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Foreign Buyers Fuel Acquisition Pace, Prices


Overseas buyers of U.S. asset managers have pushed the number and prices of mergers and acquisitions to record levels this year.

There have been sixty-five deals as of Dec. 11 of this year, according to SNL Securities of Charlottesville, Va., a financial research company. In 1998, when the previous record for the number of deals was set, there were sixty-two deals and in 1999, there were fifty-two, according to SNL. Even more notable is the dollar value of the deals. The value of deals as of Dec. 11 of this year was $12.67 billion, up from $6.66 billion for all of 1999, according to SNL. The value of the deals and the prevalence of foreign companies buying into the U.S. market, made 2000 a standout year for mergers and acquisitions, according to industry analysts.

"The valuation of asset managers was pushed up this year so it's not at all surprising that the dollar amount is higher," said Jim Folwell, a consultant with Cerulli Associates of Boston.

"Until this year, a lot of those stocks [of asset management companies] hadn't been doing very well," said Scott Cooley, senior fund analyst at Morningstar of Chicago. "As they go up, it encourages acquisition as well as brings the dollar value of the deals up."

Six of the ten largest deals since 1996 occurred in 2000. Five of those were over $1 billion deals.

"In terms of why the dollar amount is higher, there are fewer and fewer fund companies left out there and that's inducing some companies to pay higher premiums than in the past," said Kunal Kapoor, senior fund analyst at Morningstar.

Another factor contributing to the higher values might be the increase in the number of potential buyers coming to the U.S. market. The acquisition of asset management firms by foreign companies has increased, according to analysts. European companies were the buyers in the two largest deals of the year. Allianz Group of Munich, Germany, Europe's second largest insurance company, paid $1.92 billion for Nicholas-Applegate Capital Management of San Diego in October. And Caisse des Depots et Consignations of Paris bought Nvest of Boston in June for nearly $1.87 billion. There was a foreign acquirer in five of the eight largest deals this year.

"I think the most important trend for this year's fund mergers is the huge number of European financial companies buying into the U.S," said Edward Rosenbaum, director of research at Lipper of Summit, N.J. "One reason is that as confidence of the Euro waned, companies wanted to buy U.S. dollar denominated revenue. The second is that the U.S. market is extremely competitive and so it's much easier, although still not easy, to buy a share [of the market] by buying a company that already exists, than starting yourself and trying to compete with companies already entrenched in the marketplace."

It is not yet clear whether the strategy of these overseas acquirers will be successful. Although the competitiveness of the industry is one of the reasons these foreign companies bought into the market rather than starting from the beginning, it also will make it more difficult for them to have success, according to Rosenbaum.

"It's tough and getting tougher because of the consolidations," he said. "So, the jury's still out with regard to the prospect for success of this kind of move."

"I think that foreign ownership over time, is going to have a big impact on the globalization of the asset management industry," said Folwell of Cerulli. "It opens up channels of distribution, not only for foreign companies in the U.S. market, but also for those acquired asset management companies to utilize the physical presence the foreign companies may have in other markets."

Another reason for the increase in mergers is the fact that it is becoming increasingly difficult for small asset management companies to survive, said John Davidson, chief investment officer of Orbitex Management of New York.

"I think that we've seen organizations that have felt they needed to become greater in size in order to increase profitability," said Davidson. "Investment management has been a very good business and more and more financial institutions need to acquire that business and more of it."

"I think it's becoming increasingly difficult for small companies; there's marketing issues, managing issues, etc.," said Cooley of Morningstar. "Small shops are having a tough time, especially those that are specialized or have one kind of investment because if there is any drop off in that area, they are hurt. Investors aren't very patient these days."

Acquisitions are likely to continue, according to analysts. The competitive landscape, however, has not changed very much due to the mergers this year, said Avi Nachmany, director of Strategic Insight, a mutual fund research and consulting firm in New York. That is because the number of asset managers has not changed significantly. They have merely been acquired and left intact.

That may be the case with the companies, but the increase in acquisitions has an effect on investors.

"The mergers don't seem to work out too well for investors," said Kapoor of Morningstar. "Sometimes that's the case but not often. Usually, expenses are raised.

"What's been the most interesting thing is the movement back to load funds. We've seen companies acquire no-load shops and slap loads on the funds and I think that's one big impact these mergers have had on the industry."