the proposed Aon transaction.

“Clients have a long-term view,” said Jeffrey Snyder, vice president and senior consultant at Cammack Retirement Group Inc. “We tell them to take a measured approach. Don't do anything rash.”

When a record keeper merges, is acquired or sold, a DC plan “can expect to receive direct communication prior to the official press release from their day-to-day contact or relationship person,” Mr. Snyder explained. “If there is a consultant/adviser involved, they also receive a heads-up call” to begin planning for the transition and the providing of post-deal services.

“Fees aren't typically discussed or negotiated because the purchaser buys the business intact and under the current terms of the agreement,” he said. “Fees would or could be discussed as part of a formal RFP process.“

Mr. Snyder predicted the record keepers most likely to be sold are those with fewer than 1 million participants. “It's a scale business,” he said, noting the firms face ever-rising compliance and technology costs.

Aon executives cited a low profit margin as a reason for selling the various businesses to Blackstone. “This is a lower revenue growth, lower margin business for us,” said Christa Davies, Aon's chief financial officer. She made her comments during a conference call with analysts on Feb. 10, according to a transcript. After the deal closes, Aon will have “higher revenue growth, higher margins, and a higher return on capital,” she said.

Blackstone will pay $4.3 billion, plus up to another $500 million depending on performance. The deal is expected to close during the second quarter.

When Aon announced its purchase of Hewitt Associates, it touted the creation of ”a global leader in human capital solutions, benefiting clients, associates and stockholders in several ways,” said a July 12, 2010, news release. That deal closed in October 2010.

The Aon Hewitt record-keeping unit is among the largest, according to a Pensions & Investments survey based on data as of Sept. 30, 2015. It was fifth when ranked by assets under management with $377.15 billion and fourth by total participants, with 5.74 million participants among its 450 clients.

Aon changed its mind in less than seven years — about the same amount of time it took for Xerox Corp., Norwalk, Conn., to revise its strategy by spinning off DC record keeping and other businesses into what is now Conduent Inc.

Xerox got into record keeping in early 2010 via its purchase of Affiliated Computer Services Inc., a specialist in business process outsourcing. “A game-changer for Xerox, acquiring ACS helps us expand our business and benefit from stronger revenue and earnings growth,” Ursula Burns, then-CEO of Xerox, said in a Sept. 28, 2009, news release.

However, in January 2016, Xerox said it would split into two companies — document technology and business process outsourcing, which includes DC record keeping. The reason was “to drive shareholder value,” Ms. Burns said in a news release.

Xerox conceded the two companies “serve distinct client needs, have different growth drivers and require customized operating models,” the news release said.

The spinoff took effect Jan. 3, 2017. Conduent ranked ninth by assets in P&I's survey, with of $185.09 billion, and 11th in number of participants, with 2.66 million among its 151 clients.

This article originally appeared in the February 20, 2017 print issue as, "Many acquisitions lose luster over time".