Fund Consolidation Continues at Lower Values
June 25, 2001
While the number of mergers and acquisitions between investment advisors this year has kept up with the fast pace of 2000, the dollar amounts of those deals is down dramatically.
The deal value of the 38 M&As announced in the first half of last year totaled $8.8 billion, according to SNL Securities, a financial research company in Charlottesville, Va. So far this year, 37 deals have been announced, but with a total deal value of only $4.2 billion, according to SNL.
The main reason for the lower deal values is the market downturn, according to Kunal Kapoor, a senior fund analyst with Morningstar. Firms have been valued much lower this year than in 2000 and those dollar amounts are, in part, a reflection of assets under management being down substantially, he said.
The effect of the market downturn on the average deal value is intensified because the lower valuations might stop larger firms that are looking to sell from doing so right now, according to Scott Cooley, an analyst at Morningstar.
"The valuations placed on these deals have been lower than in the past, so if you're a bigger corporation, especially if you're publicly traded, there might be a reluctance to sell right now, whereas some smaller firms may have to do a deal just to stay afloat," said Cooley.
On the buyer side, the uncertain market conditions make it less likely that a firm is going to invest in a large-scale deal right now, according to Jim Folwell, an analyst at Cerulli Associates of Boston. "Before an acquisition you look at earnings potential and if assets are shrinking and forecasts indicate that the company isn't going to regain the position it had two or three years ago, this might not be the best time for a major acquisition."
By the end of June of 2000, there were four deals involving investment advisors that had total values above $1 billion, according to SNL. So far this year, only the $1.38 billion acquisition of Private Capital Management by Legg Mason has reached that mark. In fact, the largest five deals this year have averaged only $785 million, compared to $1.43 billion in 2000, according to SNL.
The fact that the number of deals has remained high despite the market downturn is surprising, according to Kapoor. Some firms might be looking at the low valuations as a good time to buy as business begins to pick up, he said.
"Ordinarily, you'd expect a bit of a slowdown, but on the flip side, this is a good time for financial advisors," said Kapoor. "Before, people were picking individual stocks on their own, but with the downturn, people are again realizing that they need some advice, so business is really not so bad for them."
Still, while advisors may be having an easier time convincing investors they need advice, firms trying to increase mutual fund assets are still having a very difficult time, according to Cooley. The assets that are going into funds are concentrated more than usual in the larger firms. Small firms, which depend on individual distribution, don't have advisor networks and are not part of fund supermarkets, are increasingly being forced to hand over the business to larger entities, he added.
"A lot of the people who have been selling out recently are smaller firms with distribution problems," said Cooley. It's getting harder for smaller companies to compete. In a tough equity market it's tough to sell any funds, he added. "When you put those two together, you get smaller firms being squeezed out."
Consolidation within the industry is likely to continue through whatever market conditions lie ahead, according to Donald Cassidy, a senior analyst with Lipper of Summit, N.J. "In the long term, you'll have a lot of deals regardless of what happens with the market," he said. "People want market share, but not everybody can have it. The industry is in a maturing phase and there's no reason to think that the consolidation won't continue."