Mutual Funds Are Prime Takeover Targets
March 29, 1999
NEW YORK The value of mergers and acquisitions among investment management companies, including mutual funds, has increased nearly seven-fold in the past eight years and it is expected to continue to grow at a robust pace.
The number of deals grew from 26, worth $800 million in 1990 to 59, valued at $5.4 billion in 1998, according to Putnam, Lovell, de Guardiola & Thornton, a New York investment banking firm that specializes in the investment management industry.
Mutual fund companies are prime acquisition targets, above all, because they are very profitable companies, agreed panelists at a recent East Coast regional meeting of the National Investment Company Services Association (NICSA).
Putnam, Lovell, de Guardiola & Thornton projects a 12 percent compound annual growth in managed assets through 2001, said Mary Pat Thornton, a principal of the firm which has brokered many investment management company mergers. The firm expects revenue growth to slightly outpace asset growth attaining a 13 percent compound annual rate in the three year period.
"Long-term demand will remain high because money management fundamentals remain compelling," Thornton said.
"Certainly there is a sense that acquisition market multiples for mutual funds have been healthy," said Lee Chertavian, senior vice president with Affiliated Managers Group, a Boston-based investment management holding company. "And they've enjoyed higher levels of profitability than they've ever seen." With its anticipated acquisition of the Managers Funds of Norwalk, Conn., AMG will have 14 affiliates with $65 billion of assets under management.
Thornton said two prime examples of asset management companies buying mutual funds for their cash flow were Affiliated Managers Group's acquisition of Tweedy Browne & Co. and Phoenix Duff & Phelps' acquisition of GMG/Seneca Capital Management, both in 1997.
Mutual fund companies' desires for diversified portfolios and a diversified client base to hedge risk in an increasingly volatile market have also driven the pace of acquisitions, the panelists said.
"Volatility exposes non-diversified managers to broad market swings, driving companies to round out their product line," Thornton said. That means that even mutual funds renown for a certain expertise will begin to look to other investment styles and geographic regions, she said.
A diversified portfolio also means diversified clients and a diversified source of assets, Thornton said. This also reduces risk. Franklin's acquisition of Templeton in 1992 is one example of a mutual fund acquiring another to diversify its offerings, said Chertavian of AMG.
"Franklin was known as more of a bond shop, and Templeton was more equity-based, so the merger of these two companies was very complementary," Chertavian said.
Increasing competition in the mutual fund business is also driving many companies to expand their products and distribution networks through mergers or acquisitions, said Thomas Ayers, a partner with Deloitte & Touche who has conducted due diligence for the mergers of many mutual fund companies. Mellon Bank Corp.'s acquisition of Founders Asset Management and Commerzbank A.G.'s acquisition of Montgomery Asset Management, both in 1997, are two examples of asset management companies being acquired specifically for their distribution capabilities, he said.
There are also the benefits of economies of scale from two businesses merging to form a larger entity, Ayers said.
Customers' increasing desire for convenience is also driving some of the mergers between mutual fund and other investment advisory companies, panelists said. Many customers like the convenience of one-stop shopping at a merged entity that can offer many investment choices, a wealth of research and the latest in technology.
"These larger firms often have [the] capital resources and technology that smaller firms sometimes don't," Ayers said. For example, such resources can enable a firm to produce more detailed and timely customer statements, Thornton said.
AMG has found that customers are also concerned about whether the managers of their portfolios will remain in place, Chertavian said. Takeovers can mitigate the problem because a larger company is more apt to have the resources to provide incentives that will persuade managers to stay put, he said.
Customers of the companies AMG has acquired have responded favorably to its acquisitions because they are confident a larger holding company can ensure continued strong performance, Chertavian said. And customers know that working with a prestigious investment management firm capable of attracting and maintaining top portfolio managers is critical in an industry so dependent on the talents of just a few managers, he said.
Retention of star portfolio managers is critical and takeovers can enable mutual fund companies to retain key people by offering them equity ownership in the new entity, he said.
"Companies need to address the issue of succession planning," he said. "Customers are demanding this."
Yet another driving force behind acquisitions has been banks and insurance companies looking for the steady, fee-based revenue stream that mutual fund companies can provide, the panelists said.