MERGERS & ACQUISITIONS
July 24, 2000
Slowing growth of the mutual fund industry, a large number of funds on the market, disappointing share prices of publicly-traded asset management firms and competition from other types of financial service companies have prompted a recent spate of mergers and acquisitions, according to analysts.
Acquisitions are likely to continue, analysts said. And, if a fund company is not bought or merged with another, it may consolidate its fund line up, analysts said.
A few years from now, the mutual fund industry "could look like a barbell, where you will see some really big players, along with a group of small, niche players who want to go it alone because of their investment expertise," said Tom Tyson, a consultant with Financial Research Corp. of Boston.
Intense competition has made size and scale more important, Tyson said. It has become nearly impossible even for established fund companies with solid reputations to compete in the crowded market, he said. This has made large advertising, marketing and distribution budgets prerequisites -and is putting intense pressure on fund margins, Tyson said.
One of the main strategies fund companies are using to try to get ahead of their competition is acquiring other companies for their customer base or distribution channels, Tyson said.
Competition has also made the high-net-worth market, virtually the last mutual fund frontier, ever more attractive, said Neil Epstein, director of research for Putnam Lovell Securities of San Francisco.
"The high-net-worth area is definitely considered one of the growth areas in the industry," Epstein said. "These firms [those catering to high-net-worth individuals] are hard to build internally because it is such a relationship- and service-oriented business that you just cannot jump into."
"The most interesting acquisitions of late have been driven by this intense desire to get into this area," said Epstein. "Take a look at the Schwab/US Trust, the Alliance/Sanford Bernstein and the UBS/PaineWebber deals. Those are the three deals of the year that have been the most interesting - and they were driven by pursuit of the trust or the high-net-worth business."
But, it is more than the high-net-worth segment that fund companies are looking for in making these deals, Tyson said. He believes companies are making acquisitions to become one-stop-shopping investment emporiums.
Fund companies want to be able to offer whatever investments a retail investor or intermediary could want, and they want to be able to offer investments with established track records, Tyson said.
"Fund companies are willing to pay a price to acquire a fund with a track record that can continue to be used," Tyson said.
Competition has also driven down the stock prices of publicly-traded asset management firms, said Epstein. The possibility of purchasing a fund company at an attractive multiple has prompted many of the recent acquisitions, he said.
As long as competition lowers operating margins, asset management company stocks will continue to trade at depressed values, making a number of firms attractive takeover targets, Epstein said.
Nvest of Boston, which was acquired by CDC Asset Management, also of Boston, and United Asset Management of Boston, which was acquired by Old Mutual of London, "were dealing from positions of weakness," said Epstein.
"Like many other publicly-traded asset management firms whose stock prices are half of what they were in 1997 and 1998, their stock prices have been depressed," he said.
The mergers and acquisitions may eventually improve margins, and therefore values, as well as fees and expenses for shareholders, Epstein and Tyson said. But it will be a long time before the mergers and acquisitions of firms with only a few hundred billion dollars of assets under management will have a significant impact on the industry, Epstein said. This is why consolidation is likely to continue for the foreseeable future, he said.
"Fund companies need to stimulate growth," said Epstein. "Acquisitions are one way of doing that."