Rivals cited as possible Wells Fargo AM suitors

San Francisco-based Wells Fargo & Co. is considering a sale of its asset management unit, which has pushed a shortlist of rival firms, including Goldman Sachs Group Inc. and J.P. Morgan Chase & Co., to the forefront as potential buyers for the $578 billion manager.

In the past few months, Wells Fargo has been approached by multiple special purpose acquisition companies, or SPACs, regarding selling its asset management business, an anonymous source told Pensions & Investments in October, noting that the firm had so far rejected the proposals.

On Oct. 22, Reuters reported that the bank was exploring a sale of its asset management business, citing people familiar with the matter. Analysts at Keefe, Bruyette & Woods Inc. in October published a note in response to a news report on the sale speculation and potential suitors for the Wells Fargo unit.

"A sale of the investment management business would be in line with the ongoing strategic review that the company is doing and we would not rule out a sale, but the financial impact could be muted and potential buyers could be few," said the note, co-authored by analysts Brian Kleinhanzl and Michael Brown.

New York-based Goldman Sachs was mentioned as an attractive buyer should Wells sell its asset management business.

"The pool of potential buyers may be small since smaller asset managers may not be able to do a large deal given (Wells') AUM scale, and larger managers may not be interested to do a deal in order to simply obtain cost (savings) and increase scale but also increase execution risk," the analyst note said. "We would note that one potential buyer could be Goldman Sachs as the company is looking to grow asset management and also could look to sell additional products to (Wells') wealth management business as a strategic partnership."

On Oct. 23, Mr. Kleinhanzl said that J.P. Morgan Chase, New York, could also make sense as a potential buyer should a deal come to pass.

"There have been plenty of large banks that have talked about their ability to consolidate in the asset management space. That includes Goldman Sachs and J.P. Morgan, and I would expect those types of companies to look if (Wells' asset management business) was for sale," he said.

Spokesmen at Wells Fargo and Goldman Sachs declined to comment on the matter, as did a spokeswoman at J.P. Morgan.

Goldman Sachs' asset, consumer and wealth management units had $2.04 trillion in assets under supervision as of Sept. 30, while J.P. Morgan's asset and wealth management unit had $2.6 trillion in AUM at the time.

In recent years, Wells Fargo has lured a number of J.P. Morgan executives into high-level roles at the bank, a Wells Fargo employee who spoke under the condition of anonymity told P&I. With the influx of hires from J.P. Morgan, the source expects that Wells could be gradually preparing to sell certain units to the bank.

In June, Wells Fargo hired Barry Sommers, former CEO of wealth management at J.P. Morgan Chase, as a senior executive vice president and CEO of Wells wealth and investment management unit, which includes Wells Fargo Asset Management.

Wells also hired former J.P. Morgan executive Amanda Norton as its chief risk officer in 2018. Ms. Norton, who was chief risk officer of consumer and community banking at J.P. Morgan Chase before her move to Wells, will oversee five chief risk officers for Wells Fargo's business lines of wealth and investment management; consumer lending; commercial banking; consumer and small business banking; and corporate and investment banking under a new risk model at the company, a news release from Wells Fargo said.

Another employee at Wells Fargo, who spoke under the condition of anonymity, said Ms. Norton has been bringing much of her risk group from J.P. Morgan Chase to Wells Fargo since joining the company more than two years ago. "Wells Fargo is in a very defensive position because of scandals. She is hiring lots of top-level executives (to have) a central risk officer in each department," the source said.

John Pancari, a senior managing director and senior regional banks analyst at Evercore Group LLC, said Wells looking to sell its asset management business is "not out of the realm of possibility, because (CEO) Charlie Scharf and the management team appear to be evaluating the business space and are still conducting a thorough review of the (company's) business lines … and that may result in the decision to exit additional businesses."

In 2017, Wells sold its commercial insurance business to Valhalla, N.Y.-based USI Insurance Services. In April 2019, Wells also entered into an agreement to sell its institutional retirement and trust business to Principal Financial Group in Des Moines.

"(Mr. Scharf) did indicate in the past that they wanted to focus on serving their core customer base on the consumer and corporate side. I can't rule out that (asset management) could end up being viewed as not 'core' to their business base," Mr. Pancari added.

Jim Cooper, managing partner at executive search firm Concentriq LLC, said Goldman "would be a logical fit as a potential suitor" for Wells Fargo's asset management business.

"They have been very public about their intentions of pursuing acquisitions that could help the firm push into new growth areas or expand existing businesses. Their recent acquisitions of United Capital (Financial Advisors) and Folio Financial demonstrate that commitment, though a deal of this magnitude would be meaningfully more accretive," Mr. Cooper said.

Due to the size of Wells Fargo's asset management unit and the large acquisition costs a deal would entail, Mr. Cooper said "it would seem likely that only a select group of asset managers would be able to make the deal happen." In addition to Goldman, Mr. Cooper sees J.P. Morgan, Bank of New York Mellon Corp., Fidelity Investments Inc. and Prudential Financial Inc. as potential suitors large enough to consider Wells' unit.

Leadership at both J.P. Morgan and Goldman Sachs have "already stated that asset management is an attractive area to grow," according to Kenneth Leon, director of equity research at CFRA Research Inc., New York.

While asset management may be an attractive business, Wells has other priorities right now, such as cost cutting and investing in technology as well as the firm's compliance and regulatory functions, Mr. Leon said.

"They have to make some significant technology investments and that will go hand in hand with cost reductions," he said.

While Wells Fargo's assets under management grew over the year ended Sept. 30, much of the growth was attributable to net inflows into money market funds and gains in the stock market, Mr. Leon said. If management at Wells is considering selling the unit, it may be because the firm "cannot be a top five player" in the industry.

"If you're a major (traditional) player, you want to see inflows into active equity and fixed income," Mr. Leon added.

According to P&I Research Center data, Wells Fargo Asset Management was the 37th largest money manager by total worldwide AUM as of Dec. 31.

Goldman CEO David Solomon said during the firm's Oct. 14 earnings call that leaders "certainly are aware of the continued consolidation that's going on in the asset management industry." As merger and acquisition opportunities come up, the firm will "consider them if we think they can enhance our franchise and allow us to expand the strength of our franchise and our ability to serve our institutional clients, and also individual clients to our wealth business," Mr. Solomon added.

In October, Morgan Stanley, New York, agreed to acquire Boston-based Eaton Vance Corp. in a $7 billion deal that will create a money management firm with nearly $1.2 trillion in assets under management. And there is also speculation that Invesco Ltd., Atlanta, and Janus Henderson Group PLC, London, could pursue a tie-up, after New York-based activist hedge fund Trian Fund Management LP took 9.9% stakes in each firm, signaling that the two might explore a combination together or separately with other asset management firms.

Rumors of Wells selling its asset management unit come as the bank has been considering cutting up to 66,000 jobs, sources told P&I in September. The company said a cost-cutting effort was underway, but it had not set targets