Money management was the driving force in one of two back-to-back bank deals earlier this month - the acquisition of Keystone Investments Inc., Boston by First Union Corp., Charlotte, N.C.
The deal was done to build up First Union's fund offerings and equity products, as well as building assets, said Chas Burkhart, president of Investment Counseling Inc., West Conshohocken, Pa.
With the purchase of Keystone, a mutual fund company with $11.6 billion in assets, First Union will become the nation's third-largest bank mutual fund family and the 27th largest mutual fund manager, a First Union official said.
First Union is one of the few banks to make several consecutive manager acquisitions, including the Evergreen family funds, money manager Palm Beach Investment Advisors Inc. and now the Keystone funds, noted Brad Hearsh, managing director of PaineWebber Inc., New York.
First Union reached agreement to acquire Keystone Investments for stock worth approximately $183 million and assumption of $106 million in debt. The transaction is expected to close by early 1997, subject to regulatory, shareholder and other approvals.
The two firms will remain separate. Albert H. Elfner, III, Keystone chairman and chief executive officer, will be president, chairman and CEO of Keystone Investments. He will report to Donald McMullen, First Union executive vice president and head of the bank's capital management group. William M. Ennis, president of Evergreen Investment Services, will become president of distribution for Keystone and Evergreen Investment Services and assume responsibility for sales, marketing and fund administration for both organizations.
Combining Keystone's and Evergreen's funds, First Union will have 69 mutual funds with nearly $27 billion in assets.
The $289 million price tag is valued at approximately 1.9 times total assets, said Mr. Elfner, and the deal is second only to the 1993 purchase of Dreyfus Corp. by Mellon Bank for mutual fund acquisitions by a bank.
The acquisition fits well with First Union's strategy of increasing fee-based revenue, said Mr. McMullen. He noted 96% of Keystone's funds are "long-term types of funds," not money market funds.
He also said Keystone gives First Union a bolstered presence in investments such as corporate bonds, small-capitalization equities, international funds and aggressive growth funds. Mr. Elfner noted Keystone will gain access to more value-oriented products to complement its growth orientation.
Keystone had decided to look for a partner, realizing the environment for midsized mutual fund companies was becoming inhospitable because of consolidation, said Mr. Elfner.
"We were asking ourselves whether we were appropriately sized and whether we had the appropriate resources. .*.*. We concluded that we would need help," Mr. Elfner said. First Union has "tremendous sales and marketing horsepower that they are beginning to bring to bear (in mutual fund products)," he added.
The two firms had talked unsuccessfully a year ago, and starting talking again over the summer, said Mr. Elfner. Though Keystone had talked to other suitors, First Union was still the best strategic fit, Mr. Elfner said.
Together, Keystone and First Union have a have strong shareholder and client services platform that the combined operation and any future acquisitions can access, said Mr. Elfner. He would not elaborate on potential acquisitions, but said First Union would be interested in companies with styles and products it doesn't currently have.
The other bank deal - the acquisition of Boatmen's Bancshares Inc., St. Louis, by NationsBank Corp., Charlotte, N.C. - was not driven by money management. Instead, NationsBank had spotted a strong regional banking franchise, said PaineWebber's Mr. Hearsh.
Still, the deal will create the sixth-largest bank-owned money manager in the United States and a mutual fund family with $23 billion in assets.
The combined entity will have $111 billion in assets under management - $67 billion from NationsBank (which includes discretionary assets of its private client group, mutual funds and its TradeStreet Investment Associates and Gartmore Global Partners money management units) and $44 billion from Boatmen's. The combination of the NationsFunds family - managed by TradeStreet and Gartmore Global - and the Pilot family of funds run by Boatmen's Trust Co. will have $23 billion in assets.
NationsBank will acquire Boatmen's in a cash and stock transaction expected to be worth more than $9 billion. Andrew B. Craig III, Boatmen's chairman and chief executive, will be chairman of the board of the new company; Hugh L. McColl Jr., NationsBank chairman and CEO of NationsBank, will be CEO of the merged company, which will operate under the NationsBank name. The merger is expected to close in January; shareholders will vote on the plan in December.
Mr. McColl said the Boatmen's name has a valuable reputation in the industry, so it will remain on the combined trust and asset management operations. Trust and asset management operations will be consolidated under the leadership of Bob Shell, now president of NationsBank-Tennessee, and Martin "Sandy" Galt, will remain in St. Louis as president of Boatmen's Trust Co.
"Basically from our perspective, it's business as usual," said Andrew Silton, president of TradeStreet. "We will be looking at where the synergies lie."
At first glance, both banks appear to have a wide range of product and mutual fund lines. Mr. Silton noted TradeStreet is a multistrategy fixed-income shop, while Boatmen's appears to be more of an active-duration manager in that area. Both have money market funds and municipal bond products, and both have various equity products.
The merger will not affect Gartmore Global, a joint venture owned equally by NationsBank and London's Gartmore Investment Management Co. In fact, the joint venture will benefit from the deal, said Charles G. Smith IV, president.
"Based on the figures I've seen, Boatmen's has not been as active in international investments as NationsBank, so we look at the opportunity to bring to their client base the services of Gartmore Global Partners," he said.
As for the future of banks in the money management business, outside observers expect banks to act more as gatherers of assets, using partnerships with managers, as well as piecing together smaller money management companies. One example is the recent acquisitions by KeyCorp - which acquired Society Asset Management and, later, smaller firms such as Spears, Benzak, Solomon & Farrell Inc.
"With few exceptions, there's just not that many banks that have put together a structure or motivating environments for these (fund) companies to partner with. That's the banks' challenge," Mr. Burkhart said.
The buyers' market today is made up of independent managers, holding companies such as United Asset Management and financial services companies such as Merrill Lynch & Co., Morgan Stanley Group and Goldman Sachs & Co. - all of which have done deals recently, he said.
Investment Counseling's tally of financial mergers and acquisitions at midyear found only two of the 23 U.S. firms acquired were bought by banks; 10 of the 59 acquired in 1995 were purchases by banks.
Mr. Burkhart noted banks still are having problems being recognized for their money management capabilities, and they still are trying to find ways to effectively integrate money management and banking.
